BILL ANALYSIS �
SENATE COMMITTEE ON VETERANS AFFAIRS
LOU CORREA, CHAIRMAN
Bill No: SB 817
Author: Senate Veterans Affairs Committee
Version: As Introduced
Hearing Date: April 12, 2011
Fiscal: Yes
Consultant: Donald E. Wilson
SUBJECT OF BILL
Business Utilization Plan (BUP) for Disabled Veterans
Business Enterprises (DVBE)
PROPOSED LAW
1. Re-codifies in the Public Contract Code DVBE
provisions of percentage ownership, percent disabled,
and provision of income taxes.
2. Adds Disabled 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 three
percent 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 rather 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 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 Limited
Liability Corporation (LLC) 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 DVBE, or contact DVBE for work in fields other
than the work DVBE did, and then report to the state
that a good faith had been made in hiring 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 DVBE and be compliant on state contract
bids.
8. Last year Assemblyman Nielsen proposed this bill as
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AB 2627, which passed this committee unanimously.
After some last minute concerns the bill was held up
in Appropriations.
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 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. Say 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 $400,000 in business, which is above the
3% goal, then why does the state care as long as the
DVBE is thriving and paying taxes on that money?
With this flexibility, it is more likely that
contractors would bring DVBEs in house to help them
grow, which in turn should lighten the load for state
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departments since the overall dollar amount would be
monitored for compliance rather than every contract
issued.
6. The bill is still a work in progress and is the
same version as last year's
AB 2627(Nielsen).
SUPPORT
None received
OPPOSE
None received
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