BILL ANALYSIS Ó
SENATE COMMITTEE ON GOVERNMENTAL ORGANIZATION
Senator Isadore Hall, III
Chair
2015 - 2016 Regular
Bill No: SB 1176 Hearing Date: 4/12/2016
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|Author: |Galgiani, et al. |
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|Version: |2/18/2016 Introduced |
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|Urgency: |No |Fiscal: |Yes |
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|Consultant:|Felipe Lopez |
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SUBJECT: Small Business Procurement and Contract Act: business
size
DIGEST: This bill revises the definition of "small business"
and "microbusiness" for purposes of the Small Business
Procurement and Contract Act (Act) by increasing the dollar
amount threshold for a small business to $30 million and for a
microbusiness to $5 million and requires those dollar amounts to
be adjusted to reflect changes in the California Consumer Price
Index (CPI) biennially.
ANALYSIS:
Existing law:
1)Grants, through the Small Business Procurement and Contract
Act, preference for small businesses and microbusiness in the
award of a contract for goods, services, or information
technology to the state and in the construction of state
facilities.
2)Permits a state agency and the California State University to
award specified types of contracts with a value of between
$5,000 and $250,000 to a certified small business, including a
microbusiness and a disabled veteran business enterprise,
without complying with certain competitive bidding
requirements, provided the agency obtains price quotations
from at least 2 small businesses, including microbusinesses,
SB 1176 (Galgiani) Page 2 of ?
or 2 disabled veteran business enterprises.
3)Establishes the Office of Small Business and Disabled Veteran
Business Enterprise Services and prescribes duties for the
office, which include maintaining a bidders list of small
businesses and disabled veteran businesses and identifying
which small businesses also qualify as microbusinesses.
4)Prescribes penalties for small businesses or microbusinesses
that provide incorrect information or withhold information
that leads to its incorrect classification as such an entity
and is awarded a contract because of the classification.
Penalties include the repayment of the amount of the bid
preference, in addition to a penalty up to 10 percent of the
contract amount, reimbursement of the costs of investigating
the fraud, prohibiting the business to participate in state
contracts for between 3-10 years, and, if the fraud is found
to be willful and knowing, the business is subject to a civil
penalty of between $10,000-$30,000 for the first offense, and
$30,000-$50,000 for subsequent offenses.
5)Defines a "small business" (SB) to mean an independently owned
and operated business that is not dominant in its field of
operation, the principal office of which is located in
California, the officers of which are domiciled in California,
and which, together with affiliates, has 100 or fewer
employees, and average annual gross receipts of $10 million or
less over the previous three years, or is a manufacturer, as
defined, and has 100 or fewer employees.
6)Defines a "microbusiness" (MB) as a small business which,
together with affiliates, has average annual gross receipts of
$2.5 million or less over the previous three years, or is a
manufacturer, as defined, with 25 or fewer employees.
7)Defines a "disabled veteran business enterprise " (DVBE) to
mean an enterprise that is at least 51% owned by one or more
disabled veterans and the daily business operations are
managed and controlled by one or more disabled veterans. For
certification purposes a "disabled veteran" is a veteran of
the U.S. military, naval, or air service who resides in
California and has a service-connected disability of at least
10% or more.
8)Requires the Director of General Services (DGS) to conduct a
SB 1176 (Galgiani) Page 3 of ?
biennial review of the average annual gross receipt levels and
authorizes the Director to adjust the average annual gross
receipts threshold to reflect changes in the California
Consumer Price Index for all items.
9)Requires a contractor requesting a small business or
microbusiness preference to do so under penalty of perjury.
This bill:
1)Revises the definition of "small business" and "microbusiness"
for purposes of the Small Business Procurement and Contract
Act by increasing the dollar amount threshold for a small
business to $30 million and for a microbusiness to $5 million
and requires those dollar amounts to be adjusted to reflect
changes in the CPI.
2)Allows the DGS and other state agencies to count contractors
that would be considered a small business or microbusiness
under the changes made by this bill for the year this bill is
enacted if the directors are unable to meet the small business
participation goals under existing laws.
3)Allows more contractors to qualify as a small business or
microbusiness, thus expanding the group of contractors
authorized to request a preference filed under penalty of
perjury.
4)Makes various findings and declarations pertaining to the
importance of small businesses in the State of California.
Background
Purpose of the bill. According to the author, "the proposed
adjustment takes into consideration inflation, the benefits of
increased competition as more small businesses become eligible
for state contracting preferences and the recognition that the
state, with $29.5 billion in unissued general obligation bonds
for infrastructure projects, is currently inconsistently meeting
its 25% small business participation goal. And, with the state
engaging in massive, costly and lengthy construction projects,
the current revenue limits may disqualify many relatively small
businesses after they receive their first substantial
subcontracts."
SB 1176 (Galgiani) Page 4 of ?
Current Thresholds. Current law defines a small business as,
among other things, an independently owned and operated business
with average annual gross receipts of $10 million or less over
the previous three years. It defines a microbusiness as, among
other things, a small business with average annual gross
receipts of $2.5 million or less over the previous three years.
However because current law allows the Director of DGS to
adjust the average annual gross receipts threshold to reflect
changes in the CPI the current threshold for a SB is $14 million
and $3.5 million for MBs. This bill will increase those
thresholds to $30 million for SBs and $5 million for MBs as well
as require, and not simply allow, the Director of DGS to adjust
those dollar amounts to reflect changes in the CPI.
As of December 2015, there were 26,404 businesses in California
which DGS had certified as small businesses for purposes of the
Act. It is unclear how many more businesses would qualify as
small businesses with a $30 million threshold. However, it
should be expected that businesses which currently qualify as
small businesses would face competition from businesses that
would now qualify under the $30 million threshold.
Participation Goals. On March 29, 2006, Executive Order S-02-06
by Governor Schwarzenegger established a minimum participation
goal of 25 percent for SBs/MBs and directed DGS to monitor the
progress of all agencies, departments, boards and commissions
towards meeting the 25 percent small business participation
goal. It should be noted that there is currently no MB
participation goal; rather the 25 percent participation goal for
small businesses is a combination of SBs and MBs. Also, though
DGS implements various strategies to aid departments'
achievement of their participation goals, there is no statutory
penalty for not meeting the goal.
Every year, DGS releases a Consolidated Annual Report (CAR) on
contracting dollars that state departments award to small
businesses. There are 154 mandatory reporting departments,
those that are under DGS' statutory purchasing authority, that
are required to report and another 31 state departments that
report voluntarily, departments that are not under DGSs
statutory purchasing authority.
According to the 2014-15 CAR, mandatory reporting departments
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exceeded the statewide goal; reporting 25.61% participation by
SBs/MBs. It should be noted that the report does not give a
detailed breakdown of SBs/MBs, but rather the 25.61% is a
combination of both SBs/MBs for mandatory reporting departments.
Over the last five years, the average for all mandatory state
departments has been 24.78% with a high of 28.35% in fiscal year
2013-14 and a low of 22.12% in fiscal year 2010-2011.
As the numbers demonstrate, over the past five years the state
has, if rounded up, averaged 25%, or the intended participation
goal for mandatory reporting departments. This an average
across all mandatory reporting departments and not for specific
departments.
Small Business Procurement and Contract Act. The Small Business
Procurement and Contract Act was implemented in 1973 to
establish a small business preference within the state's
procurement process. The goal is to increase the number of
contracts between the state and small businesses. The 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.
Upon meeting eligibility requirements, certified small
businesses and micro- businesses are entitled to a five percent
bid preference on applicable state solicitations. Certified
small businesses and microbusinesses are eligible for the
State's Small Business Participation Program. The program sets
a goal for the use of small businesses in at least 25% of the
State's overall annual contract dollars.
In addition, under the Prompt Payment Act, the State must pay a
certified small business or microbusiness higher interest
penalties for late payment of an undisputed invoice. The Act
also permits state agencies to use a streamline process, known
as the SB/DVBE Option, by contracting directly with California
certified SBs/MBs for goods, services, information technology
and Public Works Projects. The solicitation must be valued at
more than $5,000 and the State agency must obtain price quotes
from at least two California certified SBs/MBs.
Prior/Related Legislation
SB 1176 (Galgiani) Page 6 of ?
SB 1219 (Hancock, 2016) includes "employment social enterprise,"
which are businesses that provide jobs for individuals who have
experienced significant barriers to employment, within the Small
Business Procurement and Contract Act (Act) for the purpose of
allowing them to participate in state contracting bid
preferences provided to certified small business enterprises.
(Pending in Senate Governmental Organization Committee)
AB 1218 (Weber, 2015) would make significant adjustments to
contracting performance goals and program participation
reporting associated with the DVBE Program. (Held on the Senate
Suspense File)
AB 1568 (Grove, 2014) would have required state agencies that
opt to acquire goods, services, or information technology
through a specified SB/DVBE contracting option to solicit at
least three quotes, and obtain at least two quotes before
awarding the contracts. (Held on the Senate Suspense File)
SB 297 (Roth, 2014) would have increased the annual statewide
participation goal for DVBE state contracts from three percent
to five percent. (Held in Assembly Jobs, Economic Development
and the Economy Committee)
AB 218 (Dickinson, Chapter 699, Statutes of 2013) prohibits a
state or local agency from asking employment applicants to
disclose information regarding their conviction history until
the agency has determined an applicant meets the position's
minimum employment qualifications.
AB 177 (Ruskin, Chapter 342, Statutes of 2010) increased and
conformed penalties for persons who falsely engage in activities
relating to the Act.
AB 31 (Price, Chapter 212, Statutes of 2009) increased the
maximum contract threshold amount for awards to small
businesses, including microbusinesses, and DVBEs under the
state's streamlined procurement process, from $100,000 to
$250,000, as specified.
FISCAL EFFECT: Appropriation: No Fiscal
Com.: Yes Local: Yes
SUPPORT:
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California Hispanic Chamber of Commerce
Greater Los Angeles African American Chamber of Commerce
Los Angeles County Business Federation
OPPOSITION:
None received
ARGUMENTS IN SUPPORT: According to the Los Angeles County
Business Federation, "California State Departments already have
trouble meeting their small business goals due to the lack of
small business firms available for large infrastructure
projects. With billions more in infrastructure projects in
development, it will take more than 500-600 qualified small
businesses to be certified under the current standards to be
able to complete for planned mega-projects. The departments
responsible for these projects will not be able to meet their
small business goals with the current pool of small businesses."