BILL ANALYSIS
SB 1484
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Date of Hearing: June 22, 2010
ASSEMBLY COMMITTEE ON JOBS, ECONOMIC DEVELOPMENT AND THE ECONOMY
V. Manuel Perez, Chair
SB 1484 (Wright) - As Amended: June 14, 2010
SENATE VOTE : Not relevant
SUBJECT : Public contracts
SUMMARY : Prohibits the Department of General Services (DGS)
and other state entities from entering into bundled contracts
for goods, that exclude certified small businesses (CSBs) or
Disabled Veteran Business Enterprises (DVBEs), as defined.
Specifically, this bill :
1)Prohibits DGS and other state entities authorized to enter
into contracts from engaging in the bundling of contracts, as
defined, for goods that exclude CSBs, including
microbusinesses, or DVBEs.
2)Defines "bundling of contracts" to mean the use of a
solicitation for a single contract, or a multiple award
contract, to satisfy two or more requirements for goods, the
result of which restricts competition due to any one of the
following:
a) The diversity, size, or specialized nature of the
elements of the performance;
b) The aggregate dollar value of the anticipated award;
c) The geographical dispersion of the contract performance
sites; or
d) Restrictive contract requirements or other similar
procurement factor that limits the ability of a responsible
small business to compete or otherwise participate as a
prime contractor in the procurement process.
3)Provides that state contracting with a CSB, microbusiness or
DVBE does not count toward the state's 25% CSB or the 3% DVBE
procurement goals if the contract is with a prime contractor
that subcontracts with a CSB, microbusiness or DVBE.
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EXISTING LAW :
1)Declares state policy that CSBs receive a fair portion of the
total purchases and contracts, or subcontracts, for state
goods, services, information technology, and construction.
2)Designates DGS to administer the state Small Business
Procurement and Contract Act (Small Business Act), including,
but not limited to, a small business certification process and
a streamlined procurement process for state contracts under
$250,000, which is exempt from advertising, bidding, and
protest provisions in the State Contract Act.
3)Establishes, through Executive Order (EO), a 25% annual CSB
participation goal for DGS and all state entities. There have
been three EOs; EO D-37-01, EO S-02-6 and EO S-22-06.
4)Establishes a 25% CSB participation goal for all contracts
financed with the proceeds of the infrastructure-related bond
acts of 2006.
5)Declares that in order to facilitate the participation of CSBs
and microbusiness in the provision of goods, information
technology, and services to the state, and the construction of
state facilities, that department and agencies that enter into
those contracts shall to do the following:
a) Establish a preference for bids made by CSBs and
microbusinesses for the award of state procurement
contracts of 5% 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. A
single bid preference is limited to $50,000 and the
combined value of preferences granted may not exceed
$250,000.
b) Permit non-small businesses that subcontract at least
25% of their contracts with CSB to also qualify for the
small business bidder's preference.
c) Require state agencies to give special consideration to
CSBs by reducing the experience required and/or reducing
the level of inventory normally required in order
facilitate CBSs participation in state contracts.
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d) Requires state agencies to make awards, whenever
feasible, to CSBs for each project bid within their
prequalification rating. This may be accomplished by
dividing major projects into subprojects, so as to allow a
CSBs or microbusinesses to qualify to bid on these
subprojects.
6)Defines the following:
a) A CSB is an 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) A Microbusiness is 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; and
c) A DVBE is a business entity that is at least 51% owned
or controlled by one or more disabled veterans.
FISCAL EFFECT : Unknown
COMMENTS :
1)Author's purpose: SB 1484 is being introduced in order to
increase the ability of Certified Small Business,
Microbusiness and DVBEs participation in contracting with the
state as direct contractors in contracts for goods. This bill
will conform California practices to long lasting federal law
and regulations that prevent the bundling of contracts that
exclude CSBs and DVBEs from direct participation as the prime
contractor.
The unbundling of state contracts will significantly reduce
costs to the state, increase the amount of CSB, microbusiness
and DVBE participation and provide more jobs to economy.
Rather than simply increasing competitively bid contract
solicitations or mandatory contractors where CSBs or DVBEs
could realistically compete with large businesses, the DGS
instead began to solicit bids for very large, "bundled" or
prime vendor contracts that are awarded to large national or
multinational companies whose revenues derived from these
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contracts leave the state. These prime vendor contracts are
made up of existing contracts that historically have been
awarded primarily to small subcontractors. Thus, this
practice sharply reduces or even eliminates direct state
contracts with the CSBs and DVBEs.
Contracts that are bundled are usually awarded to larger
companies at a much higher price than if these contracts had
been broken up into smaller contracts. Breaking up the
contracts in this fashion would enable large and small
companies to bid competitively against each other for the
state's business.
For these reasons, federal law and procurement regulations
have for years prohibited the bundling of federal contracts
that have the effect of restricting or excluding small
business participation in the federal procurement.
2)Importance of small business participation: Over the years,
California has been concerned with ensuring CSBs have a fair
and equitable opportunity to successfully bid and receive
state contracts. Since 1983 the state has provided CSBs with
a 5% bid preference, a streamlined procurement process for
small size contracts, as well as, special considerations
during the bidding process.
In latter years, a 25% CSB and a 3% DVBE procurement
participation goal was added as another means for the state to
enhance its commitment to CSBs and DVBEs. Three EOs have been
released throughout the years, with the most recent EO
released in 2006, EO S-02-06. This last EO also included a
process whereby departments that fail to meet their annual
goals are required to prepare a correction action in
collaboration with the both the Small Business Advocate and
DGS.
3)What is contract bundling ? The federal Small Business
Reauthorization Act of 1997 defines contract bundling as
"consolidating two or more procurement requirements for goods
or services previously provided or performed under separate,
smaller contracts into a solicitation of offers for a single
contract that is unlikely to be suitable for award to a small
business concern".
The federal government, since its work in the late 1990s, has
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developed more expertise in addressing the negative impacts
and developing policies that more effectively limit the
bundling of contracts. Additional details on the federal
governments activites are described below. SB 1484 is modeled
after the federal law.
4)Why are contracts bundled ? There are a number of reasons
agencies began to bundle contracts. The most common
explanation provided by agencies is that bundled contracts are
the result of staff reductions and increased demands to
streamline the purchasing processes. In the past, it was
suggested that bundling contracts would be more cost efficient
than soliciting multiple contracts. Evidence now, however,
suggests that large bundled contracts have led, in some cases,
to higher prices being charged overall.
As an example, in the case of the Office Depot contract, it
took someone from outside the state government process to
notice the price inconsistencies and inform DGS that the state
may have been overcharged. To DGS's credit, they immediately
conducted an audit of the contract and confirmed problems. In
2008, the Office Depot agreed to repay $2.5 million to the
state as a result of the audit. In reviewing the DGS audit,
it appeared there was inadequate oversight of the bundled
contract. State agencies may need to be asked required to
codify in advance of issuing the solicitation that they have
adequate staff to properly oversee large-size procurement
contracts.
The federal government has been concerned for over a decade
with making sure that CSBs receive a fair and equitable
opportunity to bid on and obtain federal contracts. In 2002,
the federal Small Business Advocate's Office of Advocacy
published a report "The Impact of Contract Bundling on Small
Business FY 1992-99". According to the report, for every 100
bundled contracts, 106 individual contracts were no longer
available to small businesses. For every $100 awarded on a
"bundled" contract, there is a $33 decrease to small business.
Because bundled contracts run longer and encompass a greater
scope of products or services, competition is reduced in terms
of frequency and the number of bid opportunities. Data
indicates that although the overall money spent in contracting
with small business has remained relatively constant, there
has been a sharp decline in the number of new contracts being
awarded to small business.
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5)Federal Unbundling Actions : In March 2002, then President
Bush asked the Small Business Administration to prepare a
strategy for the unbundling of federal contracts. The report
"A Strategy for Increasing Federal Contracting Opportunities
for Small Business," was released in October 2002 by the
Office of Management and Budget and the Office of Federal
Procurement Policy. The strategy holds agencies accountable
for eliminating unnecessary contract bundling and mitigating
the effects of necessary contract bundling. The following
recommended actions are included in the strategy to help
agencies increase contracting opportunities for small
business.
a) Senior management are required to be held accountable
for eliminating unnecessary contract bundling and
mitigating the effects of necessary and justified contract
bundling;
b) Multiple award contracts are required to be specially
reviewed;
c) A contracting agency that proposes the use of a
bundled contract must first try to identify an alternative
acquisition strategy and to provide written justification
when alternatives involving less bundling are not used;
and
d) Small business teams and joint ventures are
encouraged, as a means to mitigate the effects of contract
bundling.
A complete list of recommendations and actions can be found
in contract bundling strategy at
http://www.whitehouse.gov/omb/procurement/contract_bundling_o
ct2002.pdf .
6)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
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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 55,878
companies that exported goods from California in 2007, 95%
were small- and medium-sized enterprises (SME) with fewer than
500 employees. These SMEs generated two-fifths (44%) of
California's exports in 2007. Nationally, SMEs generated well
above 30% 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.
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.
7)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
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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 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 executive
order, DGS reported that the state achieved its small business
target by awarding 28.31%, or $2.65 billion, of the value of
all 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.
8) Proposed amendments : Staff understands the author has
agreed to the following amendments:
a) Delete language which prohibits counting, subcontracts
with CSBs, and DVBEs as part of the 25% small business and
3% DVBE procurement goals; and
b) Add a five year sunset.
In addition, the committee may wish to consider if there is a
need to have, under certain limited circumstances, a process
in place for the approval of bundled contracts. The small
Business Advocate may be an appropriate third party to review
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and determine appropriateness of prospective bundled contracts
for compliance with a limited set of criteria.
9)Related legislation : Related legislation includes the
following:
a) AB 2708 (Bill Berryhill) DGS Contracts : This bill
prohibits the Department of General Services (DGS) and the
directors of other state departments or agencies that
enter into contracts from engaging in the bundling of
contracts and other requirements as specified. This is
pending in Assembly Jobs, Economic Development and the
Economy Committee.
b) AB 31 (Price) Small Business Public Contracts : 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.
c) AB 177 (Ruskin and V. Manuel P?rez) - Penalties under
the Small Business Act : This bill increases and conforms
penalties for persons who falsely engage in activities
relating to the Small Business Procurement and Contract
Act, including small businesses, microbusinesses, and
disabled veteran-owned business enterprises. Status: The
bill is pending in Senate Veteran Affairs, set for hearing
on June 22, 2010.
d) AB 309 (Price) - Small Business Participation: This
bill would have required the establishment of a 25% small
business participation goal for all state entities and
directs the Department of General Services (DGS) to
monitor each agency's progress in meeting this goal.
Status: Held on suspense in Assembly Appropriations
Committee in 2009.
e) AB 2330 (Arambula) - Small Business Costs Study : This
bill requires the OSBA to commission a study of the costs
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of state regulations on small businesses that is parallel
to the study on the impact of regulatory costs on small
firms conducted by the federal Small Business
Administration. The OSBA is required to make
recommendations on how to reduce the cost of existing and
future regulations on small businesses while achieving the
same policy and regulatory objectives. This bill also
convenes a small business advisory committee to provide
advice based on the study and recommendations. Status:
Signed by the Governor, Chapter 232, Statutes of 2006.
f) SB 1108 (Price) 25 Percent Small Business Goal: This
bill makes three enhancements to the Small Business Act
including authorizing the implementation of a 25% small
business procurement goal, the development of specific
administrative procedures for implementing the small
business preference and requiring the state to take a more
active role in promoting certification of small
businesses. Status: Pending in Assembly, Jobs, Economic
Development and the Economy, set for hearing on June 22,
2010.
REGISTERED SUPPORT / OPPOSITION :
Support
Adolph Foods Inc.
Basic Logistics
Bruce Logistics Inc.
California Black Chamber of Commerce (sponsor)
California Small Business Association
Coalition of Small and Disabled Veteran Businesses (sponsor)
Maintex, Inc.
Ostrow & Associates
Ritchie Trucking Service Inc.
San Joaquin Distributors, Inc.
Small Business California
Titus Enterprises, Inc.
The Langlois Company
Opposition
None received
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Analysis Prepared by : Mercedes Flores / J., E.D. & E. /
(916) 319-2090