BILL ANALYSIS
SB 548
Page 1
Date of Hearing: July 7, 2009
ASSEMBLY COMMITTEE ON JOBS, ECONOMIC DEVELOPMENT AND THE ECONOMY
V. Manuel Perez, Chair
SB 548 (Huff) - As Amended: May 18, 2009
SENATE VOTE : 39-0
SUBJECT : California Disabled Veteran Business Enterprise
Program
SUMMARY : Requires prime contractors who have stipulated that
they would use a Disabled Veteran-Owned Business Enterprise
(DVBE) as a subcontractor, to certify at the conclusion of the
contract that all previously represented payments to the DVBE
have been made. Specifically, this bill :
1)Requires the awarding department of a state contract, which
was approved based on the contractor's commitment to use a
DVBE in the performance of the contract, to require
certification at the completion of the contract that all
related payments have been made to the DVBE.
2)Requires the awarding department to retain the certification
on file.
3)Specifies that any person or entity that knowingly provides
false information pursuant to this bill is subject to a civil
penalty for each violation in the minimum amount of $2,500 and
the maximum amount of $25,000. Actions may be brought by any
public prosecutor in the name of the people of the State of
California and the penalty imposed shall be enforceable as a
civil judgment.
EXISTING LAW
1)Provides that, the Department of General Services (DGS),
except for contracts for certain professional bond services,
is the administering agency of the California DVBE Program.
2)Sets an annual DVBE contract participation goal of 3% for each
state department which awards contacts, including school
districts when expending certain state moneys for goods and
services.
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3)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.
4)Requires departments, when awarding contracts to the lowest
responsible bidder, to meet the 3% DVBE goal or to ensure that
the contractor has made a good faith effort to meet these
goals. A bidder is considered to have made a good faith
effort, at the time the bid is submitted, if the bid package
contains evidence that the following actions were taken:
a) The bidder contacted the awarding department to identify
a DVBE contractor who may be interested in subcontracting;
b) The bidder contacted other state and federal agencies,
and local DVBE organizations to identify DVBE contractors
who may be interested in subcontracting;
c) The bidder has sent invitations to bid to potential DVBE
contractors;
d) The bidder considered the available DVBE contractors;
and
e) The bidder advertised in trade papers and papers
focusing on DVBEs. If the time limits imposed by the
awarding department are insufficient to reasonably purchase
advertisement, this requirement can be waived.
5)Requires an awarding department to include in their bid
submittal conditions a requirement that the bid include the
specific name and type of work to be provided by each DVBE
subcontractor, if any, who will be participating in the
completion of the contract.
6)Provides that it is unlawful for any person to knowingly and
with intent to defraud, to represent DVBE participation in
order to obtain or retain a bid preference or a contract.
Violations of this law may be charged as follows:
a) A misdemeanor punishable by imprisonment in a county
jail not to exceed 6 months or by a fine not to exceed
$1,000, or both.
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b) A civil penalty of not less than $10,000 nor more than
$30,000 for the first violation and not less than $30,000
nor more than $50,000 for each additional or subsequent
violation. A person found guilty of the specified
fraudulent behavior is also required to pay all court costs
and attorney's fees incurred by a plaintiff in a civil
action.
DGS is also required to suspend a person found guilty of this
offense from bidding on, or participating as a contractor,
subcontractor or supplier in any state contract for a period
of three years. If the guilty party is a certified DVBE,
certification is also revoked, as specified.
7)Defines "Disabled veteran owned business enterprise" as a
business certified by the administering agency as meeting all
of the following requirements:
a) It is a sole proprietorship at least 51 percent owned by
one or more disabled veterans or, in the case of a publicly
owned business, at least 51 percent of its stock is owned
by one or more disabled veterans; a subsidiary that is
wholly owned by a parent corporation, but only if at least
51 percent of the voting stock of the parent corporation is
owned by one or more disabled veterans; or a joint venture
in which at least 51 percent of the joint venture's
management, control, and earnings are held by one or more
disabled veterans.
b) The management and control of the daily business
operations are run by one or more disabled veteran. The
disabled veterans who exercise management and control are
not required to be the same disabled veterans as the owners
of the business.
c) It is a sole proprietorship, corporation, or partnership
with its home office located in the United States, which is
not a branch or subsidiary of a foreign corporation,
foreign firm, or other foreign-based business.
FISCAL EFFECT : According to the Senate Appropriations
Committee analysis, implementation of this bill could result in
one-time costs of $40 to develop regulations, and to develop bid
language that requires the primary contractor who makes a
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commitment to use a DVBE to either a) certify that all payments
have been made to the DVBE subcontractor, or b) document why
there was no subcontract with the DVBE.
COMMENTS :
1)Purpose of the bill : The DVBE Program provides opportunities
for disabled veterans businesses and stimulates California's
economy by offering disabled veterans a specified level of
contractual work. As stipulated by current law, DVBE
subcontractors are written into state contracts by prime
contractors who commit to using the DVBE for 3% or more of the
work on a project. Unfortunately, in all too many cases,
contractors exploit the very veterans this program was
intended to help states the author. Many times, according to
the author, once a veteran has been worked into a contract,
contractors do not award the agreed-upon jobs, operations and
payments. The author believes that there is currently no
practical enforcement mechanism that ensures the DVBE
subcontractor receives 3% of the work.
The author has introduced SB 548 as a means to protect DVBE
contractors from fraud by requiring the prime contractor to
certify that all payments originally offered to a veteran for
work have been fulfilled. The author states that this
certification will allow awarding departments to more easily
demonstrate that a DVBE was intentionally exploited and ensure
disabled veterans enterprises receive the agreed-upon work and
pay.
2)The DVBE Program : The DVBE Program was established in 1989 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 program, each
state agency is encouraged, in awarding contracts, to honor
California's disabled veterans by taking all practical actions
necessary to meet or exceed a 3% DVBE participation goal.
In implementing the 3% contracting goal, a number of
activities are dictated by existing statute. Two major
activities include the streamlined procurement process for
small-size contracts and a compulsory DVBE participation
clause in larger state contracts. For contracts under
$100,000, awarding departments are authorized to enter into a
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limited competitive bid contract after receiving bids from at
least three small business and/or DVBE contractors.
For larger contracts existing law generally requires
solicitation for contracts to be more broadly advertised. In
these circumstances, awarding departments are required to
implement the compulsory DVBE participation clause in each
contract unless the department has already met its 3% goal.
When the compulsory DVBE participation clause in included in
the solicitation, a prospective contractor has 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 "good
faith effort'; or
c) Reference a DGS-approved DVBE Business Utilization Plan.
However, even with these DVBE participation options, success
in meeting the 3% goal has been elusive. Even in 2007, when
the state exceeded its 25% small business participation goal,
the state only awarded 2.8% of its total contract dollars,
$186 million, to contracts involving DVBE contractors and
subcontractors.
The DVBE contracting report covering contracts in 2008 is due
in the next few months. DVBE participation is expected to be
higher than in pervious years, based on the potential impact
of legislation implemented in late 2006. SB 115 (Florez),
Chapter 451, Statutes of 2005, called on DGS to establish a
specific DVBE bidding preference similar to that already
authorized for small businesses. The new DGS contracting
provisions provide state departments with a framework in which
to give a one to five percent advantage to DVBE contractors or
to prime contractors who proposed to use a DVBE subcontractor.
In addition to the challenges faced by DVBEs trying to be
included in state contracts, a growing number of DVBEs are
also concerned that they do not always receive the subcontract
work being represented in the initial bid package. With the
new DVBE incentive, these concerns have increased as a prime
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contractor may be receiving a competitive advantage for
claiming to be using DVBE subcontracts without fulfilling that
commitment. In letters presented to the committee, DVBE
subcontracts provided specific examples of these
irregularities.
3)Enforcing DVBE Commitments : Existing law places certain
penalties on a person who try to defraud the state of
California when making a bid for a state contract. In order
to prosecute, it must be shown that the misrepresentation in
the bid package was included with the specific intent to
defraud the government. Penalties include both criminal and
civil, including time in jail, fines, and debarment from
future contracts with the state.
While reasonably severe penalties can be awarded, prosecuting
these types of crimes is difficult because of the requirement
to prove intent. SB 548 addresses this issue by creating a
different test for illegal activity. This bill requires a
prime contractor that committed to using a DVBE subcontractor,
to certify at the completion of the contract that the DVBE did
indeed receive the payments which were represented in their
bid package. Rather than having to prove intent to defraud,
this bill states that the contractor would only have had to
knowingly misrepresented the information in the certification.
Penalties in this bill are also less than those for civil
fines under the intent to defraud requirement, $2,500 to
25,000 for each violation, verses $10,000 to $30,000 for the
first violation.
4 Conflicting Codes : Laws that relate to state contracting
appear in several state codes including the Public Contract,
Government, and Military and Veterans Codes. This broad
distribution of statue related to contracting has sometimes
led to conflicting and potentially inefficient contracting
activities. As an example, the concept of "good faith effort"
appears in the Public Contract Code, but does not appear in
the Military and Veterans Code.
Another example, AB 31 (Price), which passed this committee in
March 2009, amends the Public Contract Code to do something
very similar to this bill. AB 31 requires contractors that
made contract commitments to include DVBE participation in the
performance of the contact to report (not certify) at the
conclusion of the contract on the actual percent of the
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contract amount that was paid to the DVBE(s). AB 31 also does
not include a penalty for reporting improperly.
The Committee may wish to harmonize these provisions by
recommending that each author take similar language to avoid
conflicts later. Potential amendments to achieve this
harmonization in SB 548 could include the following:
a) Replace the requirement for certification with a report
to DGS that is signed under penalty of perjury; and
b) Expand the contractor reporting requirements to include
the total amount the prime contractor received under the
state contract, an identification of each DVBE that
actually participated in the performance of the contract,
and the amount each of these DVBEs received in undertaking
activities related to the contract.
5)Inconsistent Provisions between Small Businesses and DVBEs :
In addition to the conflicting provisions discussed above,
there are also inconsistencies between statutes relating to
contracts with small businesses verses DVBEs. Some of these
differences are related to policy, while others are more
process orientated.
As an 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. This provision is often used in the cases
where the performance of the contract is actually undertaken
months after the bid package has been submitted. Sometimes a
small business that may have initially agreed to help in the
performance of the contract, finds, due to the extended time
between applying and implementing, that it is no longer
available to complete the work. Prime contractors
subcontracting with a DVBE do not have a similar statutory
option. A question arises as to whether this inconsistency
and inflexibility in the application of the law has led to
some prime contractors avoiding DVBE subcontractors.
Members may wish to address this inconsistency by authorizing
prime contractors to replace, with the approval of DGS, one
certified DVBE with another certified DVBE.
5)Related from current session : Below is a status report on
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related legislation from this session.
a) AB 31 (Price) : 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 requires contractors that made contract
commitments to include small business or DVBE participation
to report at the conclusion of the contract on the actual
percent of the contract amount that was paid to those
entities. Status: Pending in the Senate Committee on
Appropriations
b) AB 309 (Price) : This bill 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: Held under
submission in the Assembly Committee on Appropriations
c) 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 requires contractors that
made contract commitments to include small business or DVBE
participation to report at the conclusion of the contract
on the actual percent of the contract amount that was paid
to those entities. Status: Held under submission in the
Senate Committee on Appropriations
6)Related from prior sessions legislation : Below is a list of
related legislation from prior sessions:
a) 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
b) AB 1492 (Ruskin): Increases and conforms penalties for
persons who engage in fraudulent activities relating to the
Small Business Procurement and Contract Act including small
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businesses, microbusinesses, and disabled veteran-owned
business enterprises. Status: Vetoed by the Governor,
October 2008
c) AB 2773 (Price): This bill 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 at the conclusion of the contract
on the actual percent of the contract amount that was paid
to those entities. Status: Held under submission in
Senate Appropriations Committee in the 2007-08 legislative
session
d) SB 115 (Florez) : This bill made various changes to the
DVBE Program, including requiring DGS to establish a state
agency-wide mandatory DVBE incentive program. This bill
also required the DGS Small Business Advocate to provide
specified services to small businesses and certified DVBEs.
Additionally, this bill required 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
REGISTERED SUPPORT / OPPOSITION :
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Opposition
SB 548
Page 10
None received
Analysis Prepared by : Toni Symonds / J., E.D. & E. / (916)
319-2090