BILL ANALYSIS
AB 926
Page 1
Date of Hearing: April 21, 2009
ASSEMBLY COMMITTEE ON JOBS, ECONOMIC DEVELOPMENT AND THE ECONOMY
V. Manuel Perez, Chair
AB 926 (Ruskin) - As Introduced: February 26, 2009
SUBJECT : Procurement and Small Businesses
SUMMARY : Requires certain advertising of state contracting
opportunities to include a specified statement relating to an
existing prohibition against the use of "loss leaders."
Specifically, this bill :
1)Requires every solicitation that appears in the California
State Contracts Register to contain the following statement,
"It is unlawful for any person engaged in business within this
state to sell or use any article or product as a "loss
leader," as defined.
2)Requires requests for proposals relating to the furnishing of
equipment, materials, or supplies to the following statement,
"It is unlawful for any person engaged in business within this
state to sell or use any article or product as a "loss
leader," as defined.
3)Requires contracts for information technology acquisition to
include the following statement, "It is unlawful for any
person engaged in business within this state to sell or use
any article or product as a "loss leader," as defined.
4)Makes other technical, nonsubstantive changes relating to the
Small Business Procurement Act.
EXISTING LAW :
1)Establishes the State Contract Act for the purpose of
providing guidance on state contracting for goods, services,
and information technology.
2)Prohibits a person engaged in business in California to sell
any product at less than the cost or give away any product for
the purpose of injuring competitors or destroying competition.
3)Defines "loss leader" as selling a product at less than cost:
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a) Where the purpose is to induce, promote or encourage the
purchase of other merchandise;
b) Where the effect is a tendency or capacity to mislead or
deceive purchasers or perspective purchasers; or
c) Where the effect is to divert trade from or otherwise
injure competitors.
4)Requires, except in cases of emergency, a department that
contracts for goods in excess of $25,000, or a higher amount
as established by the director, to advertise the availability
of the contract in the California State Contracts Register.
In addition, the department is required to post a copy of the
solicitation in a public place.
5)Designates the Department of General Services (DGS) to
administer the state Small Business Procurement and Contract
Act (Small Business Act), including, but not limited to, a
certification process for disabled veteran-owned business
enterprises (DVBEs) and small businesses and a streamlined
procurement process for state contracts under $100,000, which
are exempt from advertising, bidding, and protest provisions
in the State Contract Act.
6)Defines a small business as 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. A
DVBE is defined as a business entity that is at least 51%
owned or controlled by one or more disabled veterans, as
specified.
FISCAL EFFECT : Unknown
COMMENTS :
1)Purpose of the bill : According to the author, the purpose of
AB 926 is to ensure that the existing loss leader protections
for small businesses are fully enforced and that larger
businesses cannot undercut market prices to drive competitors
out of business.
More specifically, the author believes that existing law has
not provided adequate protections and has based this bill on
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an investigation by his office and the findings from an
internal audit undertaken by DGS regarding its 2008 bundled
contract with Office Depot. By highlighting current problems
in the administration of the State Contract Law, the author
hopes to bring its attention to all parties, state
administrators, and those bidding on state contracts.
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 less than 100 employees comprise more than
98.3% of all businesses, and are responsible for employing
more than 57.9% of all workers in the state.
Small- and medium-sized businesses are crucial to the state's
international competitiveness and 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 represented only 29% of total
exports. Again, these numbers include the export of only
goods and not services.
Small businesses function 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. Common types of
microenterprises include engineering, computer system design,
housekeeping, construction, landscaping, and personnel
services.
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 that would increase the number of
contracts between the state and small businesses. In 1989, a
DVBE component was added to state's procurement practices.
Since 2001, there have been four Executive Orders (EOs)
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specifying a 25% goal for small business and a 3% DVBE
participation in state procurement contracts, including EO
D-37-01 (2001), EO S-02-06 (2006), EO D-43-01(2001), and EO
S-11-06 (2006). Statutory advancements were also 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.
Notwithstanding the longstanding existence of the Small
Business Act, statutory (up grades), 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 small business
participation target was established in 2001, DGS has reported
that in 2006-07 the state achieved its small business target
by awarding 28.31%, or $2.65 billion, of the value of all
contracts to small businesses. This represents a $1.3 billion
increase in contracts from 2005-06. The state did not achieve
its 3% DVBE participation goal, however, as only 2.8% of
contract dollars, $186 million, was awarded in contracts
including DVBE participation.
4)DGS internal audit on the Office Depot Contract : In August of
2008, DGS released an internal compliance audit of an office
supply contract with Office Depot, Inc (Office Depot),
Contract No. 1S-06-75-55. In this contract, DGS had
consolidated the state's primary office supply purchases into
a single contract with the expectation of the state receiving
significant discounts. Key issues investigated included
whether the contract complied with state pricing rules and the
small business and DVBE contracting requirement that they
serve a commercially useful function (CUF).
In its findings DGS stated that over all, Office Depot was
accurately pricing products that had been approved as core and
non-core items. However, the audit also identified a number
of over-charges totally $34,399, which is 13% of the total
cost of the $26.4 million in core and non-core sales through
February 2008.
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Further, the audit identified several areas that required, in
the opinion of the auditor, immediate attention prior to
allowing the contract to continue in operation. Specifically,
the audit noted that Office Deport had sold approximately
16,000 items for a total of $14.2 million to state agency
customers without applying prescribed discounts. This
occurred by displaying "off-contract" products in the state
supply catalog, which lead to high numbers of contract
officers selecting these products rather than the core and
non-core products covered by the state contract. While
initially, Office Depot stated that they were not aware of any
contract limitation on offering "off-contract" products within
their catalog and online ordering website, Office Depot began
to work with DGS on addressing this problem during the course
of the audit. Based on the audit findings, the state was able
to promptly negotiate an additional discount of $2.5 million.
Relative to CUF issues, the audit concluded that the small
business consortium that Office Depot was engaged with met the
requirements of existing law. The audit specifically stated
that Office Depot had operated in a good faith manner.
In addition to the issues addressed above, the audit
identified some shortcomings in the state's administration of
this contract. As a result, DGS states that it has made
improvements to its contract oversight and administration
functions to better manage multi-faceted programs like the
Office Depot contract in the future. These changes included:
a. Implementation of a custom catalog limited to authorized
office products that were scheduled to become available in
mid-September 2008;
b. Increased focus on usage reporting and contract
management; and
c. Deployment of a contracts management software tool that
performs price and discount validation.
As noted above, the Office Depot contract was intended to
expire on August 30, 2008. Rather than go out with a new
Request for Proposal (RFP) while the audit was being
finalized, DGS decided to extend the Office Depot contract
until a new RFP could be prepared that reflected the lessons
learned in the audit and a new award for office supplies was
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awarded. The Office Depot contract was set to expire on March
30, 2009, however, a second extension is currently in place.
1)Scope of the audit : As noted above, the scope of the audit
included an investigation into the pricing of office supplies
and on the use of small businesses and DVBEs to implement the
contract. The author contends that the audit should have
additionally addressed the issue of whether Office Depot
engaged in illegal activities by using certain low cost
products as a loss leader to either win the contract or in the
implementation of the contract.
Historically, many state agencies have used their office
supply contracts to meet their annual 25% procurement target
for small businesses and their 3% target for DVBEs. By
bundling the state office supply contract, many small
businesses believe an important business opportunity is being
eliminated. Small businesses are potentially already at a
disadvantage to larger office suppliers who have access to
bulk discounts. Therefore, enhanced enforcement of this
existing loss leader law is central to small businesses
ongoing ability to obtain state contracting opportunities.
According to the author, when DGS asked whether they had
audited for violations of the loss leader law, the auditors
responded that they were not aware of the law. The author
states that implementation AB 926 addresses this lack of
knowledge of a 1950s law by placing a reference to it within
the State Contracting Code.
2)Technical amendment : The author may wish to address a
technical drafting error relating to Section 4 of the bill.
Section 4 relates to service contacts. The notice
requirement, however, relates to the furnishing of equipment.
3)Related legislation : Below is a list of related legislation:
a) AB 31 (Price) : Makes several key changes to state
procurement procedures including increasing the maximum
contract threshold amount for awards to a small business
and DVBE, under a specific streamlined procurement process,
from $100,000 to $250,000. Further, the bill required
contractors that made contract commitments to include small
business or DVBE participation to report the final percent
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of the contract actually paid to these entities. Status:
Awaiting hearing in the Assembly Appropriations Committee.
b) AB 309 (Price) : Requires the establishment of a 25%
small business participation goal for all state entities
and directs the DGS to monitor each agency's progress in
meeting this goal. Status: Scheduled to be heard in the
Assembly Committee on Jobs, Economic Development, and the
Economy on April 21, 2009.
c) SB 356 (Wright): This bill requires an agency
considering the adoption of a regulation to consult with
those persons and businesses potentially affected and would
delete the condition that the agency only involve those
parties if the proposal is large or complex. Status: The
bill is scheduled to be heard in the Senate Committee on
Business, Professions and Economic Development on April 27,
2009.
d) AB 761 (Coto) : This bill requireds 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.
e) AB 2773 (Price): 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 percent of the contract
actually paid to these entities. Status: Held under
submission in Senate Appropriations Committee in 2008.
f) SB 115 (Florez) : This bill made various changes to the
DVBE Program, including requiring DGS to establish a state
agency-wide mandatory DVBE participation incentive. The
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
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to use in reporting their DVBE participation to the
Department of Veterans Affairs. Status: Signed by the
Governor - Chapter 451, Statutes of 2005.
g) SB 642 (Denham) : This bill increases 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: Set for
hearing in Senate Governmental Organization Committee on
April 28, 2009.
4)Double Referral : Assembly Rules Committee referred this bill
to two policy committees. Should this measure pass the
Assembly Committee on Jobs, Economic Development, and the
Economy, it will be referred to the Assembly Committee on
Business and Professions.
REGISTERED SUPPORT / OPPOSITION :
Support
California Small Business Association (sponsor)
California Black Chamber of Commerce (sponsor)
Opposition
None known
Analysis Prepared by : Toni Symonds / J., E.D. & E. / (916)
319-2090