BILL ANALYSIS Ó
AB 2905
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Date of Hearing: April 19, 2016
ASSEMBLY COMMITTEE ON JOBS, ECONOMIC DEVELOPMENT, AND THE ECONOMY
Eduardo Garcia, Chair
AB 2905
(Committee on Jobs, Economic Development, and the Economy) - As
Amended April 12, 2016
SUBJECT: Public contracting with small businesses
SUMMARY: Makes a number of changes to the reporting on state
procurement activities with small businesses, including the reporting
of prime and subprime contracting activity separately and expressing
legislative intent that the state set and implement a 25% small
business participation objective. Specifically, this bill:
1)Expresses legislative intent that state government set and implement
a 25% small business participation goal for state procurement and
contracting.
2)Requires each state department to report on its internal small
business procurement participation goal. This includes contracts
for goods, information technology, services to the state, and the
construction of state facilities.
3)Requires the reporting to be part of the department's pre-existing
reporting requirements to DGS, relating to state contracts and small
business and disabled veteran business enterprise (DVBE)
participation.
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4)Requires a state department to annually report small business
participation based on prime and subprime contracts beginning with
the 2017-18 contract period.
5)Modifies the categories of reporting for small businesses from 0-5,
26-50, 51-75, and 76-100 employees, to 0-5, 0-20, and 21-100
employees.
6)Makes other technical corrections.
EXISTING LAW:
1)Declares it is state policy that small businesses and microbusiness
receive a fair portion of the total purchases and contracts or
subcontracts for state goods, services, information technology, and
construction.
2)Designates the Department of General Services (DGS) as the
administrator of the state Small Business Procurement and Contract
Act (Small Business Procurement Act), which includes certifying and
implementing targeted preference programs for certified small
businesses, microbusinesses, and DVBEs.
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.
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4)Requires each state department to establish an annual goal for small
business procurement participation, including contracts for goods,
information technology, services to the state, and in the
construction of state facilities.
5)Requires each department to annually report on its contracting
activity for consultant services and its level of procurement
participation by DVBEs, and small businesses. The information is
aggregated and made public by DGS.
6)Defines a DVBE, for the purpose of being eligible for state
procurement, as an entity meeting all of the following requirements:
a) The legal structure of the business is a:
i) Sole proprietorship with at least 51% owned by one or more
disabled veterans;
ii) Publicly owned business with at least 51% of its stock
unconditionally owned by one or more disabled veterans;
iii) 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
iv) Joint venture in which at least 51% of the joint venture's
management, control, and earnings are held by one or more
disabled veterans.
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) 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
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disabled veterans as the owners of the business; and
d) 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.
FISCAL EFFECT: Unknown
POLICY ISSUE FRAME
Small businesses play an essential role within the California economy,
contributing the most net new jobs, helping to link the California
economy to manufacturing supply chains, and helping to disburse the
financial advantages of the state's globally connected economy. In
recognition of the sacrifices already made by California's disabled
veteran community and the important economic role of small businesses,
state agencies are mandated to take certain actions to include these
two groups in state procurement opportunities. Unfortunately,
participation rates have not been as high as desired with state
agencies meeting the 25% small business procurement goal only five
times in the last 15 years.
This bill includes several technical changes that are designed to
enhance the state's procurement management practices as they relate to
small businesses. As a first step, each state department will be
required to disclose the small business procurement target when
reporting on the outcomes of its state contracting activities. Next,
the information on small business contracts will be standardized and
better aligned with industry standards. Collectively, these changes
should result in a more transparent and accountable tracking process.
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The analysis includes background on the role of small businesses
within the California economy and current state procurement practices.
COMMENTS:
1)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 to 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 the highest
number of businesses in the professional, scientific, and technical
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
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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.
2)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 small
businesses.
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.
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.
-------------------------------------------------------------------
| Small Business and Microbusiness Contracting Activity - Mandated |
| Reporters |
-------------------------------------------------------------------
|-------------+-------------+-------------+-------------+-------------|
| Fiscal year | Total | Total Small | Total |Total Number |
| | Contract |Business and | Percent |of Contracts |
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| | Dollars |Micobusiness | | |
| | | Contract | | |
| | | Dollars | | |
|-------------+-------------+-------------+-------------+-------------|
|2013-14 |$7,101,433,43|$2,013,377,79| 28.35% | 90,784 |
| | 3| 2| | |
|-------------+-------------+-------------+-------------+-------------|
|2012-13 |$7,616,142,07|$1,801,695,54| 23.66% | 105,617 |
| | 1| 7| | |
|-------------+-------------+-------------+-------------+-------------|
|2011-12 |$7,399,022,42|$1,796,451,72| 24.28% | 165,523 |
| | 5| 2| | |
|-------------+-------------+-------------+-------------+-------------|
|Average |$7,372,199,31|$1,870,508,35| 25.43% | 120,641 |
| | 0| 4| | |
---------------------------------------------------------------------
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| 2013-14 DGS Statewide Consolidated Annual Report|
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Unfortunately, participation rates have not been as high as desired,
with state agencies meeting the 25% small business goal in only five
out of the last 15 report years. Further, in comparing year to year
numbers, it is important to note that not all of the mandatory
reporting agencies provide annual data to DGS for inclusion in the
report. As an example, only 80% of the mandatory reports were
provided for 2013-14.
3)Increasing Small Business and DVBE Procurement Participation: Every
year, Members of the Legislature introduce a range of bills to
improve outreach and expand targeted preferences to increase small
business participation in state contracting. Over the years, direct
and innovative approaches have been added including mandating small
business and DVBE liaisons at every agency, establishing official
state-level Small Business and DVBE Advocates, and requiring the
state join a national on-line contracting platform (BidSync), which
is soon to be transferred back to a state-only web platform
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(F$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. AB 2905 establishes a first step by requiring the
disclosure of the individual department's small business
participation target, which is currently required to be set, but
necessarily disclosed.
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 to small businesses) and
the California Transportation Commission (89.44% of the $14,291 in
contracts awarded to small businesses), 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.
-------------------------------------------------------------------
| 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 | |
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|-------------+----------+-----------+----------------+-------------|
| 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| | | |
|-------------+----------+-----------+----------------+-------------|
| 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 | | | | |
|-------------+----------+-----------+----------------+-------------|
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| Top 10 |$5,975,205| 83.77% | 27.35% | 3.02% |
| Total | ,480| | | |
-------------------------------------------------------------------
-------------------------------------------------------------------
| Source: 2013-14 Statewide Consolidated Annual Report prepared |
|by DGS |
| |
| |
| |
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According to DGS, the state's inability to reach its small business
procurement goal in 2011-12 was directly attributable to DHCS' poor
performance. In 2011, DHCS issued a multiyear contract for Medi-Cal
Dental Services worth $300 million per year without any small
business or DVBE participation. Had DHCS met their small business
goals on this one contract, DHCS would have had a 21% small business
participation rate, instead of the reported 5%. DGS suggested that
DHCS focus on certifying the individual dentists that will be
subcontracting under the master Delta Dental contract, otherwise
this single contract will continue to hold down the state's overall
participation rates for years to come.
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 DHCS
will need to meet their small business participation.
4)Related Legislation: Below is a list of the related bills by date.
a) AB 351 (Jones-Sawyer) Small Business Participation Goal in
Public Contracts: This bill would have required each state
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agency to establish and achieve a 25% small business procurement
participation goal. Agencies that failed to meet the goal would
have been required to develop and implement a corrective plan, as
specified. Status: Held on Suspense in the Assembly Committee
on Appropriations, 2015.
b) 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 enterprises from
3% to 5% of the value of state contracts. Status: Held on the
Suspense File in the Assembly Committee on Appropriations, 2014.
c) AB 550 (Brown) State Procurement Procedures for Small
Businesses: This bill would have made key changes to state
procurement procedures for the purpose of increasing small
business, including microbusiness, and disabled veteran-owned
business enterprise participation rates. Status: Held on the
Suspense File of the Assembly Committee on Appropriations, 2013.
d) SB 67 (Price) Small Business Participation in Public
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. Status: Held in the Assembly Committee
on Appropriations in 2011.
e) 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. Status: Held in the Assembly Committee on
Appropriations in May 2010.
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REGISTERED SUPPORT / OPPOSITION:
Support
None Received
Opposition
None Received
Analysis Prepared by:Toni Symonds / J., E.D., & E. / (916) 319-2090