BILL ANALYSIS
SENATE COMMITTEE ON VETERANS AFFAIRS
JEFF DENHAM, CHAIRMAN
Bill No: AB 2627
Author: Nielsen
Version: As amended June 17, 2010
Hearing Date: June 22, 2010
Fiscal: Yes
SUBJECT OF BILL
Disabled Veterans Business Enterprises (DVBE) and Business
Utilization Plans (BUP)
PROPOSED LAW
1. Re-codifies in the Public Contract Code DVBE
provisions of percentage ownership, percent disabled,
and provision of income taxes.
2. Adds Disables Veteran Business Enterprise Services
to the title of the Office of Small Business.
3. Allows a vendor with state contracts to meet DVBE
goals with dollars from other than state contracts.
4. Allows both direct and indirect costs to be
contributed to the goal.
5. Defines direct and indirect costs.
EXISTING LAW AND BACKGROUND
1. Since 1989, California has encouraged a 3% set
aside on state contracts.
2. In the early 2000s, rampant fraud was exposed in
the program and the state legislature has attempted to
close fraud loopholes ever since.
3. Among other forms of fraud were "pass through"
companies that did not manufacture or compete in the
market place but only added their mark up to the
state's price for commodities.
AB 669 of 2003 (Cohn) codified the requirement for a
DVBE to perform a "commercially useful function"
(CUF).
4. Another form of fraud that had been detected was
the use of Limited Liability Corporations (LLC) to
hide the fact that disabled veterans were no longer
owners of companies in spite of the fact that the
state was awarding contracts to those companies as
part of the DVBE program.
SB 1008 of 2003 (Machado) eliminated the LLCs that
were used for DVBEs unless the company was 100% owned
by disabled veterans.
5. Fraud also came in the disguise of "equipment
brokering." SB 1008 of 2003 (Machado) also eliminated
counting brokered equipment towards satisfying the
DVBE goal.
6. After those fraud loopholes were closed, the most
often used fraud was the exploitation of a "Good Faith
Effort" (GFE) in which companies would pretend to
contact a DVBE, or contact a DVBE for work in fields
other than the work a DVBE did, and then report to the
state that a good faith effort had been made to hire a
DVBE. At the time a GFE could substitute for actual
participation in the program.
ABx4 21 of the 2009 Budget Act eliminated the Good
Faith Effort (GFE)
7. Contractors have been concerned that with the
elimination of the GFE that there may be no way to
properly use a DVBE and be compliant on state contract
bids.
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COMMENT
1. The BUP has always been an alternative to the GFE,
but GFE was usually the option that was used.
2. The intent of the DVBE program has always been to
help California's disabled veterans to return home and
be successful, which helps both the veteran to once
again lead as normal a life as possible and helps the
state establish businesses that pay taxes here.
3. If the DVBE program is to be successful, it also
needs to be useable. For various reasons including
past fraud, lack of technology, and "learning as we
go," the DVBE program has not always been
user-friendly.
4. This bill is an attempt to make the DVBE program
user friendly by providing flexibility to contractors,
while still helping to grow California's small
businesses, which this state's coffers desperately
need at this point in time.
5. This bill allows a contractor flexibility to pay a
DVBE out of funds earned from either a state or a
private contract. For example, a contractor does $80
million dollars a year in business but only $10
million is with the state. The DVBE goal then is
$300,000. In this example, however, the $10 million
in state contracts does not have enough DVBE
businesses in the field to do the work.
Under a BUP the DVBE is in house. If the contractor
uses that in-house DVBE on private contracts and the
DVBE is doing, for example, $400,000 in business,
which is above the 3% goal, then the state care is
accomplished, the DVBE is being grown, and the state
coffers are being filled.
With this flexibility, it is more likely that
contractors would bring DVBEs in house to help DVBEs
grow, which in turn should lighten the load of state
departments since the overall dollar amount would be
monitored for compliance rather than monitoring every
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contract issued. Any increase in certification would
be due to certifying more DVBEs if the program grew.
6. A possible loophole exists on Page 8, line 8.
Committee members may wish to strike the words
disabled veteran business enterprise from this line of
this bill.
PRIOR ACTIONS
This bill is a gut and amend. Prior votes are not
pertinent.
SUPPORT
Associated General Contractors (AGC)
OPPOSE
None received
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