BILL ANALYSIS Ó
SB 1176
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Date of Hearing: June 21, 2016
ASSEMBLY COMMITTEE ON JOBS, ECONOMIC DEVELOPMENT, AND THE ECONOMY
Eduardo Garcia, Chair
SB
1176 (Galgiani) - As Amended April 21, 2016
SENATE VOTE: 38-0
SUBJECT: Small Business Procurement and Contract Act: business size
SUMMARY: Expands the number of businesses which can utilize the
special provisions in the Small Business Procurement and Contract Act
when bidding on a state contract. The bill modifies the definition of
a small business and microbusiness by increasing the maximum revenue
limits and the number of employees, as specified. Specifically, this
bill:
1)Finds and declares a number of statements relating the importance of
entrepreneurship, including, but not limited to, the following:
a) The essence of the American economic system of private
enterprise is to be free, open, and to have transparent
competition. The preservation and expansion of that competition
are basic to the economic well-being of this state, and that
well-being cannot be realized unless the actual and potential
capacity of small business enterprises are encouraged and
developed;
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b) It is the policy of the state to aid the interests of small
business enterprises in order to preserve reasonable and just
prices and free competitive enterprise, to ensure that a fair
proportion of the total purchases and contracts or subcontracts
for commodities, supplies, technology, property, and services,
including, but not limited to, renewable energy, wireless
telecommunications, broadband, smart grid, rail, and other mega
infrastructure projects, for regulated state departments are
awarded to small business enterprises, and to maintain and
strengthen the overall economy of the state;
c) The opportunity for full participation in our free enterprise
system by small business enterprises is essential if this state
is to attain social and economic equality for those businesses
and improve the functioning of the state economy. It is in the
interest of the state to expeditiously improve the economically
disadvantaged position of small business owners and employees;
d) The position of small business enterprises can be
substantially improved by expanding the definition of a small
business that would allow these businesses to amass the capital
and expertise necessary to compete for state procurement
opportunities; and
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e) The long-term economic viability of this state depends
substantially upon the ability of small businesses to be
successful.
2)Expresses legislative intent that modifying the definition of a
small business for state contracting purposes does the following:
a) Encourages greater economic opportunity for small businesses;
b) Promotes competition among state departments that issue
contracts in order to enhance economic efficiency in the
procurement of state services; and
c) Clarifies and expands the program for procurement by state
departments for small business enterprises.
3)Increases the average annual gross revenue limit for businesses
eligible for state small business procurement benefits and
incentives, as follows:
a) The revenue cap for small businesses is increased from $10
million to $15 million; and
b) The revenue cap for microbusinesses is increased from $2.5
million to $5 million.
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4)Establishes a new category of small business for the purpose of
bidding on state public works projects, including the erection,
construction, alteration, repair, or improvement of any kind, upon
real property, as specified. The new category of small business is
identical to the existing category, except that the business may
employ up to 200 employees and have average annual gross receipts of
up to $25 million over the preceding three years.
5)Requires rather than authorizes the Department of General Services
(DGS) to adjust the average annual gross receipt levels to reflect
the changes in the California Consumer Price Index.
EXISTING LAW:
1)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 disabled veteran owned business
enterprises (DVBEs).
2)Authorizes a 5% preference for state contract bidders that are
either a certified small business, microbusiness, or a larger
business that commits to using a certified small business or
microbusiness in undertaking the contract. This 5% is calculated
based on the bid of the lowest responsible bidder.
3)Designates DGS as the administrator of the state Small Business
Procurement and Contract Act, which includes certifying and
implementing targeted preference programs for certified small
businesses, microbusinesses, and DVBEs.
4)Authorizes a 5% preference for state contract bidders that are
either a certified small business, microbusiness, or a larger
business that commits to using a certified small business or
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microbusiness in undertaking the contract. This 5% is calculated
based on the bid of the lowest responsible bidder, which may be a
small or non-small business.
5)Authorizes 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 two small
businesses, including microbusinesses, or two DVBEs.
6)Defines, for the purposes of the Small Business Act, that a:
a) "Small business" is 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 receipts for the three previous years.
b) "Microbusiness" is 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.
DGS is required to conduct a biennial review of the average annual
gross receipt levels for small businesses and authorizes DGS to
adjust those levels to reflect changes in the California Consumer
Price Index for all items.
7)Defines a 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.
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FISCAL EFFECT: Unknown
POLICY ISSUE FRAME
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.
Over the next five years, the state is anticipated to initiate over
$50 billion in construction projects related to transportation and
community services including health care, education, courts, and
recreation. To the extent that they can qualify, these construction
projects represent excellent business opportunities for small
businesses. This bill expands the number of business which would be
able to compete for state contracts under the Small Business
Procurement and Contract Act rules. The analysis includes background
on the role small businesses play within the overall economy, current
small business procurement activities, and related legislation.
COMMENTS:
1)Author's Purpose: According to the author, "SB 1176 updates the
average annual gross receipts limit California small and micro
businesses must adhere to as a condition for certification to
participate in certain state procurement programs. The measure
proposes to statutorily increase the three-year average annual gross
receipts limit requirement from $10 million to 15 million for small
businesses and $2.5 million to $5 million for micro businesses.
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For businesses involved in public works projects, the limit is
raised to $25 million and up to 200 employees. Given the type and
complexity of projects the state is currently building, or will
build in the near future - dams, water systems, rail - the technical
expertise many construction businesses must maintain has increased
requiring companies to invest in greater amounts of human and
technical capital, thus limiting the entry of relative small
construction companies from being considered a small business for
state contracting purposes.
And, lastly the proposed measure also requires the Director of
General Services to biennially adjust the revenue limits based on
the California Consumer Price Index. The limits have not been
adjusted for 7 years, since late 2009. The percent change in the
California Consumer Price Index from 1998 to 2015, for example is
52.5%. Meaning, $10 million in 1998 has the same purchasing power
of $15.25 million in 2015 dollars.
This proposed adjustment to the small business definition 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 $29.7 billion
in unissued general obligation bonds for infrastructure projects,
has not always met its 25% small business participation goals for
all departments. "
2)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 $2.4
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 and development
within the California economy.
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Nonemployer firms make up the single largest component of businesses
in California, 2.9 million out of an estimated 3.8 million firms in
2014, with the highest number of businesses (515,814) in the
professional, scientific, and technical services industry sector.
As these non-employer businesses grow, they continue to serve as a
key driver of California's dynamic economy. Excluding nonemployer
firms, businesses with less than 20 employees comprise nearly 90% of
all businesses and employ over 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 3.1 million
firms ($162.4 billion in revenues) for 2014. 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.
3)Small Business Procurement Act: The Small Business Procurement and
Contract Act, administered through DGS, was established 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 80% of DVBEs have dual
certification as a small business or microbusiness.
The Small Business Procurement and Contract 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
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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 from 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|$1,870,508,3| 25.43% | 120,641 |
| | 10| 54| | |
----------------------------------------------------------------
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---------------------------------------------------------------
| 2013-14 DGS Statewide Consolidated Annual Report|
---------------------------------------------------------------
Unfortunately, participation rates have not been as high as desired,
with state agencies meeting the 25% small business goal in only five
out of the last 15 report years. Further, in comparing year to year
numbers, it is important to note that not all of the mandatory
reporting agencies provided annual data to DGS for inclusion in the
report. As an example, only 80% of the mandatory reporters provided
data for 2013-14.
4)Increasing Small Business and DVBE Procurement Participation: Every
year, Members of the Legislature introduce a range of bills to
improve outreach and small business participation in state
contracting. Over the years, direct and innovative approaches have
been added including mandating small business and DVBE liaisons at
every agency, establishing official state-level Small Business and
DVBE Advocates, and continually trying to update the state automated
procurement platform (F$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 more 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
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job of contracting with small businesses and microbusinesses 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 | DVBE |
| | Contact | of | Business | Participat|
| | Dollars | Statewide | and | ion |
| | | Spending | Microbusin| Percentage|
| | | | ess | |
| | | | Participat| |
| | | | ion | |
| | | | 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|$1,0174,833| 15.14% | 28.24% | 3.70% |
| n | ,768| | | |
|-------------+-----------+-----------+-----------+-----------|
| Health Care |$1,069,021,| 15.05% | 2.36% | 0.45% |
| Services | 018| | | |
| (DHCS) | | | | |
|-------------+-----------+-----------+-----------+-----------|
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| State | $553,519,1| 7.79% | 49.17% | 2.12% |
| Hospitals | 67| | | |
|-------------+-----------+-----------+-----------+-----------|
| Water | $351,102,4| 4.94% | 19.79% | 2.62% |
| Resources | 39| | | |
|-------------+-----------+-----------+-----------+-----------|
| Highway | $234,348,3| 3.30 | 12.28 | 1.72 |
| Patrol | 94| | | |
|-------------+-----------+-----------+-----------+-----------|
| General | 135,233,2| 1.90% | 42.23% | 10.49% |
| Services | 55| | | |
|-------------+-----------+-----------+-----------+-----------|
| Parks and | 123,503,8| 1.74% | 31.49% | 6.76% |
| Recreation | 10| | | |
|-------------+-----------+-----------+-----------+-----------|
| Motor | 111,305,0| 1.57% | 25.09% | 6.55% |
| Vehicles | 71| | | |
|-------------+-----------+-----------+-----------+-----------|
| Public | $99,350,0| 1.40 | 12.34 | 3.34 |
| Utilities | 11| | | |
| 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 among all other agencies in the
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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.
5)Changes in Small Business Procurement: SB 1176 proposes to increase
the limit on annual average gross revenues of the business over the
previous three years. For small businesses, the limit is increased
from $10 million to $15 million. The limit on microbusinesses is
increased by $2.5 million, moving from $2.5 million to $5 million.
Small businesses participating in contracts for public works
projects would be allowed to have $25 million in gross receipts and
the maximum number employees could be as high as 200. While DGS has
had the authority to make annual increases in gross receipts, the
department has chosen not to exercise this authority. SB 1176 would
also mandate that these revenue limits are annually reviewed and
increased to meet the California Consumer Price Index. The author
contends these increases are necessary to ensure that there is a
robust field of small businesses in which to compete for small
businesses.
As of December 2015, there were 26,404 businesses in California
which DGS had certified as small businesses with approximately 80%
of these businesses being also certified as a DVBE. DGS is unable
to identify the number of contracts that may be impacted by this
policy change. Since 2012, overall small business participation has
ranged between 22% and 28%.
6)Impact on the Number of Eligible Small Businesses: This bill would
create a split system of small business certification. Firms with
less than 100 employees and $15 million in revenue would continue to
qualify as small businesses for all contracts. Other firms (with
101-200 employees and/or $15-25 million in revenue) would qualify as
small businesses only for the purposes of public works contracts.
DGS would ultimately need to establish a separate certification for
firms with 101-200 employee and/or $15-25 million in revenue.
As noted in a prior Comment, firms with 99 or less employees
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comprise 97.4% of all firms with employees in the state. Businesses
with between 100 and 200 employees include an additional 7,543 firms
or less than 1% of all firms. In terms of the raw number of
businesses impacted, the changes proposed in SB 1176 do not appear
to be significant. This broader category of small business could,
however, represent a meaningful change in the capacity of eligible
businesses who bid on state public works contracts.
7)Related Legislation: Below is a list of the related bills.
a) AB 31 (Price) Public Contracts: Small Business Procurement and
Contract Act: This bill increased the maximum contract threshold
amount for awards to small businesses (SME), including
microbusiness, and DVBE under the states streamlined procurement
process, from $100,000 to $250,000, as specified. It required
contractors to report the contract amount allocated to SMEs and
DVBEs with which they made contract commitments. Status: Signed
by the Governor, Chapter 212, Statutes of 2009.
b) AB 172 (Weber) State Contracting Microbusiness: This bill
would have increased the microbusiness procurement preference
from 5% to 7% for state contracts to purchase goods, services,
information technology, and construction of state facilities, and
allowed the preference to be awarded to either a microbusiness
bidder or a non-microbusiness bidder that uses a microbusiness
subcontractor. Status: Held on the Suspense File of the
Assembly Committee on Appropriations, 2013.
c) AB 351 (Jones-Sawyer) 25% Small Business Goal: This bill
would have required each state agency to establish and achieve a
25% small business participation goal. Status: Held on Suspense
in the Assembly Committee on Appropriations, 2015.
d) 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.
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e) AB 1125 (Weber) State Agency Small Business Contracts: This
bill would have increased the maximum financial value of an
individual small business bid preference on specified state
contracts from $50,000 to $100,000. Status: Held on Suspense in
the Assembly Committee on Appropriations, 2015.
f) AB 1734 (Jones-Sawyer) Public Contracts and Small Business and
DVBE Participation: This bill would have required each state
agency to establish and achieve a 25% small business
participation goal and increases the annual procurement
participation goal for DVBEs from 3% to 5% of the value of state
contracts: Status: Held in the Assembly Committee on
Appropriations, 2014.
g) AB 1783 (Perea) Streamlining Small Business Certification:
This bill required the Department of General Services to publish
on the department's website, and make available to local
agencies, a list of small businesses and microbusinesses that
have been certified as such by the department. Status: Signed
by the Governor, Chapter 114, Statutes of 2012.
h) AB 2278 (Weber) Small Business Procurement Preferences: This
bill would have revised the maximum small business bid preference
amount and made related changes to the maximum value of all
procurement preferences. Status: Held in the Assembly Committee
on Appropriations, 2014.
i) SB 67 (Price) Small Business Participation in Public
Contracts: This bill would have authorized the Department of
General Services 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, 2011.
j) SB 733 (Price) High Speed Rail: This bill would have required
the California High-Speed Rail Authority (HSRA) to include in its
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January 1, 2012 business plan a strategy for ensuring
California-certified small business participation in contracts
awarded with state and federal funds during all phases of the
high-speed rail project. It also required the HSRA to have a
strategy for working with the Employment Development Department
to ensure that at least 25% of the project workforce at each
worksite is from the local workforce. Status: Held in Senate
Committee on Appropriations, 2011.
REGISTERED SUPPORT / OPPOSITION:
Support
California Asian Chamber of Commerce
California Hispanic Chamber of Commerce
Coalition of Small and Disabled Veteran Businesses
Greater Los Angeles African American Chamber of Commerce
Los Angeles County Business Federation
Los Angeles Latino Chamber of Commerce
Opposition
None Received
Analysis Prepared by:Toni Symonds / J., E.D., & E. / (916)
319-2090
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