BILL ANALYSIS Ó
AB 2270
Page 1
Date of Hearing: April 5, 2016
ASSEMBLY COMMITTEE ON JOBS, ECONOMIC DEVELOPMENT, AND THE ECONOMY
Eduardo Garcia, Chair
AB 2270
(Bonta) - As Introduced February 18, 2016
SUBJECT: Statewide bonding and contractor assistance program
SUMMARY: Establishes a statewide contractor assistance program for
the purpose of helping participating contractors to meet applicable
bid, payment, and performance bonding requirements for public
contracts with state agencies, as specified. Specifically, this bill:
1)Establishes the Statewide Contractor Bonding Program (Program) for
the purpose of assisting participating contractors to meet
applicable bid, payment, or performance bonding requirements for
public contracts with state agencies.
2)Specifies that the program will be administered through the Office
of the Small Business and Disabled Veteran Business Enterprise
Services (Office), located within the Department of General Services
(DGS).
3)Authorizes the Office to act as a guarantor on a surety bond for a
participating contractor on a contract with a state agency.
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4)Requires the Office to establish a request for proposals process by
which contractors may participate in the Program and requires a
preference to be given to any of the following:
a) A disadvantaged business enterprise, as defined;
b) A certified small business enterprise; and
c) A certified disabled veteran business enterprise (DVBE), as
defined.
5)Authorizes the Office to terminate a contractor's participation in
the program after a reasonable period of time if the contractor is
no longer in compliance with the requirements of the Program.
6)Authorizes the Office to suspend a participating contractor that
defaults on a bond from transacting any business with the state
either directly as a prime contractor or indirectly as a
subcontractor, for a period of not less than three years and not
more than 10 years. A suspended contractor is required to receive
Office approval before resuming participation in the Program.
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7)Authorizes the Office to provide technical assistance to a
participating contractor. Required technical assistance includes,
but is not limited to, all of the following:
a) Assessment and identification of the particular barriers
facing the participating contractor and development of solutions
to those barriers. Activities may include the following:
i) Assessments by surety and construction experts;
ii) Development of a business plan;
iii) Project field support; and
iv) Workshops addressing the following topics:
(1) Basic information pertaining to contractor bonding;
(2) Understanding the surety process and underwriting;
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(3) The process for bidding on state projects;
(4) Addressing stop notices;
(5) Strategies for accessing capital;
(6) Prevailing wages;
(7) Job safety and the Occupational Safety and Health
Administration;
(8) Certification; and
(9) Any other topics that would be beneficial to the
participating contractor.
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b) Identification of and assistance in obtaining other financial
support and resources. Activities may include the following:
i) Linkages with accountants, brokers, and surety companies
committed to helping contractors build bonding and
organizational capacity;
ii) Pre-qualifications for additional assistance; and
iii) Collateral guarantees.
c) Monitoring and reporting on the progress of the participating
contractor to the Office, including reporting on the following:
i) Collaboration with other programs;
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ii) Progress on any project for which a bond is issued
pursuant to this article;
iii) Defaults on a bond issued pursuant to this article; and
iv) Funds administration. The bill prohibits the Office from
charging a fee for services related to monitoring and reporting
on funds administration.
8)Requires DGS to adopt the rules and regulations necessary to
implement this Program.
9)Authorizes the Office to charge a participation fee to cover the
costs of administering the Program, excluding the funds of
administration monitoring and reporting, as noted above.
10)Authorizes a contractor to use the surety bond issued by the Office
as proof of having performance and payment bonds.
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EXISTING LAW:
1)Declares it is state policy that small business and microbusiness
receive a fair portion of the total purchases and contracts or
subcontracts for state goods, services, information technology, and
construction.
2)Establishes the Office within DGS for the purpose of:
a) Compiling and maintaining a comprehensive bidders list of
qualified small businesses and disabled veteran business
enterprises;
b) Coordinating with the Federal Small Business Administration,
the Minority Business Development Agency, and the Office of Small
Business Development of the Department of Economic and Business
Development;
c) Providing technical and managerial aids to small businesses,
microbusinesses, and disabled veteran business enterprises, by
conducting workshops on matters in connection with government
procurement and contracting;
d) Assisting small businesses, microbusinesses, and DVBEs, in
complying with the procedures for bidding on state contracts; and
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e) Working with appropriate state, federal, local, and private
organizations and business enterprises in disseminating
information on bidding procedures and opportunities available to
small businesses, microbusinesses, and disabled veteran business
enterprises.
3)Defines a small business, for the purpose of being eligible for
state small business procurement contract bid preferences, as
independently owned, not dominant in its field of operation,
domiciled in California, employing 100 or fewer employees, and
earning $10 million or less in average annual gross revenues for the
three previous years.
4)Defines a DVBE, for the purpose of being eligible for state
procurement, as an entity meeting all of the following requirements:
i) The legal structure of the business is a:
(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) 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.
iii) The management and control of the daily business
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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.
iv) 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.
5)Establishes the I-Bank within the Governor's Office of Business and
Economic Development (GO-Biz) and authorizes it to undertake a
variety of financial activities including, but not limited to, the
administration of a revolving loan fund, oversight of the Small
Business Finance Center, and the issuance of tax-exempt and taxable
revenue bonds.
6)Establishes the Small Business Finance Center within the I-Bank for
the purpose of assisting businesses seeking capital resources not
otherwise available in the private markets including:
a) Loan guarantees and other credit enhancements;
b) Direct loans and other debt instruments;
c) Disaster loan guarantees; and
d) Surety bond guarantees.
FISCAL EFFECT: Unknown
POLICY ISSUE FRAME
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Small businesses play an essential role within the California economy,
contributing the most net new jobs, offering an alternative to un- and
underemployment, and helping to disburse the financial advantages of
the state's globally connected economy. State procurement
opportunities represent an important economic tool to support small
business development. In the last 15 report periods, the state has
met the 25% small business procurement participation goal only five
times including the 2013-14 fiscal year.
This measure proposes the establishment of a contractor development
program to assist businesses in accessing surety bonds. With enhanced
technical assistance, and the option of utilizing a surety bond
guarantee, small businesses, DVBEs, and disadvantaged businesses
should be able to more successfully compete for state
infrastructure-related contracts. The analysis includes background on
surety bonds, small businesses role in the California economy, small
business and DVBE participation in state contracting, and a former
state small business contractor program, which addressed similar
needs. Amendments are discussed in Comment #7.
COMMENTS:
1)Small and Emerging Contractor Challenges: Small and emerging
contractors face a variety of challenges in participating in state
procurement opportunities. This bill addresses one of small
businesses' key challenges, that of being able to obtain a surety
bond; a basic requirement for construction-related contracts with
public entities.
Other challenges include the high cost of purchasing liability
insurance, limited opportunities to develop new relationships with
experienced prime contractors, and having the in-house technical and
administrative skills to comply with state and federal accounting
and reporting practices. The increasing practice by state agencies
to issue contracts that exceed $1 million in value, particularly in
the area of state highway construction, also places a unique burden
on small contractors.
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2)Removing Contracting Impediments: The Miller Act, under federal
law, and the Little Miller Act, under state law, require contractors
on most public works construction projects to post bonds
guaranteeing both the performance of their contractual duties and
the payment of their subcontractors, workers, and material
suppliers. These types of bonds serve as a safeguard to the public
entity by ensuring compensation and/or the completion of a project.
In some cases, the surety company is obligated to find another
contractor to complete the contract or compensate the project owner
for the financial loss incurred.
Structurally, the surety bond is a three party agreement between the
contractor, who is mandated to provide the bond; the project owner,
the party protected by the bond; and the surety-insurance company,
who writes the bond. There are a variety of surety bonds, but each
type shares a common purpose of guaranteeing a contractual
obligation to the project owner. For example, a performance bond
will guarantee an obligation is met in accordance with the plans and
specifications, while a supply bond guarantees that ordered
materials will be delivered as agreed upon. Overall, surety bonds
can be instrumental in limiting the risk of selecting a bidder;
namely the risk of the project not being completed or that a
contractor's unpaid creditors might place a lien on the project.
Reducing these risks ultimately aids the owner in reducing the cost
of borrowing money to finance the project.
Implementation of AB 2270 would assist emerging contractors by
providing an early assessment of the firm's strengths and
weaknesses. Based on the assessment, a technical assistance
provider would work with the contractor to address deficiencies and
then assist the contractor in negotiating the terms of the surety
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bonds. In some cases, a surety guarantee could be used to enhance
the position of the business before the surety bond issuer. By
providing technical assistance and collateral support for small
construction businesses, the proposed program would positively
benefit the contractor, as well as the project owner, the prime
contractor, and prospective workers.
Over the next five years, the author contends that the state will
initiative over $50 billion in construction projects related to
transportation and community services including health care,
education, courts, and recreation. These construction projects
represent excellent business opportunities for small businesses,
DVBEs, and disadvantaged businesses. However, without assistance in
obtaining surety bonds, many of these opportunities could go
unexplored.
3)The Role of Small Businesses within the California Economy:
California's dominance in many economic areas is based, in part, on
the significant role small businesses play in the state's $2.3
trillion economy. Two separate studies, one by the U.S. Census
Bureau and another by the Kaufman Foundation, found that net job
growth was strongest among businesses with less than 20 employees.
Among other advantages, small businesses are crucial in the state's
international competitiveness and are an important means for
dispersing the positive economic impacts of trade within the
California economy.
Nonemployer firms make up the single largest component of businesses
in California, 2.9 million out of an estimated 3.6 million firms in
2012, representing over $149 billion in revenues with highest number
of businesses in the professional, scientific, and technical
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services industry sector. As these non-employer businesses grow,
they continue to serve as an important component of California's
dynamic economy. Excluding nonemployer firms, businesses with less
than 20 employees comprise nearly 90% of all businesses and employ
approximately 18% of all workers. These non-employer and small
employer firms create jobs, generate taxes, and revitalize
communities.
In hard economic times, smaller size businesses often function as
economic engines. In this most recent recession the trend
continued, with the number of nonemployer firms increasing from 2.6
million firms ($137 billion in revenues) for 2008 to 2.8 million
firms ($138 billion in revenues) for 2010. In the post-recession
economy, small businesses are expected to become increasingly
important due to their ability to be more flexible and better suited
to meet niche market needs. Their small size, however, results in
certain challenges in meeting regulatory requirements, accessing
capital, competing for large-size contracts and marketing their
goods and services.
4)Small Business Procurement Act: The Small Business Procurement 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.
Today, approximately 90% of DVBEs have dual certification as a small
business or microbusiness.
The Small Business Procurement Act states that it is the policy of
the State of California that the state 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 2010 executive order sets a 25%
goal for small businesses and microbusinesses.
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The charts below show small business and microbusiness aggregate
procurement participation rates for fiscal years 2011-12, 2012-13,
and 2013-14 for mandatory reporting agencies (including Caltrans).
---------------------------------------------------------------
| Small Business and Microbusiness Contracting Activity - |
| Mandated Reporters |
---------------------------------------------------------------
|------------+------------+------------+------------+------------|
|Fiscal year | Total |Total Small | Total | Total |
| | Contract | Business | Percent | Number of |
| | Dollars | and | | Contracts |
| | |Micobusiness| | |
| | | Contract | | |
| | | Dollars | | |
|------------+------------+------------+------------+------------|
|2013-14 |$7,101,433,4|$2,013,377,7| 28.35% | 90,784 |
| | 33| 92| | |
|------------+------------+------------+------------+------------|
|2012-13 |$7,616,142,0|$1,801,695,5| 23.66% | 105,617 |
| | 71| 47| | |
|------------+------------+------------+------------+------------|
|2011-12 |$7,399,022,4|$1,796,451,7| 24.28% | 165,523 |
| | 25| 22| | |
|------------+------------+------------+------------+------------|
|Average |$7,372,199,3|$1,870,508,3| 25.43% | 120,641 |
| | 10| 54| | |
----------------------------------------------------------------
---------------------------------------------------------------
| 2013-14 DGS Statewide Consolidated Annual Report|
---------------------------------------------------------------
Unfortunately, participation rates have not been as high as desired,
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with state agencies meeting the 25% small business goal in only five
out of the last 15 report years. Further, in comparing year to year
numbers, it is important to note that not all of the mandatory
reporting agencies provide annual data to DGS for inclusion in the
report. As an example, only 80% of the mandatory reporters provided
data for 2013-14.
5)Increasing Small Business and DVBE Procurement Participation: Every
year, Members of the Legislature introduce a range of bills to
improve outreach and increase targeted preferences to increase small
business participation in state contracting. Over the years, direct
and innovative approaches have been added including mandating small
business and DVBE liaisons at every agency, establishing official
state-level Small Business and DVBE Advocates, and requiring the
state join a national on-line contracting platform (BidSync), which
is soon to be transferred back to a state-only web platform
(F$SCAL).
Among other challenges is the high concentration of contracting
within a few departments including several which bid contracts for
specialized services. According to the 2013-14 Statewide
Consolidated Annual Report, by DGS, the top 10 contracting agencies
awarded more than 83% of contract dollars in 2013-14. The data
suggests that having department specific strategies to increase
small business participation will be required to consistently meet
the 25% goal.
In 2013-14, 61% of all state contracts were awarded by the
Department of Corrections (SDCR), the Department of Transportation,
and the Department of Health Care Services (DHCS). This means that
regardless of the efforts of the California School Finance Authority
(88.04% of the $99.677 contracts awarded) and California
Transportation Commission (89.44% of the $14,291 in contracts
awarded), the state's largest contracting entities must do a better
job of contracting with small businesses and microbusiness if the
state is going to consistently meet its mission of offering small
businesses meaningful procurement opportunities. The chart below
shows information on the contracting activities of the top 10
contracting departments for 2013-14.
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-------------------------------------------------------------------
| Top 10 Contracting Agencies in 2013-14 |
-------------------------------------------------------------------
|-------------+----------+-----------+----------------+-------------|
| Departments | Total | Percentage| Small Business | DVBE |
| | Contact | of | and | Participatio|
| | Dollars | Statewide | Microbusiness | n |
| | | Spending | Participation | Percentage |
| | | | Percentage | |
|-------------+----------+-----------+----------------+-------------|
| All |$7,372,199| 100% | 28.35% | 3.67% |
| Mandatory | ,310| | | |
| Reporters | | | | |
|-------------+----------+-----------+----------------+-------------|
| Corrections |$2,196,722| 30.93% | 36.03% | 3.60% |
| and | ,703| | | |
|Rehabilitatio| | | | |
| n | | | | |
|-------------+----------+-----------+----------------+-------------|
|Transportatio|$1,0174,83| 15.14% | 28.24% | 3.70% |
| n | 3,768| | | |
|-------------+----------+-----------+----------------+-------------|
| Health Care |$1,069,021| 15.05% | 2.36% | 0.45% |
| Services | ,018| | | |
| (DHCS) | | | | |
|-------------+----------+-----------+----------------+-------------|
| State | $553,519,| 7.79% | 49.17% | 2.12% |
| Hospitals | 167| | | |
|-------------+----------+-----------+----------------+-------------|
| Water | $351,102,| 4.94% | 19.79% | 2.62% |
| Resources | 439| | | |
|-------------+----------+-----------+----------------+-------------|
| Highway | $234,348,| 3.30 | 12.28 | 1.72 |
| Patrol | 394| | | |
|-------------+----------+-----------+----------------+-------------|
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| General | 135,233,| 1.90% | 42.23% | 10.49% |
| Services | 255| | | |
|-------------+----------+-----------+----------------+-------------|
| Parks and | 123,503,| 1.74% | 31.49% | 6.76% |
| Recreation | 810| | | |
|-------------+----------+-----------+----------------+-------------|
| Motor | 111,305,| 1.57% | 25.09% | 6.55% |
| Vehicles | 071| | | |
|-------------+----------+-----------+----------------+-------------|
| Public | $99,350,| 1.40 | 12.34 | 3.34 |
| Utilities | 011| | | |
| Commission | | | | |
|-------------+----------+-----------+----------------+-------------|
| Top 10 |$5,975,205| 83.77% | 27.35% | 3.02% |
| Total | ,480| | | |
-------------------------------------------------------------------
-------------------------------------------------------------------
| Source: 2013-14 Statewide Consolidated Annual Report prepared |
|by DGS |
| |
| |
| |
-------------------------------------------------------------------
In 2013-14, as shown above, DHCS contracted with small business for
only 2.36% of its contracting activities. In fact, the Health and
Human Services Agency had the lowest overall small business and
microbusiness participation rates (20.285) among all other agencies
in the state. If California is going to meet and exceed its small
business and DVBE goals, high contract volume agencies like
Department of Transportation will need to substantially exceed the
25% and 3% targets.
6)Small and Emerging Contractors Technical Assistance Program: After
several failed attempts to provide assistance to small business in
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accessing surety bonds, the Legislature successfully passed, and the
Governor signed AB 2376 (Price) Chapter 458, Statutes of 2008. This
measure established the Small and Emerging Contractors Technical
Assistance Program (SECTAP) through the California Department of
Transportation. Under the SECTAP, Caltrans offered training and
technical assistance to small contractors to improve their ability
to secure surety bonds. Collateral support, in the form of a surety
guarantee, was provided through the federal Small Business
Administration (described below). The SECTAP was repealed under its
own terms in January 2013. Statute required annual reporting by the
Department of Transportation, but committee staff was unable to
locate any report.
AB 2270 proposes a similar model to the SECTAP, this time using a
state guarantee to help the contractor access surety bonds. The
bill proposes establishing a new surety bond guarantee program; the
I-Bank, however, has existing surety bond guarantee authority, which
is described below.
Federal Surety Bond Guarantee: The Small Business Administration
(SBA) offers a surety bond guarantee program for small and emerging
contractors that cannot otherwise obtain surety bonds through
regular commercial channels. The SBA guarantee covers contracts up
to $2 million.
A surety bond is a three-party financial agreement between a surety,
the contractor, and the project owner, in this case the state. The
agreement binds the contractor to comply with the terms and
conditions of a contract. If the contractor is unable to
successfully perform the contract, the surety institution assumes
the contractor's responsibilities and completes the project. The SBA
surety guarantee program covers four types of contract bonds:
Bids - bonds that guarantee that the bidder on a contract will
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enter into the contract and furnish the required payment and
performance bonds;
Payment - bonds that guarantee the payment of the contractor's
workers and materials;
Performance - bonds that guarantee the contractor will perform
the contract in accordance with its terms; and,
Ancillary - bonds that are incidental and essential to the
performance of the contract.
A contractor applying for an SBA surety guarantee must qualify as a
small business, in addition to meeting specific eligibility criteria
for surety bonding.
State Surety Bond Guarantee Program: Given the importance of surety
bonds to small business contractors, including primes and
subcontractors, the state also has authority to operate a surety
bond guarantee program through the Small Business Center at the
I-Bank. Qualifying small business contractors are required to
demonstrate to following:
There is a low probability that the surety bond would be
granted by a financial institution or financial company under
reasonable terms or conditions, and the beneficiary has
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demonstrated a reasonable prospect of successful completion of
the project.
The surety bond will be used for a project in this state.
The beneficiary has a minimum equity interest in the business
as determined by the directives and requirements.
As a result of the surety bond, the jobs generated or retained
demonstrate reasonable conformance to the directives and
requirements specifying employment criteria.
The Small Business Finance Center is not currently offering surety
bond guarantees. With funding for technical assistance and
collateral capitalization, the I-Bank provides this new contractor
development program.
1)Suggested Amendments: The Committee may wish to consider whether
the state requires another surety bond guarantee program operated by
DGS, or whether the existing I-Bank program should be activated.
2)Related Legislation: Below is a list of the related bills.
a) AB 1247 (Medina and Bocanegra) Small Business Finance Center:
This bill establishes the California Small Business Finance
Center at the I-Bank, within the Governor's Office and Economic
Development, and transfers the authority to administer the small
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business loan guarantee program, direct disaster loans, surety
bond guarantees, and other related programs to the I-Bank.
Status: Signed by the Governor, Chapter 537, Statutes of 2013.
b) AB 1491 (Arambula) Small and Emerging Contractors Technical
Assistance Program: This bill establishes the Small and Emerging
Contractors Technical Assistance Program, administered by the
California Department of Transportation, to provide small
contractors with technical assistance and training to improve
their knowledge and skills necessary to secure surety bonds
required for public works contracting and assist them in
participating in state-awarded construction contracts. Status:
JEDE-related content removed, 2007.
c) AB 1695 (Bass) Capitalize Surety Bond Guarantee program: This
bill capitalizes and activates the Surety Bond Guarantee Account,
administered by the Small Business Loan Guarantee Program, for
the purpose of providing surety bond guarantees for small
businesses that provide services on state and federally funded
transportation projects. Status: Held under submission in the
Assembly Committee on Appropriations, 2007.
d) AB 2376 (Price): Emerging Contractors Technical Assistance
Program: This bill authorizes the establishment of the Small and
Emerging Contractors Technical Assistance Program, administered
by the California Department of Transportation, for the purpose
of providing small and emerging contractors with the technical
assistance necessary to obtain surety bond guarantees offered by
the federal Small Business Administration. The program is
repealed on January 1, 2013. Status: Signed by the Governor,
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Chapter 458, Statutes of 2008.
3)Double Referral: This measure has been double referred to the
Assembly Committee on Jobs, Economic Development, and the Economy
and the Assembly Committee on Accountability and Administrative
Review (AAR). Should this measure pass JEDE, 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