BILL ANALYSIS
Bill No: AB
177
SENATE COMMITTEE ON GOVERNMENTAL ORGANIZATION
Senator Roderick D. Wright, Chair
2009-2010 Regular Session
Staff Analysis
AB 177 Author: Ruskin
As Amended: June 2, 2010
Hearing Date: June 9, 2010
Consultant: Art Terzakis
SUBJECT
Public Contracts
DESCRIPTION
AB 177 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 (DVBEs). Specifically,
this measure:
1. Increases the current 3-year maximum suspension from
transacting any business with the State to10-years for
any person who obtains classification as a small business
or microbusiness by reason of having furnished incorrect
supporting information or withholding relevant
information.
2. Increases the current one year revocation period to
five years for a small business which has obtained
certification by reason of having furnished incorrect
information or withholding relevant information. Also,
with respect to subsequent violations, increases the
period of certification revocation or suspension to ten
years instead of the current three year period.
Furthermore, stipulates that additional or subsequent
violations shall result in the revocation of the
business' seller's permit.
AB 177 (Ruskin) continued
Page 2
3. 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
that is equal to the costs incurred for investigating the
improperly obtained certification.
4. Increases existing civil penalties, as specified, for a
variety of fraudulent activities related to certified
small businesses. Also, increases the existing
suspension and revocation time periods, relative to
fraudulent activities, to mirror those referenced in item
#1 and item #2 above.
5. Adds a new provision to the Act that requires any
existing contract between any awarding department and
contractor to be terminated if the contractor knowingly
and fraudulently represents that a "commercially useful
function" is being performed by a small business or
microbusiness. Also, provides that if a contractor is
found to be in violation of this provision, any existing
contract must be terminated and the State Controller must
withhold any payments to that contractor except for
outstanding invoices.
6. Requires any person who violates specified fraudulent
activities to pay all costs incurred by the awarding
department and DGS for any investigation involving the
finding of the violation.
7. With respect to the State's DVBE program, adds a new
provision to the Military and Veterans Code making it
unlawful to knowingly and fraudulently represents that a
"commercially useful function" is being performed by a
DVBE in order to obtain or retain a bid preference.
Also, provides that if a contractor is found to be in
violation of this provision, any existing contract must
be terminated and the State Controller must withhold any
payments to that contractor except for outstanding
invoices.
8. Additionally, with respect to the DVBE program,
increases existing suspension and revocation penalties,
as specified.
EXISTING LAW
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Under current law, the Department of General Services (DGS)
generally governs state procurement activities, including
acquisition of materials, supplies, and services.
Under the State Contract Act and various provisions in the
Local Agency Public Construction Act, state and local
agencies awarding contracts are required to award the
contract to the lowest responsible bidder.
Existing law establishes a preference for bids made by
certified small businesses and microbusinesses, including
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.
Non-small businesses that subcontract at least 25% of their
contracts with small businesses may also qualify for the
small business bidder's preference.
Existing law limits 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.
Existing law imposes civil penalties and fines for
businesses that fraudulently obtain classification as a
small business or microbusiness. Civil penalties cannot
exceed $5,000. Also, existing law provides suspensions
from participation in state contracts for periods of not
less than 6 months and not more than 3 years. In addition,
existing law requires DGS to revoke the small business
certification of a business found to have fraudulently
obtained certification for a period of not less than one
year. For an additional or subsequent violation, the
period of certification revocation or suspension must be
extended for a period up to 3 years.
Under existing law, contracts awarded by state entities for
professional bond services, construction, and acquisition
of materials, supplies, and services are required to have
annual statewide participation goals of not less than 3%
for disabled veteran-owned business enterprises (DVBEs).
Existing law imposes civil penalties and fines for
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businesses that fraudulently obtain certification as a
DVBE. Such violations are misdemeanors punishable by
imprisonment in the county jail not to exceed six months or
by a fine not to exceed $1,000, or by both. In addition,
existing law provides that the person shall be liable for
civil penalties of up to $30,000 for the first offense and
up to $50,000 for additional or subsequent violations.
Furthermore, existing law provides for certain periods of
revocation and suspension for such violations.
BACKGROUND
Purpose of AB 177: According to the author's office, this
measure is intended 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.
The author's office notes that testimony provided in
legislative hearings by DGS, small business groups and DVBE
advocates indicates 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.
The author's office points out that 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.
The author's office claims that while existing law contains
penalties for contractors that fraudulently bid -
enforcement of these laws has been limited. This measure
would substantially increase penalties for a variety of
fraudulent behaviors and extend existing periods of
revocation, including terms of suspension for participating
in state contracts. The author's office emphasizes that
this measure would also create an enforcement incentive by
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authorizing awarding departments to be reimbursed for the
cost of successful investigations. Additionally, the
measure would provide substantial deterrents to knowingly
and willingly make false representations.
Staff Comments: This measure is nearly identical to AB
1942 (Ruskin) of 2008 which was vetoed. The Governor's
veto message stated, "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."
PRIOR/RELATED LEGISLATION
AB 31 (Price) Chapter 212, Statutes of 2009. Among other
things, increased from $100,000 to $250,000 the maximum
contract threshold for awards to small business, including
microbusinesses and DVBEs under a specific streamlined
procurement process.
AB 1942 (Ruskin) 2007-08 Session. Nearly identical to AB
177 (Ruskin) of 2009-10 Session. (Vetoed by Governor on
the basis that the historic delay in passing the 2008-09
Budget forced him to prioritize bills sent to his desk and
only sign bills of highest priority)
AB 761 (Coto) Chapter 611, Statutes of 2007. 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.
SB 1008 (Machado) Chapter 632, Statutes of 2004. Among
other things, strengthened the sanctions that can be levied
against businesses that fraudulently misrepresent their
eligibility for DVBE certification.
AB 669 (Cohn) Chapter 623, Statutes of 2004. Among other
things, required DVBEs and small businesses, as defined, to
perform commercially useful functions, as defined, in
relation to any contract those businesses are awarded under
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certain provisions of law. Also, imposed certain civil
penalties for fraudulent misrepresentations regarding DVBE
and small business state contracts.
SUPPORT: The Elite SDVOB Network
OPPOSE: None on file as of June 4, 2010.
DUAL REFERRAL: Senate Veterans Affairs Committee
FISCAL COMMITTEE: Senate Appropriations Committee
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