BILL ANALYSIS
AB 177
Page 1
Date of Hearing: January 5, 2010
ASSEMBLY COMMITTEE ON JOBS, ECONOMIC DEVELOPMENT AND THE ECONOMY
V. Manuel Perez, Chair
AB 177 (Ruskin and V. Manuel Perez) - As Amended: January 4,
2010
SUBJECT : Penalties under the State Business Procurement and
Contract Act
SUMMARY : Increases and conforms penalties for persons who
falsely engage in activities relating to the Small Business
Procurement and Contract Act (Small Business Act), including
small businesses, microbusinesses, and disabled veteran-owned
business enterprises (DVBE). Specifically, this bill :
1)Increases penalties for falsely obtaining small business
certification . The bill increases the term of the small
business certification revocation period from not less than
one year to not less than five years. The bill also increases
the term of the suspension from doing business with the State
of California from 6-36 months to 3-10 years for violating
state procurement requirements. For additional and subsequent
violations, the bill increases the period of revocation of the
small business certification from a maximum of three years to
a maximum of 10 years. Subsequent and additional violations
also require that the seller's permit be revoked.
These increased penalties apply to violations where the
business is found to have obtained small business or
microbusiness certification based on fraudulent information
and has also been awarded a contract that the business would
not otherwise have been awarded except for the business'
status as a certified small business.
2)Requires recovery of investigation costs for false small
business certification . Requires a business that has been
found to have fraudulently obtained classification as a small
business or microbusiness to pay the awarding department an
amount equal to the costs incurred for investigating the
improperly obtain certification.
3)Increases penalties for a variety of other fraudulent
activities related to certified small businesses. The bill
increases penalties for any person who willingly and knowingly
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makes false statements or takes fraudulent actions in order
to:
a) Represent themselves or aid someone else in representing
themselves as a small business;
b) Influence a decision on small business certification;
c) Obstruct or impede an investigation into a business'
qualifications as a certified small business;
d) Obtain or help others to obtain public moneys, bid
preferences or state contracts; or
e) Represent that a commercially useful function (CUF) is
being performed in order to obtain or retain a bid
preference or state contract.
The increased penalties include raising the maximum civil
penalty from $5,000 to a two-tiered system where the penalty
for the first violation ranges from $10,000 to $30,000 and
each additional and/or subsequent violation ranges from
$30,000 to $50,000. The small business revocation period is
also extended from not more than one year to a period of not
less than five years. Businesses would also face longer
suspension periods from bidding on, or participating in, state
contracts: 6 to 36 months in existing law as compared to 3 to
10 years proposed in this bill. Further, while a business is
operating in the suspension period, its seller's permit is
revoked and the business is required to reimburse the awarding
department and Department of General Services (DGS) for their
costs in investigating the violation.
4)Extends revocation of DVBE certification and prohibition on
further state business . The bill modifies the length of time
an individual is suspended pursuant to the Military Code from
doing business with the state from not less than three years
with no cap on the maximum suspension period to setting a
specific limit of between 3 and 10 years. If a DBVE is found
to be in violation of the procurement rules below, then its
DVBE certificate is revoked for at least an additional two
years, from not less than three years in existing law to not
less than five as specified in the bill.
For subsequent violations, the bill increases the period of
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revocation of the DVBE certification from not less than five
years to not less than 10 years, with the business' seller's
permit also being revoked. The bill also requires recovery of
investigation costs for awarding department in successful
civil actions. These increased penalties apply for any person
who willingly and knowingly makes false statements or takes
fraudulent actions in order to:
a) Obtain themselves or aid others to obtain a DVBE
certification;
b) Influence a decision on DVBE certification;
c) Obstruct or impede an investigation into a business'
qualifications as a certified DVBE;
d) Obtain or help others obtain public moneys, obtain or
retain a bid preference or state contract.
5)Creates a new prohibition against knowingly and with intent to
make false statements in order to obtain or retain a DVBE
preference or state contract . The bill expands the list of
prohibited activities under the Military Code to include any
person who willingly and intentionally provides a false
representation that the DVBE is performing a commercially
useful purpose (CUF.)
6)Adds further penalty for knowingly and willingly making false
representations that a CUF is being performed by a small
business, microbusiness or DVBE. The bill requires that all
existing contracts between the business and any awarding
department be terminated. The State Controller is directed to
withhold all payments to the business except for outstanding
invoices.
EXISTING LAW
1)Designates DGS to administer the state Small Business Act,
including, but not limited to, small business, microbusiness
and DVBE certification processes.
2)Declares it is state policy that small businesses and
microbusinesses receive a fair portion of the total purchases
and contracts or subcontracts for state goods, services,
information technology, and construction.
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3)Establishes a 25% small business participation goal for all
contracts financed with the proceeds of the
infrastructure-related bond acts of 2006.
4)Sets an annual DVBE contract participation goal of 3% for each
state department, including school districts when expending
certain state moneys for goods and services.
5)Requires state entities contracting for materials, supplies,
equipment, alterations, or repairs to meet specified DVBE
participation goals when submitting a bid for a state
contract, including the requirement that the bid go to the
lowest responsible bidder that meets the DVBE goal.
6)Requires DGS to adopt written policies and guidelines for
establishing a uniform process for state contracting that
provides a DVBE bid incentive. These policies and guidelines
are required to include a tracking system to monitor
compliance with the 3% contract participation goal.
Administratively, awarding departments are authorized to offer
DVBE bid preferences of between 0 and 5%.
7)Establishes preferences for bids made by certified small
businesses and microbusinesses, including:
a) Providing a 5% preference for awards of state
procurement contracts where solicitations are made either
on the basis of lowest responsible dollar bid, or on the
basis of highest score, considering factors in addition to
price.
b) Limiting a single bid preference to $50,000. In
instances where a small business qualifies for multiple bid
preferences, the preference cannot be greater than the bid
price or more than $100,000. Application of the bid
preference is also prohibited from resulting in a bid which
exceeds the amount of funds appropriated by the
Legislature, as specified.
c) Permitting non-small businesses that subcontract at
least 25% of their contracts with small businesses to
qualify for the small business bidder's preference.
8)Provides for the following definitions under the Small
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Business Act:
a) Small business: A business that 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 revenues for
the three previous years.
b) Microbusiness: A small business that has average annual
gross receipts of $250,000 or less during the previous
three years or is a manufacturer with 25 or fewer
employees.
c) DVBE: A business entity that is at least 51% owned or
controlled by one or more disabled veterans, as specified.
FISCAL EFFECT : Unknown
COMMENTS :
1)Authors' purpose : The purpose of this bill is to address
fraudulent behavior by individuals and businesses who seek to
improperly obtain or retain small business and DVBE
certification, bidding preferences or participation in state
contracts.
Testimony in legislative hearings by DGS, small business
groups and DVBE advocates has reported that some current and
prospective state contractors have fraudulently represented
that they are a certified small business, DVBE, or that they
will be utilizing the services of a certified small business
or DVBE subcontractor.
In other reported cases, individuals and businesses have made
false statements in order to assist an ineligible business to
become certified or to help them retain their improperly
obtained certification once the business is being investigated
by state officials. Still other individuals and businesses
have fraudulently submitted bid packages that commit to using
a certified DVBE or small business, but in actuality the
subcontract is never let or the contracted work is
inconsequential and only included in order to obtain a bid
preference.
While existing law contains penalties for contractors that
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fraudulently bid, state enforcement of these laws has been
limited. This bill, according to the authors, would
incentivize enforcement by authorizing awarding departments to
be reimbursed for the cost of successful investigations and
providing more substantial deterrents to knowingly and
willingly making false representations.
2)California Small Business : California's dominance in many
economic areas is based, in part, on the significant role
small businesses play in the state's $1.8 trillion economy.
Businesses with fewer than 100 employees comprise more than
99% of all businesses, and are responsible for employing more
than 57% of all workers in the state.
As an example, small- and medium-sized 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. Of the over 52,000
companies that exported goods from California in 2006, 95%
were small- and medium-sized enterprises (SME) with fewer than
500 employees. These SMEs generated nearly half (44%) of
California's exports in 2006. Nationally, SMEs generated only
29% of total exports.
Historically, small businesses have functioned as economic
engines, especially in challenging economic times. During the
nation's economic downturn from 1999 to 2003, microenterprises
(businesses with less than five employees) created 318,183 new
jobs or 77% of all employment growth, while larger businesses
with more than 50 employees lost over 444,000 jobs. From 2000
to 2001, microenterprises created 62,731 jobs in the state,
accounting for nearly 64% of all new employment growth.
Unfortunately during the current recession, small business
have been especially hard hit with small business bankruptcies
up 81% for the 12 months ending September 2009, as compared to
the same period in the previous year. Nationally, bankruptcy
filings were up 44%, according to Equifax Inc.
Because of their importance in the state economy, small
business issues have been a particular focus of the Assembly
Committee on Jobs, Economic Development and the Economy (JEDE)
for the past several years. In March 2009, JEDE produced a
state economic recovery strategy that included several key
recommendations on the needs of small business, including
helping small businesses meet their short term capital needs.
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In May 2009, JEDE held a special hearing to learn more about
how the recession was impacting small businesses and in
October, JEDE's review of the California Enterprise Zone
Program included a panel on how the program responds to needs
of small business.
Improving enforcement of state procurement laws, as proposed
in AB 177, would also address small business access to capital
needs by keeping small business contracting preferences to
legitimate small business.
3)The Small Business Act : The Small Business Act, administered
through DGS, was implemented more than 30 years ago to
establish a small business preference within the state's
procurement process for the purpose of increasing the number
of contracts between the state and small businesses.
In 1989, a DVBE component was established with the Small
Business Act to address the special needs of disabled veterans
seeking rehabilitation and training through entrepreneurship
and to recognize the sacrifices of Californians disabled
during military service. Under the provisions of the DVBE
program, each state agency is required, in awarding contracts
throughout the year, to honor California's disabled veterans
by taking all practical actions necessary to meet or exceed an
annual 3% DVBE participation goal.
Since 2001, there have been four Executive Orders (EOs) and a
number of statutory advancements made to strengthen the Small
Business Act, including SB 115 (Florez), Chapter 451, Statutes
of 2005, which required DGS to establish a DVBE incentive
program for state contracts; and AB 761 (Coto), Chapter 611,
Statutes of 2007, which specifically codified the 25% small
business participation goal for contracts related to revenues
expended from the 2006 infrastructure bonds.
Despite the longstanding existence of the Small Business Act,
statutory upgrades, and EOs, the state's success in obtaining
small business and DVBE participation goals in state
procurement contracts has been inconsistent.
For only the second time since the 25% small business
participation target was established in 2001 through EO, DGS
reported that the state achieved its small business target by
awarding 28.31%, or $2.65 billion, of the value of all
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contracts to small businesses in the 2006-07 fiscal year.
This represents a $1.3 billion increase in contracts from
2005-06. The state did not, however, achieve its 3% DVBE
participation goal in 2006-07, as only 2.8% of contract
dollars, $186 million, was awarded in contracts including DVBE
participation.
4)Conflicting Codes : Laws that relate to state contracting
appear in several California codes, including the Public
Contract, Government, and Military and Veterans Codes. This
broad distribution of statute related to state procurement has
sometimes led to conflicting and potentially inefficient
contracting activities, as state contracting staff try to
blend the different laws together when issuing solicitations
of state goods and services. While some of the differences
occur simply because an issue is addressed in one code and not
another, others provide for a separate treatment of small
business and DVBE solicitations. Since DGS estimates that
over 80% of DVBEs are also eligible to be certified as a small
business, it may be useful to minimize these differences to
only those cases when state policy warrants a difference.
As an example, the small business bid preference appears in
statute and the DVBE preference only appears in the code of
regulations. In another example, a prime contractor who
submits a bid package identifying a small business
subcontractor may, with the approval of DGS, substitute
another certified small business subcontractor when actually
doing the work in the contract. This provision is used in
cases where the performance of the contract is actually
undertaken months after the bid package has been submitted and
the original small business subcontractor is no longer
available to complete the work. Existing law, however, does
not offer such a statutory option for DVBE subcontractors. In
this instance, it appears as if similar flexibilities between
the small business and DVBE programs may be advantages for
encouraging DVBE subcontractor participation.
While this bill harmonizes some of the inconsistencies between
the DVBE and small business programs, others still remain.
The authors may wish to consider further harmonizing
amendments as the measure moves forward.
5)Increased penalties : AB 177 significantly increases penalties
for fraudulent behaviors that are determined to have been
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undertaken with the intent and knowledge of the individual or
business. The bill proposes to increase the length of time a
contractor is prohibited from doing business with the state,
revoke sellers' permits, and terminate other state contracts
for individuals and business found guilty of specified
violations. As an example, the bill increases the suspension
term for doing business with the state from 6-36 months to
3-10 years for certain small business related violations. In
some cases, these penalties may be more extreme than necessary
to discourage fraudulent behavior and others, based on the
significant size of a state contract, may still be too little.
The authors may wish to consider providing more specific
statutory direction regarding sizing the penalty to the total
value of the contract.
6)Good faith effort eliminated : As part of the July 2009 budget
deal, the Governor signed AB 21 (4th Extraordinary Session),
Chapter 19, Statutes of 2009, which eliminated the "good faith
effort" (GFE) option for potential state contractors in
meeting the 3% DVBE contracting goal. Previously, when the
compulsory DVBE participation clause was included in a
solicitation, a prospective contractor had three compliance
options:
a) Identify and commit to subcontracting with a certified
DVBE for at least 3% of the work;
b) Demonstrate a credible effort to obtain DVBE
participation, sometimes referred to as making a GFE; or
c) Reference a DGS-approved DVBE Business Utilization Plan.
Bidders would have been considered to have made a GFE if their
bid package included information on the steps they took to
locate and consider DVBE subcontractors. DGS proposed
removing the GFE option as a way to eliminate the cost to the
state to review the contractors' documented efforts. DGS
estimates that the state spent $3.5 million annually
evaluating prospective bidders' GFEs and that bidders spent
nearly $18 million annually to perform the GFE - all of which
still resulted in less than 3% of all state contracts
including DVBEs in the last reporting period.
As a new program modification, there are still questions as to
whether the elimination of the GFE will actually lead to
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higher DBVE participation rates or will simply increase
fraudulent behavior by contractors trying to obtain state
contracts.
7)Related legislation : These provisions were originally
included in SB 1942 (Ruskin) from the 2007-08 Session, which
was vetoed. According to the Governor's message, "The
historic delay in passing the 2008-2009 State Budget has
forced me to prioritize the bills sent to my desk at the end
of the year's legislative session. Given the delay, I am only
signing bills that are the highest priority for California.
This bill does not meet that standard and I cannot sign it at
this time." Other related legislation includes the following:
a) AB 31 (Price) : This bill made several key changes to
state procurement procedures, including increasing the
maximum contract threshold amount for awards to a small
business or DVBE, under a specific streamlined procurement
process, from $100,000 to $250,000. Further, the bill
requires contractors that made contract commitments to
include small business or DVBE participation to report the
final percentage of the contract actually paid to these
entities. Status: Signed by the Governor, Chapter 202,
Statutes of 2009.
b) AB 761 (Coto) : This bill required each state agency
awarding contracts that are financed with proceeds from the
infrastructure bonds approved by voters in November 2006 to
establish a 25% small business participation goal for state
infrastructure construction contracts and to provide
specified assistance to small businesses bidding on state
infrastructure bond-related contracts. Status: Signed by
the Governor, Chapter 611, Statutes of 2007.
c) AB 1189 (Assembly Committee on Veterans Affairs) : This
bill would have required awarding departments, prior to
issuing an award, to obtain a copy of a contractor's DVBE
certification letter with reference number and to check the
contractor's standing as a certified DVBE on the DGS
website. Status: The bill was amended on the Senate Floor
and all language relating to DVBEs was removed.
d) AB 2773 (Price): This bill would have increased the
maximum contract threshold amount for awards to small
business, including microbusiness and DVBEs under the
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streamlined procurement process, from $100,000 to $250,000,
as specified. Further, the bill required contractors that
made contract commitments to include small business or DVBE
participation to report the final percentage of the
contract actually paid to these entities. Status: Held
under submission in Senate Appropriations Committee in
2008.
e) SB 115 (Florez) : This bill made various changes to the
DVBE procurement program, including requiring DGS to
establish a state agency-wide mandatory DVBE participation
incentive. This bill also requires the DGS Small Business
Advocate to provide specified services to small businesses
and certified DVBEs. Additionally, this bill requires DGS
to adopt a streamlined reporting procedure for state
agencies to use in reporting their DVBE participation to
the Department of Veterans Affairs. Status: Signed by the
Governor, Chapter 451, Statutes of 2005.
f) SB 642 (Denham) : This bill would have increased the
maximum contract threshold amount for awards to small
business, including microbusiness and DVBEs under the
streamlined procurement process, from $100,000 to $250,000,
as specified. Further, the bill required contractors that
made contract commitments to include small business or DVBE
participation to report the final percentage of the
contract actually paid to these entities. Status: Held
under submission in Senate Appropriations Committee in
2008.
8)Double Referral : When AB 1942 was introduced in 2008,
Assembly Rules Committee referred the measure to JEDE and the
Assembly Committee on Business and Professions. Should AB 177
receive a favorable vote from JEDE, the bill may need to be
similarly referred.
REGISTERED SUPPORT / OPPOSITION :
Support
None received
Opposition
None received
AB 177
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Analysis Prepared by : Toni Symonds / J., E.D. & E. / (916)
319-2090