BILL ANALYSIS Ó
SENATE COMMITTEE ON VETERANS AFFAIRS
Senator Jim Nielsen, Chair
2015 - 2016 Regular
Bill No: AB 1218 Hearing Date: 6/23/15
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|Author: |Weber |
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|Version: |4/23/15 Amended |
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|Urgency: |No |Fiscal: |Yes |
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|Consultant:|Wade Cooper Teasdale |
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Subject: Public contracts: disabled veteran business
enterprise.
DESCRIPTION
Summary:
Makes significant adjustments to contracting performance goals
and program participation reporting associated with the Disabled
Veterans Business Enterprise (DVBE) Program.
Existing law:
1)Establishes the DVBE program for the purposes 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.
2)Designates the Department of General Services (DGS) as the
administering agency for the DVBE program and directs DGS to
adopt regulations to implement the program.
3)Defines a DVBE contractor, subcontractor, or supplier as any
person or entity that has been certified by the administering
agency and that performs a commercially useful function, as
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defined.
4)Sets an annual DVBE procurement participation goal of three
percent for each state entity that enters into a contract for
materials, supplies, equipment, alteration, repair, or
improvement.
5)Provides that the three-percent participation goal applies to
the overall dollar amount expended each year by the awarding
department, as defined.
6)Requires DGS to make available an annual report on contracting
activity containing specified information, including a
statistical summary detailing each awarding department's goal
achievement under the DVBE program and a statewide total of
those goals.
This bill:
1)Expands application of the existing annual three-percent
statewide participation goal, which applies to overall dollar
amount expended, to be applied also to the overall dollar
amount awarded each year.
2)Modifies the existing DVBE incentive program to provide for a
higher incentive when the bid comes from any of the following:
a) A prime contractor who owns a DVBE;
b) A DVBE that employs a workforce that is more than 50%
veterans; or,
c) A DVBE that has not previously entered into any
contracts with the state.
3)Requires the California Department of Veterans Affairs
(CalVet) to establish a system for tracking the effectiveness
of its efforts to promote the DVBE program and maintain
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complete records of its promotional events, as specified.
4)Requires departments that award DVBE contracts to retain DVBE
payment records for at least five years and establish review
procedures to ensure the accuracy and completeness of the
records.
5)Revises the information that DGS is already required to report
on DVBE contracting activity to include the following:
a) The level of participation, by agency, of DVBEs as a
prime contractor or a subcontractor in statewide
contracting; and,
b) Both (i) the dollar values of the contract award and
(ii) the amount of the contract paid.
6)Directs DGS to establish guidelines for reporting multiyear
contracts in all contracting programs (not just the DVBE
program).
BACKGROUND
California is home to nearly two million of the nation's 22
million veterans. Many are disabled and would qualify to
participate as DVBE entrepreneurs. The demographics and needs of
the state's veteran population are changing rapidly due to the
passing away of older generations and the ongoing downsizing our
nation's active duty armed forces. Many of the newer, younger
veterans also will have disabilities from the conflicts in Iraq
and Afghanistan or other service-connected causes.
The DVBE program's purpose and philosophical orientation are
established in MVC 999(a):
The California Disabled Veteran Business Enterprise Program is
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established to address the special needs of disabled veterans
seeking rehabilitation and training through entrepreneurship
and to recognize the sacrifices of Californians disabled
during military service. It is the intent of the Legislature
that every state procurement authority honor California's
disabled veterans by taking all practical actions necessary to
meet or exceed the disabled veteran business enterprise
participation goal of a minimum of 3 percent of total contract
value.
Audit Findings
In February 2014, the State Auditor released Audit Report
2013-115, which included the following findings:
1)The State's current method of measuring the success of the
DVBE program may distort an assessment of whether the program
is meeting the legislative intent.
2)The data in the State Contract and Procurement Registration
System (SCPRS) indicates that only a relatively small subset
of DVBE firms enjoy the major part of the State's
business-during fiscal year 2012-13, 83 percent of the DVBE
contract award amounts went to only 30 DVBE firms.
3)All five of the awarding departments the Auditor visited
lacked adequate supporting documentation for their reported
fiscal year 2012-13 DVBE contracting activity.
4)DGS has not provided clear guidance as to what level of
support and documentation is sufficient to support their
reported DVBE performance data nor how to report DVBE
participation on multiyear contracts.
5)DGS currently lacks the ability to obtain a complete and
accurate copy of the State's procurement data-as currently
maintained in the eProcurement data system.
6)CalVet's management confirmed that it has not taken an active
role in coordinating with awarding departments to promote DVBE
contracting opportunities.
Audit Recommendations
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The audit report offered the following recommendations to the
Legislature:
To provide a more meaningful measure of how well disabled
veteran-owned businesses benefit financially from the DVBE
program, the Legislature should amend the DVBE reporting
requirements in the Public Contract Code to require that all
awarding departments report DVBE participation annually based on
amounts paid, and maintain accounting records and certifications
from DVBE subcontractors, as applicable, that support the DVBE
participation data reported.
1)If the Legislature chooses not to amend the DVBE reporting
requirements in the Public Contract Code-to require awarding
departments to report DVBE participation based on amounts
paid, not amounts awarded-the Legislature should amend the
Public Contract Code to do the following:
2)Require awarding departments to maintain detailed support for
their DVBE activity and to establish review procedures to
ensure the accuracy and completeness of the amounts reported.
3)Include instructions to awarding departments on how they
should report multiyear contracts, either at the time of the
award or by an equal distribution of the award over the life
of the contract.
For the DVBE program to financially benefit a broad base of
disabled veteran-owned businesses, the Legislature should enact
legislation aimed at increasing the number of those DVBEs that
contract with the State, including increasing the amount of the
DVBE incentive that awarding departments can apply when
considering bids on state contracts. Such an incentive could
include additional preference points for certain bids when the
bidder is a DVBE firm that the department has not previously
used or when the firm is bidding as a prime contractor.
DVBE Reporting
DGS publishes an annual consolidated report of state contracting
activity. The reporting requirements for the DVBE program are
spelled out in subdivision (d) of Public Contract Code Section
10111 states:
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(d) The level of participation, by agency, of disabled
veteran business enterprises in statewide contracting and
shall include dollar values of contract award for the
following categories:
(1) Construction.
(2) Architectural, engineering, and other professional
services.
(3) Procurement of materials, supplies, and equipment.
(4) Information technology procurements.
Additionally, the report shall include a statistical
summary detailing each awarding department's goal
achievement and a statewide total of those goals.
DGS states that PCC Sec. 10111(d) is ambiguous as to the metric
that DVBE program reporting should use. In interpreting the
statute and promulgating its program guidelines, DGS opts for a
"dollars awarded" basis for reporting - rather than "dollars
expended" as DVBE participation goals are defined in statute.
"Dollars awarded" is the amount for which a contract is
authorized. It is a ceiling on how much prime contractors and
their subcontractors potentially may be paid under the contract.
But the actual utilization of services provided by the
contractors and subcontractors often is less than initially
anticipated, meaning that the actual payments (dollars expended)
to the contractors and subcontractors is lower, sometimes
substantially lower, than the authorized contract amount
(dollars awarded). "Dollars awarded" is an inaccurate measure of
actual program participation.
The explicit requirement for a statistical summary detailing
goal achievement originated in MVC Sec. 999.7, closely proximate
to the DVBE goal defining sections, where it existed from
1999-2006. MCV Sec. 999.7 was repealed when the Legislature
moved the reporting requirement into the Public Contract Code as
the second element in the current PCC Sec. 10111(d).
DGS claims that its reporting guideline (2 CCR § 1896.78)
requires awarding departments to report on a "dollars awarded"
basis; however, in practice, DGS allows awarding departments to
choose whether to report based either on the "awarded" or
"expended" standard. The administrative result is that a major
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proportion of California's approximately 180 state departments
report to DGS based on dollars expended, while the other major
proportion reports based on dollars awarded. DGS leaves the
decision to the awarding departments.
COMMENT
Related Legislation
1)SB 159 (Nielsen, pending Assembly Committee on Jobs, Economic
Development, and the Economy, 2015) Clarifies existing law,
which requires an awarding department's goal achievement under
the Disabled Veteran Business Enterprise (DVBE) program to be
reported by overall dollar amount expended each year by the
awarding department.
2)SB 839 (Correa, 2014) - (Held, suspense, Senate Committee on
Appropriations)
a) Required the annual expenditure report to include the
dollar amounts expended annually on contracts awarded
pursuant to the DVBE program.
b) For contracts with DVBE prime contractors, required
departments to report the amount paid to DVBEs each fiscal
year.
c) For contracts with non-DVBE prime contractors that have
one or more DVBE subcontractors, required state departments
to report based on a signed joint certification by the
prime contractor and the DVBE subcontractor attesting to
the amount paid to the DVBE. DGS and the Department of
Veterans Affairs would jointly develop the joint
certification form.
d) Required each state department to develop policies and
procedures for the preparation of the reports to ensure the
reports are accurate, complete, and verifiable against the
awarding department's accounting records and subcontractor
certifications.
3)SB 719 (Correa, 2013) would have required awarding departments
that used the Financial Information System for California
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(FISCal) to report statewide participation goals for the DVBE
program in the amount expended to DVBEs. (Held in Assembly
Appropriations Committee)
Committee Comments :
1)The State Auditor opined that the DVBE program needs of
greater transparency and accountability and proffered several
statutory recommendations.to the Legislature. AB 1218 takes
bold steps toward reform, which are consistent with the
Auditor's suggestions and bear similarity to some provisions
of SB 839 (Correa, 2014).
2)Existing law establishes a three-percent goal for DVBE
contracting to be applied to dollars actually expended. AB
1218 creates an additional, parallel three-percent goal to be
applied to dollars awarded. As explained above in the
"Background" section, contracts frequently experience a
dropoff, sometimes very substantial, from dollars awarded to
dollars actually expended. Because dollars expended is a
subset of dollars awarded, it could be confusing for program
managers, the Legislature, and program participants to deal
with two goals established at the same numerical metric.
Having two closely related goals also could complicate
compliance assessment.
Awarding departments have little if any control over the
dropoff that occurs in praxis between a prime contractor and
its subcontractors. If the author's intent is to be able to
measure the dropoff, and also be able to recognize an awarding
department's earnest DVBE participation efforts, even in the
face of substantial dropoff, that can be done relying solely
on AB 1218's separate requirement that program reporting
include both dollars awarded and dollars expended. It is not
necessary to actually change the performance goals themselves.
3)AB 1218 modifies the existing DVBE incentive structure in
order to advance the general intent of the program -
increasing participation and payouts to DVBE firms. One bill
provision prefers contracting with DVBE primes to contracting
with non-DVBE primes that subsequently subcontract with DVBEs.
According to the author's office, the purpose of this
provision is to incentivize DVBE subcontractors to begin
participating as DVBE primes, which generally is more
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financially lucrative than is subcontracting. In practice,
however, this could be complicated and have unintended
consequences.
One of the DVBE program's strengths is the diversity of the
DVBE community. DVBE firms range from large to small,
represent nearly every industry, and vary in management skills
and sophistication. Some DVBE subcontractors have the skills
and flexibility to operate as prime contractors, but many
others are more highly specialized and lack the ability to
serve as prime contractors.
Testimony received at this Committee's oversight hearing
(March 2014) indicated that, during Fiscal Year 2012-13, 59
percent of all DVBE awards were to DVBE prime contractors and
41 percent were to DVBE subcontractors, so a strong program
bias toward DVBE subcontractors already exists. In addition,
the audit report stated that, for fiscal year 2012-13, only
256 DVBE firms, or nearly 19 percent of the State's certified
DVBE firms during that period, contracted with awarding
departments as a prime contractor, suggesting that most
certified DVBEs are not situated to perform as prime
contractors. AB 1218's provision might aggravate this ratio.
POSITIONS
Sponsor: Author
Support:
American Federation of State, County and Municipal Employees,
AFL-CIO
American Legion-Department of California
American Veterans-Department of California
Military Officers Association of America, California Council
State Council on Developmental Disabilities
Vietnam Veterans of America-California State Council
Oppose: None received
-- END --
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