BILL ANALYSIS Ó
AB 1218
Page 1
Date of Hearing: April 21, 2015
ASSEMBLY COMMITTEE ON JOBS, ECONOMIC DEVELOPMENT, AND THE ECONOMY
Eduardo Garcia, Chair
AB 1218
Weber - As Amended April 14, 2015
SUBJECT: Public contracts: disabled veteran business enterprise
SUMMARY: Makes changes to the goal and implementation actions
associated with the disabled veteran business enterprise (DVBE)
targeted procurement program, administered through the Department of
General Services (DGS). Specifically, this bill:
1)Expands the 3% DVBE procurement participation goal to include the
amount actually awarded, as well as the existing requirement to
report on the value of the DVBE participation at the time the
contract was let.
2)Modifies the existing DVBE incentive program by requiring a higher
incentive for a bid package that includes a DVBE:
a) Serving as the prime contractor.
b) Prime whose workforce is comprised of more than 50% veterans
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or proposes to use a DVBE subcontractor who has a workforce that
is comprised of more than 50% veterans.
3)Deletes a requirement for a periodic survey of newly certified DVBEs
to determine how they learned about the program and why they became
certified and, instead, requires California Department of Veteran
Affairs and state contracting agencies to identify who attends state
procurement promotional events and compare that list to who becomes
a certified DVBE and/or participates in a state contract, as
specified.
4)Requires awarding departments to retain DVBE payment records for
five-years. The bill also requires the awarding department to
establish a process to confirm that these records are submitted,
accurate, and reflect the agreement set forth in the state contract.
These records are already mandated to be submitted by prime
contractors who have committed to using DVBE subcontractors,
however, the State Auditor found that many agencies were not
retaining or checking records for compliance with state law.
5)Refines the information DGS is already required to report in the
State Consolidated Report to include:
a) Separate listing of the aggregate level of DVBE participation
in state contracts as a prime contractor and as a subcontractor.
b) The aggregate amount of funds actually paid to the DVBE.
Current law allows reporting of what was intended to be the DVBE
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participation rate at the time the contract was let.
6)Requires DGS to establish procedures for reporting multi-year
contracts.
EXISTING LAW:
1)Establishes the California Disabled Veteran Business Enterprise
Program, administered by DGS, for the purpose of addressing the
special needs of disabled veterans seeking rehabilitation and
training through entrepreneurship, and to recognize the sacrifices
California's disabled veterans made during their military service.
Contracts for professional bond services are administered through
the State Treasurer's Office.
2)Applies the 3% DVBE participation goal on each awarding state
agency, department, and officer that enters into a contract for
materials, supplies, equipment, alteration, repair, or improvement.
This requirement can be waived on a specific contract with the
approval of the department director or another designated person.
Contracts with a DVBE for equipment rentals do not count toward the
goal.
3)Defines the following terms:
a) A DVBE contractor, subcontractor, or supplier is any person or
entity that has been certified by the administering agency and
that performs a commercially useful function, as defined.
b) A disabled veteran is a veteran of the military, naval, or air
service of the U.S. who has a service-connected disability of at
least 10% and who is domiciled in the state.
c) A DVBE is a business certified by the administering agency as
meeting all of the following requirements:
i) The legal structure of the business is a:
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(1) Sole proprietorship with at least 51% owned by one
or more disabled veterans;
(2) Publicly owned business with at least 51% of its
stock unconditionally owned by one or more disabled
veterans;
(3) Subsidiary that is wholly owned by a parent
corporation, but only if at least 51% of the voting stock of
the parent corporation is unconditionally owned by one or
more disabled veterans; or
(4) Joint venture in which at least 51% of the joint
venture's management, control, and earnings are held by one
or more disabled veterans.
ii) The management and control of the daily business
operations are by one or more disabled veterans. The disabled
veterans who exercise management and control are not required
to be the same disabled veterans as the owners of the business.
iii) It has a home office located in the United States, which
is not a branch or subsidiary of a foreign corporation, foreign
firm, or other foreign-based business.
4)Requires DGS to collect information from awarding departments on the
level of DVBE procurement participation. The current report lists
total contract values awarded and amount expected to be paid to DVBE
contractors.
5)Requires an awarding state department to require a prime contractor
who has committed to using a DVBE subcontractor to certify upon
completion of the contract:
a) The total amount the prime contractor received under the
contract.
b) The name and address of the DVBE that participated in the
performance of the contract.
c) The amount each DVBE subcontractor received from the prime
contractor.
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d) That all required payments under the state contract have been
made to the DVBE subcontractor.
6)Provides that a person or entity that knowingly provides false
information on the DVBE subcontractor certification shall be subject
to a civil penalty for each violation in the minimum amount of
$2,500 and the maximum amount of $25,000.
FISCAL EFFECT: Unknown
POLICY ISSUE FRAME:
This bill implements changes to the DVBE Program in response to a 2014
State Auditor Report which found, among other things, that DVBE
participation was limited to a fairly small segment of the certified
DVBE contractors, compliance data was potentially misleading, and
awarding departments failed to maintain sufficient records on
contracts involving DVBEs.
The Comment section of the analysis includes background on the Small
Business Procurement and Contract Act, current DVBE Program activity,
previous legislative efforts to improve program accountability,
recommendations from the 2014 State Audit, and related legislation.
The author will be proposing an amendment, which is discussed in
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Comment 6.
COMMENTS:
1)Author's Purpose: According to the author's statement, "As
California works to address the employment needs of the latest
cohort of veterans from recent conflicts, it is time to revisit the
Disabled Veteran Business Enterprise (DVBE) program to ensure that
it works as intended and provides greater access to new
entrepreneurial ventures.
A recent review of the program by the California State Auditor,
found departments were using the less than accurate measure of the
contract amount awarded to a DVBE, rather than actual amount paid,
as a measure of performance toward the required goal of 3 percent
goal. Additionally, investigators discovered that only about 2
percent of firms out of 1,400 received 83 percent of the total spent
on DVBE contracts, and only 19 percent of DVBE firms are acting as
prime contractors.
AB 1218 would make a number of changes to improve access to the
program and to improve program accountability including, preferences
for both new DVBEs an those seeking to become prime contractors;
more accuracy in measuring performance toward 3 percent goals; and
outcome-based measurements of DVBE recruitments efforts."
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2)Small Business Procurement and Contract Act: The Small Business
Procurement and Contract Act, administered through DGS, was
implemented more than 30 years ago to establish a small business
preference within the state's procurement process that would
increase the number of contracts between the state and small
businesses. A DBVE component was added in 1989.
The Small Business Procurement and Contract Act states that it is
the policy of the State of California to aid the interests of small
businesses in order to preserve free competitive enterprise and to
ensure that a fair portion of the total purchases and contracts of
the state be placed with these enterprises. The statute further
states that DVBE participation is strongly encouraged to address the
special needs of disabled veterans seeking rehabilitation and
training through entrepreneurship, and to recognize the sacrifices
of California's disabled military veterans. Statute sets an annual
3% DVBE participation goal and a 25% participation goal for small
businesses and microbusinesses was set in 2006 through executive
order.
4)The DVBE Program: The 3% DVBE procurement participation goal is
applied to the state agency or department's overall contracting
activities in the given fiscal year and may be achieved by awarding
state contracts to DVBEs as prime contractors or when DVBEs are used
as a subcontractor.
Awarding departments have an option of including DVBE participation
in every contract or making alternative arrangements, as long as the
3% objective is met at the end of the year. Each agency and
department is required to designate a small business and DVBE
contracting liaison to facilitate it in meeting the 3% DVBE goal and
the 25% small business goal.
Departments also have the option of offering a 1% to 5% DVBE
contracting preference to assist bidders in helping to meet the
state DVBE goal. Although not currently being utilized, bidders
that are unable or unwilling to include a DVBE in a contract also
have the option of submitting a DGS approved utilization plan that
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commits the businesses to using DVBEs in the future. DGS is
authorized to audit businesses that submit utilization plans to
ensure compliance.
State departments that fail to meet the annual 3% goal can have
their delegated contracting authority removed, although DGS has
never removed program authority solely based on an agency or
department's failure to meet its DVBE contracting goal.
DGS has a range of responsibilities relating to the implementation
of the DVBE Program including:
Certification of DVBEs (1,537 DVBEs certified in 2013-14);
Certification of small businesses and microbusinesses, with
approximately 90% of DVBEs also holding a small business or
microbusiness certifications (1,289 small businesses and
microbusinesses certified in 2013-14);
Outreach to the potential bidders and the veteran community
(150 events in FY 2013-14);
Marketing of the DVBE program to state agencies;
Consulting with the California Procurement Contracting Academy
on the DVBE training of state contracting staff;
Preparation of an annual consolidated report on DVBE, small
business, and microbusiness participation within state
contracting activities; and
Program oversight to identify abuses by bidders and failures
to preform by state agencies.
Below are charts displaying three years of DVBE participation rates.
The charts include information on mandatory reporting entities and
all reporting entities. Under both reporting metrics, it appears
that the state is consistently meeting its DVBE procurement
participation goals.
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---------------------------------------------------------------
| DVBE Three-Year Contracting Activity - Mandated Agencies |
---------------------------------------------------------------
|------------+------------+------------+------------+------------|
|Fiscal Year | Total | Total DVBE | Total DVBE | Total DVBE |
| | Contract | Dollars | Percent | Contracts |
| | Dollars | | | |
|------------+------------+------------+------------+------------|
|2013-14 |$6,566,406,9|$241,002,566| 3.67% | 12,777 |
| | 79| | | |
|------------+------------+------------+------------+------------|
|2012-13 |$7,151,257,0|$216,903,765| 3.03% | 14,907 |
| | 13| | | |
|------------+------------+------------+------------+------------|
|2011-12 |$7,173,594,3|$340,156,464| 4.74% | 16,246 |
| | 29| | | |
|------------+------------+------------+------------+------------|
|Average |$6,963,752,7|$266,020,932| 3.82% | 14,643 |
| | 74| | | |
----------------------------------------------------------------
---------------------------------------------------------------
|2013-14 DGS Consolidated |
|Report |
---------------------------------------------------------------
---------------------------------------------------------------
| DVBE Three-Year Contracting Activity - All Reporting Agencies |
---------------------------------------------------------------
|------------+------------+------------+------------+------------|
|Fiscal Year | Total | Total DVBE | Total DVBE | Total DVBE |
| | Contract | Dollars | Percent | Contracts |
| | Dollars | | | |
|------------+------------+------------+------------+------------|
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|2013-14 |$8,233,113,6|$299,683,794| 3.64% | 14,305 |
| | 60| | | |
|------------+------------+------------+------------+------------|
|2012-13 |$8,573,498,6|$267,285,324| 3.12% | 16,776 |
| | 23| | | |
|------------+------------+------------+------------+------------|
|2011-12 |$8,508,477,5|$373,936,941| 4.39% | 17,835 |
| | 96| | | |
|------------+------------+------------+------------+------------|
|Average |$8,438,363,2|$313,635,353| 3.7% | 16,305 |
| | 93| | | |
----------------------------------------------------------------
---------------------------------------------------------------
|2013-14 DGS Consolidated |
|Report |
| |
| |
| |
---------------------------------------------------------------
While the year-to-year percentages are useful to review, it is also
important to note that consistency among which agencies report
varies. As an example, in 2011-12, 86% of the mandatory reporting
entities reported their contracting activity to DGS. In 2012-13,
79% reported their contracting activity and in 2013-14, 80%
reported.
1)Concerns with DVBE Program: While DVBE participation rates are
generally up, programmatic challenges continue to plague the
program. Among other things, significant issues have been raised
relative to the accuracy of the reporting data and on fraudulent
bidder practices. In the past several years, the Committee has
repeatedly heard testimony from veteran groups about bidders that
fail to follow-through on the DVBE commitments made in bid
proposals, bidders that use DVBEs that haven't renewed their
certification, and of DVBEs being included within bid proposals, but
never actually performing a commercially useful function.
Some of these program concerns have been addressed in legislation
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which increased penalties, defined commercially useful function, and
strengthened bidder reporting requirements, including AB 177 (Ruskin
and V. Manuel Pérez) Chapter 342, Statutes of 2010 and SB 1510
(Wright), Chapter 421, Statutes of 2012, respectively. A more
comprehensive list of compliance enhancements is included under the
related bills section of the analysis.
Other concerns, such as poor reporting of data, lack of enforcement
tools, and challenges to increasing the number of certified DVBEs
that participate in state contracting activities have not been
comprehensively addressed in more than a decade. Responding to
these and other issues, Senator Hueso, then Chair of the Senate
Committee on Veterans Affairs, and former Senator Ron Calderon,
requested in March 2013 that the Joint Legislative Audit Committee
approve a comprehensive review of the DVBE program by the California
State Auditor. The audit was released in February 2014 and among
other findings, the State Auditor found the following:
a) The objective of the program "to increase DVBE participation
in state procurement," is not appropriately being measured
through the current reporting system. The system measurers the
award value and not the actual amount DVBEs' receive.
b) Only a small percentage of certified DVBEs serve as prime
contractors. As an example, only 19% of certified DVBEs served
as primes and, of those, 30 firms received 83% funding.
c) There is inadequate documentation by state contracting
agencies on DVBE participation.
d) Reporting methodologies differ by state agencies on DVBE
participation.
e) DGS has inadequate control over the state's procurement
vendor, Bidsync.
f) CalVet needs to take a more active role in working with state
agencies and tracking outreach activities.
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Based on these findings, the Auditor recommended key actions for the
Legislature, DGS, and CalVet. These recommendations focused on
better and more consistent reporting including: verification of DVBE
status before finalizing the contract, increasing the number of
DVBEs that participate in state contracting, better management by
the state vendor, and a heightened role and accountability for
CalVet. Bills were amended in the Assembly and the Senate to
address these concerns, however, both measures were unable to pass
their respective appropriations committees, SB 839 (Correa) and AB
1735 (Jones-Sawyer) from 2014.
In January 2015, the State Auditor again highlighted the
deficiencies in the program and encouraged the Legislature to take
action. AB 1218 addresses the concerns raised in the 2014 audit,
improves program accountability, and requires DGS and state awarding
agencies to take actions to meet the mission of the DVBE program.
2)Proposed Amendments: Staff understands the author will present an
amendment to add a third bidding preferences for bids that include a
DVBE that have not formerly contracted with the state. With the
committee's favorable consideration, the actual amendment will be
made in the following committee.
3)Related Legislation: Below is a list of related measures including
those from the current session and prior sessions.
a) Bills introduced in the 2015-16 Legislative Session:
i) AB 351 (Jones-Sawyer) Small Business Goal: This bill
requires each state agency to establish and achieve a 25% small
business participation goal. Status: scheduled to be heard on
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April 21, 2015, in the Assembly Committee on Jobs, Economic
Development and the Economy.
ii) AB 1125 (Weber) Small Business Procurement Incentives:
Increases the maximum financial value of an individual small
business bid preference and the aggregate value that may be
applied to a bid package that includes more than one
preference. The bill also modifies the base of that calculation
from being the lowest responsible bidder to the lowest
responsible non-small business bidder. Status: Scheduled to
be heard in the Assembly Committee on Jobs, Economic
Development, and the Economy on April 21, 2015.
iii) AB 1445 (Brown) Small Business Procurement Incentive:
This bill increased the maximum contract threshold amount for
awards to small business, including microbusiness, and DVBEs
under the state's streamlined procurement process, from
$250,000 to $500,000, as specified. Status: Pending in the
Assembly Committee on Accountability and Administrative Review.
iv) SB 159 (Nielsen) DVBE Clarification: This bill provides
that the 3% DVBE procurement goal is to be measured based on
the overall dollar amount expended each year by the awarding
department. The bill states that this is declaratory of
existing law. Status: Scheduled to be heard on April 28,
2015, in the Senate Governmental Organization Committee.
b) Bills introduced in a prior legislative sessions:
i) AB 31 (Price) Public Contracts: Small Business Procurement
and Contract Act: This bill increased the maximum contract
threshold amount for awards to small business (SME), including
microbusiness, and DVBEs under the state's streamlined
procurement process, from $100,000 to $250,000, as specified.
This bill requires contractors to report the contract amount
allocated to SMEs and DVBE 's with which they made contract
commitments. Status: The bill was signed by the Governor,
Chapter 212, Statutes of 2009.
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ii) AB 177 (Ruskin and V. Manuel Pérez) Enforcement of Small
Business Act: This bill increases and conforms penalties for
persons who falsely engage in activities relating to the Small
Business Procurement and Contract Act, including small
businesses, microbusinesses, and disabled veteran-owned
business enterprises. Status: The bill was signed by the
Governor, Chapter 342, Statutes of 2010.
iii) AB 309 (Price) Public Contracts: Small Business
Participation: This bill would have required the establishment
of a 25% small business participation goal for all state
entities and directs DGS to monitor each agency's progress in
meeting this goal. The bill would have required that the
Office of the Small Business Advocate receive the same progress
report information as state entities and directs DGS and the
Office of the Small Business Advocate to work collaboratively
to assist state entities in meeting their goal. This goal is
currently provided for in Executive Order (EO) D-37-01 and EO
S-02-06. Status: Held in the Assembly Committee on
Appropriations in May 2010.
iv) AB 550 (Brown) State Procurement Procedures for Small
Businesses: This bill would have required the establishment of
a 25% small business participation goal for all state entities
and directs DGS to monitor each agency's progress in meeting
this goal. The bill would have required that the Office of the
Small Business Advocate receive the same progress report
information as state entities and directs DGS and the Office of
the Small Business Advocate to work collaboratively to assist
state entities in meeting their goal. This goal is currently
provided for in Executive Order (EO) D-37-01 and EO S-02-06.
Status: Held on the Suspense File of the Assembly Committee on
Appropriations, 2013.
v) AB 1568 (Grove) Quotes for Public Contracts: This bill
would have required state agencies that opt to acquire goods,
services, or information technology through a specified small
business and disabled veteran business enterprise contracting
option to solicit at least three price quotes, and obtain at
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least two quotes before awarding the contract. Status: Held
on the Suspense File in the Senate Committee on Appropriations,
2014.
vi) AB 1734 (Jones-Sawyer) Public contracts: Small Business
Participation: Disabled Veterans: This bill would have
required each state agency to establish and achieve a 25% small
business participation goal and increased the annual
procurement participation goal for disabled veteran business
enterprise from 3% to 5% of the value of state contracts. In
addition the bill required greater reporting and accountability
of DVBE program information. Status: Held on the Suspense
File in the Assembly Committee on Appropriations, 2014.
vii) AB 2249 (Ruskin) DVBE Documentation: This bill requires
applicants for small business or DVBE certification to submit a
written declaration, under penalty of perjury, that the
information submitted to DGS is true and correct. The bill
also authorizes DGS, if it determines that just cause exists,
to require the owner of a DVBE or small business to submit the
Internal Revenue Service Form 4506-T which would allow DGS to
obtain a copy of their tax return. Finally, the bill requires
that at least 51% of the stock or voting stock of a disabled
veteran business enterprise be unconditionally owned by
disabled veterans. Status: Signed by the Governor, Chapter
383, Statutes of 2010.
viii) AB 2682 (Wagner) Responsible Small Business and DVBE
Contractors: This bill would have required a state agency that
solicits offers, awards a contract, or consents to
subcontracts, under the Small Business Procurement and Contract
Act, to do so only with responsible and reliable parties.
Prohibits a state agency from allowing a party to participate
in any procurement activity if the party has been suspended,
debarred, or otherwise excluded from participation in a state
contract. Status: Died in the Assembly Committee on
Accountability and Administrative Review, 2014.
ix) SB 67 (Price) Small Business Participation in Public
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Contracts: This bill would have authorized DGS to direct all
state entities to establish an annual goal of achieving no less
than 25% small business participation in state procurement
contracts, as specified. This goal is currently provided for
in Executive Order (EO) D-37-01 and EO S-02-06. Status: Held
in the Assembly Committee on Appropriations in 2011.
x) SB 733 (Block) Disabled Veteran Business Enterprise
Participation Goals: This bill deletes provisions of law
allowing an awarding department to accept submission of a
disabled veteran business enterprise utilization plan to meet
the 3% statewide participation goal for awarded contracts. The
bill authorizes, instead, a new review process for
demonstrating a business's long-term commitment to using
veteran-owned businesses. Status: Died in the Assembly
Committee on Jobs, Economic Development, and the Economy, 2014.
xi) SB 839 (Correa) Contracting with Veterans: This bill
would have would have modified reporting requirements for state
departments with respect to DVBEs including contracts where the
DVBE acted as the prime and as a subcontractor. Status: Held
on the Suspense File in the Senate Committee on Appropriations,
2014.
xii) SB 941 (Florez) DVBE Advocates: This bill requires the
Department of Veteran's Affairs and awarding departments to
appoint DVBE advocates to assist in meeting DVBE procurement
participation goals. Status: Signed by the Governor, Chapter
666, Statutes of 2002.
xiii) SB 1510 (Wright) Commercial Useful Purpose: This bill
tightens the bidder requirements for demonstrating that a small
business, microbusiness, or DVBE will serve a commercially
useful function (CUF) in carrying out a state contract. The
purpose of the CUF requirement is to prevent a bidder from
using a business as a "pass through" or "front" for another
business that would otherwise not qualify for the small
business, microbusiness or DVBE bid preference. By meeting the
CUF requirements, a bidder may claim a bid preference on
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competitive state contracts for goods, services, informational
technology, and public works. Status: The bill was signed by
the Governor, Chapter 421, Statutes of 2012.
4)Double Referral: The Assembly Rules Committee has referred this to
measure the Assembly Committee on Jobs, Economic Development and the
Economy and to the Assembly Committee on Accountability and
Administrative Review (AAR). Should this measure pass the
committee, it will be referred to AAR for further policy
consideration.
REGISTERED SUPPORT / OPPOSITION:
Support
None received
Opposition
None received
Analysis Prepared by:Toni Symonds / J., E.D., & E. / (916) 319-2090
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