BILL ANALYSIS Ó
SB 159
Page 1
Date of Hearing: June 23, 2015
ASSEMBLY COMMITTEE ON JOBS, ECONOMIC DEVELOPMENT, AND THE ECONOMY
Eduardo Garcia, Chair
SB
159 (Nielsen) - As Amended March 23, 2015
SENATE VOTE: 38-0
SUBJECT: California Disabled Veteran Business Enterprise Program: goal
achievement.
SUMMARY: Clarifies the metrics to be used when calculating the 3%
procurement participation goal for disabled veteran business
enterprises (DVBEs). The bill includes legislative findings that
these changes are declaratory of existing law.
EXISTING LAW:
1)Establishes the California Disabled Veteran Business Enterprise
Program (DVBE 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, officer, and any other state entity that enters into a
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contract using state funds for construction, professional services,
materials, supplies, equipment, alteration, repair, or improvement.
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:
(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
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firm, or other foreign-based business.
4)Requires DGS to collect information from awarding state departments
on the level of DVBE procurement participation by contract value
awarded and a statistical summary detailing each awarding department
and the state's progress in achieving the 3% procurement
participation goal for DVBEs.
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.
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: None
POLICY ISSUE FRAME:
The DVBE Program was established in 1989 for the purpose of
facilitating state contracting opportunities among businesses owned by
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disabled veterans. Since 2000, the 3% procurement participation goal
has been met only five times. All five of those years have been during
the most recent report periods. While this should be an indication of
more effective program implementation, there have also been growing
concerns over the accuracy of state agency reporting. Most recently,
the California State Auditor issued a report which found significant
reporting and management deficiencies in the manner state agencies were
implementing the DVBE Program. Among other issues, was the
inconsistent manner in which state agencies calculated and reported
DVBE participation data to DGS for inclusion in the state consolidated
report on procurement.
This bill clarifies that the 3% goal is to be based on the total amount
of dollars actually expended by each agency and received by the DVBE
during the fiscal year.
The Comment section of the analysis includes additional 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.
COMMENTS:
1)Author's Purpose: According to the author's statement, "In 1989, the
Senate enacted Senate Bill 1517, which established the Disabled
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Veteran Business Enterprise program and installed the Department of
General Services (DGS) as the central administering agency.
From its inception, the program contained a statutory requirement for
DGS to report on how well awarding departments, individually and in
statewide aggregate, were doing in achieving the program's 3%
participation goals. And those goals are clearly defined in terms of
being measured in dollars actually expended under contracts.
But DGS serves as administering agency for several other contracting
programs in addition to the DVBE program. Each program is located in
different parts of the state codes, and each had its own reporting
requirement.
In 2005, the Legislature enacted a bill that pulled the reporting
sections away from their statutory locations and co-located them in a
new section. This created a consolidated contracting report in which
DGS could report on all the programs in one document at one time.
But when the Legislature consolidated the report requirements, it
forgot to include statutory references to that pointed back to the
original code areas from where the reporting sections originated and
draw their meaning and legislative intent.
This has contributed to considerable confusion with DGS' annual
report on DVBE goal achievement. DGS has stated the reporting statute
is vague and ambiguous and, therefore, has regularly reported DVBE
participation using dollars awarded, which is a much broader and less
accurate metric.
SB 159 merely adds the proper references to existing law to clarify
that the program reporting metric has always been intended to be the
same metric used for measuring actual program participation.
The bill does not change the law. It merely clarifies it ."
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
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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.
3)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 fiscal 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 and microbusiness goal. Approximately 90% of
DVBEs also hold a small business or microbusiness certification.
Departments also have the option of offering a 1% to 5% DVBE
contracting incentive 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 commits the
businesses to using DVBEs in the future. DGS is authorized to audit
businesses that submit utilization plans to ensure compliance.
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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 (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.
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 consistently me its DVBE procurement participation
goals for the report years.
---------------------------------------------------------------
| DVBE Three-Year Contracting Activity - Mandated Agencies |
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---------------------------------------------------------------
|------------+------------+------------+------------+------------|
|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 | | | |
|------------+------------+------------+------------+------------|
|2013-14 |$8,233,113,6|$299,683,794| 3.64% | 14,305 |
| | 60| | | |
|------------+------------+------------+------------+------------|
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|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.
Further challenges were identified in a 2014 State Audit [2013-115],
which reported significant inconsistencies in the reporting protocols
among different state agencies. Some agencies reported only
contracts where the DVBE served as the prime contractor and other
departments reported both DVBE prime and subcontracts. Some awarding
departments only reported DVBE participation based on the initial
contract bid, while others more accurately reported the actual amount
paid to the DVBE.
SB 159 clarifies one of the central issues of the 2014 State Audit by
cross-referencing the 3% goal provisions with the reporting
requirements.
4)2014 Audit of the DVBE Program: The DVBE Program is unique in that
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it is intended as both a reward for their significant sacrifices on
behalf of the nation, and as a means to assist disabled veterans
establish and grow their own businesses. Over the last decade, the
DVBE community has often been critical of the state's oversight of
the various contracting departments implementation of the program.
Concerns have been raised about poor and inconsistent reporting of
data, a lack of effective enforcement tools, and the seemingly
limited number of DVBEs that have successfully obtained prime or
major subcontracts.
Responding to these and other issues, Senator Hueso, then Chair of
the Senate Committee on Veterans Affairs, and former Senator Ron
Calderon, requested a comprehensive review of the DVBE program by the
California State Auditor. The completed audit was released in
February 2014 and it reported the following findings:
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.
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.
There is inadequate documentation by state contracting agencies
on DVBE participation.
Reporting methodologies differ by state agencies on DVBE
participation.
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DGS has inadequate control over the state's procurement vendor,
Bidsync.
CalVet needs to take a more active role in working with state
agencies and tracking outreach activities.
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.
Implementing legislation, SB 839 (Correa) and AB 1735 (Jones-Sawyer),
failed to pass fiscal committees in 2014. In January 2015, the State
Auditor again highlighted the deficiencies in the DVBE Program and
encouraged the Legislature to take action.
SB 159 clarifies that the state must report on the actual amount of
proceeds received by DVBEs through state contracts. AB 1218 (Weber),
which passed this committee in April 2015, also addresses the 3%
calculation discrepancy, as well as:
Improving documentation and administrative review requirements;
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Incentivizing the selection of DVBE that haven't previously
participated in state contracts and DVBEs with 51% or more veteran
workers;
Setting an accountability standard for DVBE outreach efforts;
Requiring reporting of both DVBEs that serve as prime
contractors and subcontractors; and
Requiring DGS to establish reporting requirements for
multi-year contracts.
AB 1218 is scheduled to be heard in the Senate Committee on Veteran
Affairs on June 23, 2015.
1)DGS Response to the Audit: Effective July 2014, DGS updated its
forms to specifically require state awarding agencies to report on
the total amount of DVBE participation proposed in the bid package
and ultimately paid to the DVBE. In addition, DGS developed a
PowerPoint and other educational materials to inform state agency
contracting staff of the revised forms.
While it may appear that the data discrepancy issue has been
addressed, without clarifying statutory changes and greater
specificity in administrative areas that have consistently been found
lacking, similar program challenges will likely arise in the future.
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Without the proper data, the Legislature may be unable to
successfully carryout its oversight responsibilities.
2)Amendments: The author has submitted language to the Committee and
received approval from the Assembly Committee on Rules to add an
urgency clause to the bill.
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 413 (Chavez) Transfer of DVBE Status: This bill
authorizes a spouse or child to enter into additional state
contracts during the three years currently permitted for the
continued operation of a disabled veteran-owned business
enterprise (DVBE) following the death or permanent disability of
an owner of a certified DVBE. Existing law limits the business'
activities to the completion of existing contracts. Status:
Scheduled to be heard in the Senate Committee on Veterans
Affairs on June 23, 2015.
ii) AB 1218 (Weber) DVBE Program Reform: This bill 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 Senate Committee
on Veterans Affairs on June 23, 2015.
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.
The bill also requires contractors to report to the awarding
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department the actual contract amount paid to the SME and/or
DVBE. Status: The bill was signed by the Governor, Chapter
212, Statutes of 2009.
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 669 (Cohn) Commercially Useful Function: This bill
requires DVBE's and small businesses to perform a commercially
useful function, as defined, in relation to any contract those
businesses are awarded a specified preference or incentive.
Status: Signed by the Governor, Chapter 623, Statutes of 2003.
iv) 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.
v) 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,
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Statutes of 2010.
vi) 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.
vii) 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.
viii) SB 719 (Correa) FI$CAL Reporting of DVBE Contracting
Activity: This bill would have required awarding departments
that sued the Financial Information System for California
(FI$CAL) to report statewide participation goals for the DVBE
Program in the amount expended to the DVBE. Status: Held on
Suspense in the Assembly Appropriations Committee, 2013.
ix) 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.
x) SB 941 (Florez) DVBE Advocates: This bill requires the
Department of Veteran's Affairs and awarding departments to
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appoint DVBE advocates to assist in meeting DVBE procurement
participation goals. Status: Signed by the Governor, Chapter
666, Statutes of 2002.
xi) AB 1008 (Machado) DVBE Certification Sanctions: This bill
strengthened sanctions that could be levied against businesses
that fraudulently misrepresent their eligibility for DVBE
certification. Status: Signed by the Governor. Chapter 632,
Statutes of 2003.
xii) 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 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
measure the Assembly Committee on Jobs, Economic Development and the
Economy and to the Assembly Committee on Veterans Affairs (VA).
Should this measure pass the committee, it will be referred to VA for
further policy consideration.
REGISTERED SUPPORT / OPPOSITION:
Support
The American Legion
AMVETS, Department of California
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California Association of County Veterans Service Offices
California State Commanders Veterans Council
Disabled Veteran Business Alliance
Military Officers Association of America-California Council
Veterans of Foreign Wars - Department of California
Vietnam Veterans of America - California State Council
Opposition
None received
Analysis Prepared by:Toni Symonds / J., E.D., & E. / (916)
319-2090