BILL ANALYSIS                                                                                                                                                                                                    

                                                                       AB 2905

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       Date of Hearing:   April 19, 2016


                                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  

       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)  


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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  

       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  

       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


       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.  


       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  

         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  

         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|             |             |
         |                   2013-14 DGS Statewide Consolidated Annual Report|

         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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         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                                                             |
         |                                                                   |
         |                                                                   |
         |                                                                   |

         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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       None Received

       None Received

       Analysis Prepared by:Toni Symonds / J., E.D., & E. / (916) 319-2090