BILL ANALYSIS �
AB 450
Page 1
Date of Hearing: May 3, 2011
ASSEMBLY COMMITTEE ON HIGHER EDUCATION
Marty Block, Chair
AB 450 (Wieckowski) - As Amended: May 2, 2011
SUBJECT : California State University.
SUMMARY : Requires California State University (CSU) service
contractors to disclose and credit manufacturer rebates to CSU
campuses. Specifically, this bill :
1)Provides that policies and procedures developed by the CSU
Trustees for the acquisition of services shall specify that
any direct or indirect rebates from a third party shall be
fully disclosed and credited to the campus or other unit of
the CSU, and be available for review as part of any audit, as
specified.
2)Provides the CSU Trustees, in conjunction with the controller,
the right to examine, at reasonable times and upon reasonable
notice, the books, records and other compilations of data of
the services contractor that relate to the provisions and
requirements of all service contracts, including records
related to any rebates received by a contractor from a third
party as a consequence of, or incidental to, a contract.
3)Defines "services contractor" to include those providing food,
janitorial, laundry, maintenance, window cleaning or landscape
services.
4)Defines "rebate" to include any return of monetary value
including, but not limited to, any volume discounts,
allowances, or discount purchase incentives.
EXISTING LAW :
1)Provides the CSU Trustees broad powers to establish policies
and procedures governing the acquisition of services,
facilities, materials, goods, supplies, or equipment.
Requires the policies to include a competitive means for
obtaining best value while complying with legislative intent
regarding competitive bids or proposals as expressed in the
California Public Contracts Code (Education Code �89036).
AB 450
Page 2
2)Authorizes the CSU Trustees to establish a process that allows
a campus to make payments directly to vendors and provides the
CSU Trustees authority to draw from appropriated funds
amounts necessary to make payments of obligations of the
university directly to vendors. Provides that payments in
excess of 10% of the fund total must be approved by the
Director of Finance (Government Code �12400.1).
3)Requires the CSU Trustees to contract with one or more public
accounting firms to conduct systemwide and individual campus
annual financial statement and compliance audits. Requires
audits to test compliance with procurement procedures and the
integrity of the payments made (Government Code �12400.1).
4)Requires every contract involving the expenditure of public
funds in excess of $10,000 by any public entity to be subject
to the examination and audit of the State Auditor for a period
of three years after final payment under the contract.
Requires every contract to contain a provision stating that
the contracting parties shall be subject to that examination
and audit (Government Code �8546.7).
FISCAL EFFECT : Unknown
COMMENTS : Background : According to the sponsor, food
manufacturers commonly give rebates for purchases from large
food service companies such as Sodexo, Chartwells, and Aramark.
In 2010, after significant controversy surrounding the amounts
of those rebates, the U.S. Department of Agriculture (USDA)
enacted regulations requiring contractors under the
federally-subsidized school meals program to disclose all
discounts, rebates and other applicable credits received by the
contractor and to credit those rebates back to the school. The
regulations are designed to ensure that the limited school meals
program resources are used as efficiently as possible and that
federal agencies are only paying "net costs". After concerns
were raised that large food service vendors were not returning
all of the rebates received, the New York Attorney General
conducted an investigation revealing that, over a five-year
period beginning in 2004, Sodexo received significant rebates
from suppliers without acknowledging or passing the savings on
to these schools-in violation of the contracts between Sodexo
and the schools as well as state and federal laws. In July of
2010, Sodexo agreed to pay New York $20 million to settle
complaints. While federal regulations are in place to prohibit
AB 450
Page 3
contractors from pocketing rebates from food manufacturers in
California's federally-subsidized K-12 district meals programs,
there appears to be no federal or state laws governing this
practice in California's higher education segments.
Purpose of this bill : According to the author, "There is no
specific law or policy in this area related to rebates nor are
there laws relating to the ability of the CSU Trustees or the
State Controller to examine a service contractor's books or
records to determine if the contractor is receiving off-invoice
rebates from its suppliers. This bill will allow CSU to
determine if for example, food service companies are receiving
rebate payments for their food purchases on behalf of the
university and whether these rebate payments are being credited
back to the campus. The audit provisions will allow CSU to
discover if off-invoice rebates exist which may point to receipt
of rebates from suppliers to the contractor."
Identified problem in California : Committee staff understands
that the USDA provision requiring food service rebates to be
credited to K-12 districts is one of many new federal
regulations relating to the federally-subsidized school meals
program. The California Department of Education (CDE) and K-12
districts are in the process of implementing these new
regulations. In addition to providing guidance and oversight of
K-12 school contracts with service providers, CDE is
implementing a Food Service Management Registry and prohibiting
schools from contracting with vendors that are not registered
with the state. The extent to which this registry might provide
oversight of rebate credits is unclear. While there is
currently no evidence of similar rebate abuses are occurring in
California, the author notes that abuses appear widespread and
that "other states such as Massachusetts, Pennsylvania, and New
Jersey are pursuing similar cases to the one in New York."
CSU has this authority. As previously noted CSU Trustees have
broad authority over campus procurement policies for services
and goods. The CSU Policy Manual for Contracting and
Procurement contains detailed policies and procedures for
selecting contractors for goods and services. While a complete
accounting of these policies is beyond the scope of this
analysis, it is important to note that these policies and
procedures are generally designed to ensure responsible
contractors and the best price/value for CSU and contracts of
greater than $50,000 require a competitive bidding process.
AB 450
Page 4
It is unclear to what extent service contractors, when
attempting to achieve the lowest possible bid on a contract,
assume rebate savings in their bid amount. The author
indicates that contracts, particularly in the area of food
service, contain provisions requiring campuses to pay (in
addition to the service contract price) the actual cost of goods
such as food products and cleaning supplies. The author argues
that contractors are passing along these costs without factoring
in manufacturer rebates. Committee staff was unable to
ascertain the degree to which CSU service contracts already
include or exclude these "hard" costs. It appears that, under
existing law, CSU has the authority to enact provisions
requiring contractors to credit manufacturer rebates to
campuses.
Additionally, in regards to auditing contractors, existing law
provides that for all contracts in excess of $10,000, the
Contractor must agree to be subject to an audit by the Office of
the University Auditor and the State Auditor for matters
connected with the performance of the contract. It appears that
this provision would allow CSU and the State Auditor to examine
manufacturer rebates related to the services/goods provided in
the contract.
Why apply this only to CSU ? As previously noted, this bill is
only applicable to CSU. The rationale behind limiting the
provisions of this proposal to CSU is unclear. If, as the
author indicates, the rebate abuses are widespread should this
bill be made applicable to CCC and UC?
Definition of contractor : As previously noted, this bill would
define "service contractor" to include "a contractor providing
food, janitorial, laundry, maintenance, window cleaning, or
landscape services." While implementation may be easier for
services such as janitorial or landscape where CSU is likely
paying the contractor directly, the applicability of this
definition in the area of food is less clear. In addition to
cafeteria plans provided to students by CSU, would this
definition also include all food vendors, for example a
fast-food restaurant contracted to operate inside of a student
union where the student is paying the food costs?
Alternative approach : This bill responds to an assumption that
widespread abuses of manufacturer rebates are occurring in CSU
AB 450
Page 5
service contracts. At this point, the Committee has not been
provided with evidence to support this assumption. The author
and committee may wish to consider whether a more appropriate
first step would be to require an examination into the use of
manufacturer rebates in service contracts.
REGISTERED SUPPORT / OPPOSITION :
Support
Service Employees International Union
Opposition
None on File
Analysis Prepared by : Laura Metune / HIGHER ED. / (916)
319-3960