BILL ANALYSIS �
SB 1510
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Date of Hearing: July 3, 2012
ASSEMBLY COMMITTEE ON JOBS, ECONOMIC DEVELOPMENT AND THE ECONOMY
V. Manuel P�rez, Chair
SB 1510 (Wright) - As Amended: June 12, 2012
SENATE VOTE : 37-0
SUBJECT : Department of General Services: small business
contracts
SUMMARY : Tightens the bidder requirements for demonstrating
that a small business or microbusiness will serve a commercially
useful function (CUF) in carrying out a state contract. By
meeting the CUF requirements, a bidder may claim a 5% bid
preference on competitive state contract awards.
Specifically, this bill expands the CUF requirements to include
demonstrating that the small business or microbusiness has
responsibility for:
1)Its own accounts receivable, and that the accounts receivable
of the certified small business or microbusiness are not
directly or indirectly controlled by the prime contractor,
supplier, or wholesaler.
2)Negotiating price, determining quality and quantity, ordering,
installing, if applicable, and making payment for the
products, inventories, materials, and supplies required for
the contract.
EXISTING LAW :
1)Designates The Department of General Services (DGS) as the
administrator of the state Small Business Procurement and
Contract Act (Small Business Act), including, but not limited
to, a small business certification process and a 5% preference
program for bids made by certified small business and
microbusinesses.
2)Establishes a 25% small business participation goal for
contracts financed with the proceeds of the
infrastructure-related bond acts of 2006. Through Governor
Executive Order, a 25% annual small business procurement
participation goal is set for all state contracts made by
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state entities under the authority of the Governor.
3)Establishes a 5% preference for bids made by certified small
business and microbusinesses for the award of state
procurement contracts. A single bid preference is limited to
$50,000. Non-small businesses must subcontract at least 25%
of their contracts with small business to qualify for the
small business bidder's preference.
4)Requires, as a condition for receiving the preference, that
the small business or microbusiness perform a commercially
useful function (CUF) in executing the state contract.
5)Specifies that information in the bid package demonstrate that
the small business or microbusiness does all of the following:
a) Is responsible for the execution of a distinct element
of the work of the contract.
b) Carries out its obligation by actually performing,
managing, or supervising the work involved.
c) Performs work that is normal for its business services
and functions.
6)Applies civil penalties for any person who knowingly and
fraudulently represents that a CUF is being performed in order
to obtain or retain a bid preference or a state contract.
7)Defines a small business as independently owned, not dominant
in its field of operation, domiciled in California, employing
100 or fewer employees, and earning $14 million or less in
average annual gross revenues for the three previous years.
8)Defines a microbusiness as a small business which, together
with its affiliates, has an average annual gross receipts of
$2.5 million or less over the previous three years, or is a
manufacturer with fewer than 25 employers.
FISCAL EFFECT : The measure was referred from the Senate
Committee on Appropriations to the Senate Floor pursuant to
28.8.
COMMENTS :
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1)Bill Purpose : According to the author, "SB 1510 will codify
and strengthen existing laws pertaining to small businesses
bidding on state work in order to stop the practice of using
sham small businesses to get state contracts.
SB 1510 seeks to strengthen these existing policies by
providing DGS with clearly defined language to identify phony
small businesses. Right now, DGS' ability to enforce
compliance is hindered, due to the very broad definitions of
compliance requirements. The current statute sets a very low
threshold, thereby allowing CSBs/DVBEs with little or no
employees or inventory to compete against CSBs/DVBEs who do
hire their own employees.
SB 1510 will clarify that the small business: Must be
responsible for negotiating price, determining quality and
quantity and pay for the material itself. SB 1510 will
provide a clear set of rules so that legitimate small and
disabled veteran businesses can fairly compete for state
business."
2)Small Business Preferences : The Small Business Act,
administered through DGS, was implemented more than 30 years
ago to increase the participation of small business within the
state's procurement process. In 1989, a disabled veteran
owned business enterprise (DVBE) component and a 3% annual
procurement participation goal was added to SBA. While
existing law has no annual small business goal, since 2001
there have been four Executive Orders (EOs) specifying a 25%
annual goal for small business participation in state
procurement.
In order to assist state government entities in reaching the
small business and DVBE participation goals, contracting
entities are provided a number of specific tools, including
bid preferences, a streamlined procurement method, and
designation of small business procurement liaisons at every
agency. SB 1510 proposes to tighten the requirements for
claiming the small business and microbusiness bid preference.
Certified small business and microbusiness bidders and other
bidders that commit to using certified small business and
microbusiness subcontractors are eligible for a 5% bid
preference where the solicitations are made either on the
basis of lowest responsible dollar bid, or on the basis of
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highest score, considering factors in addition to price. DVBE
bidder and firms that commit to using DVBEs may also receive a
bid preference of between 1% and 5%. There are programmatic
limits to the overall value of these preferences with a single
bid preference limited to $50,000 and the combination of all
preferences not exceeding $100,000 (many DVBEs are also
certified small businesses allowing for two preferences).
The purpose of these preferences is to help these targeted
businesses to successfully compete with larger size firms and
national chains for state contracts. In applying these
preferences to a state contract, a bidder is required to
demonstrate that the small business, microbusinesses or DVBE
will perform a CUF in executing the contract. The CUF
requirement is designed to prevent a bidder from using a
business as a "pass through" or "front" for another business
that would otherwise not qualify for the small business,
microbusiness or DVBE bid preference. The CUF requirement
applies to all state purchasing activities, including
contracts for goods, services, informational technology and
public works.
Current law requires a business to (1) be responsible for a
distinct element of the contract; (2) actually perform,
manage, or supervise contract related work; and (3) perform a
task that is normal for its business, in order to be
considered as serving a CUF.
A contractor or subcontractor is not considered performing a
CUF if the contractor's or subcontractor's role is limited to
that of an extra participant in a contract, through which
funds are passed to other businesses, which actually perform
the contract work. The contracting entity has the challenging
task of making a CUF determination prior to awarding the
contract, as the bid preference is likely to be a determining
factor in a business obtaining the bid. Small business and
DVBE advocacy groups, like those sponsoring SB 1510, believe
that the CUF rules are being exploited in practice, resulting
in state contacts being awarded to inappropriate bidders based
on the use of small businesses that are simply "fronts" for
other businesses.
SB 1510 adds to the CUF requirements by having the bidder also
demonstrate that the small business and microbusiness is
financially and administratively independent of the prime
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contractor, suppliers or wholesaler.
3)Proposed DGS Regulations : Existing law only applies the CUF
requirement to small businesses and microbusinesses. Statute
does not currently address the standards by which a DVBE is
certified including requirements for material financial and
administrative control. In 2011, DGS began a comprehensive
update of its DVBE regulation to reflect a range of statutory
changes between 2003 and 2010. In addition, DGS is proposing
the inclusion of language substantially similar to the
existing and proposed CUF provisions in SB 1510.
The Committee may wish to consider codifying DVBE CUF
requirements to ensure that future regulatory changes are kept
consistent with the CUF requirements for small business,
microbusiness.
4)Historical Small Business Procurement Participation : Despite
the longstanding existence of the Small Business Act, periodic
statutory upgrades, and EOs, the state's success in achieving
small business and DVBE participation goals in state
procurement contracts has been inconsistent.
Since 2001, when the first EO set the 25% small business
participation target, the state has met its goal only three
times. In the most recent report on procurement, 2008-09, DGS
reported that $2.4 billion (26.8%) out of a total of $8.96
billion of all state contracts to small businesses. This
represents a $2.0 billion increase in small business contracts
from 2007-08. The state has only once achieved its 3% DVBE
participation goal, that being in 2007-08 when $190 million in
contracts (3.04%) were awarded to bids that included DVBEs.
5)California's Small Business Economy : California's dominance
in many economic areas is based, in part, on the significant
role small businesses play in the state's $1.9 trillion
economy. Businesses with fewer than 100 employees comprise
nearly 98% of all businesses, and are responsible for
employing more than 37% of all workers in the state.
Among other advantages, small businesses are crucial to the
state's international competitiveness and are an important
means for dispersing the positive economic impacts of trade
within the California economy. Small businesses have
consistently functioned as economic engines. According to the
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Small Business Administration's Small Business Economy 2011,
small businesses nationally outperformed large firms in net
job creation nearly three out of four times from 1992 through
2010 when private-sector employment rose.
Small businesses have also played an important role in
challenging economic times. During the nation's economic
downturn from 1999 to 2003, microenterprises (businesses with
fewer 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.
During the most recent recession, however, small businesses
have been especially hard hit. Equifax reported that
bankruptcies in California rose by 81% in 2009, as compared to
44% nationally. This trend continued in 2010 where the
Equifax report stated that while in general bankruptcies were
down across the nation (26% decrease), small business
bankruptcies in California accounted for almost 20% of all
small business bankruptcies in the nation. In 2011, the
metropolitan statistical areas (MSAs) in western states
continued from the final quarter in 2010 to lead the nation in
small business bankruptcies. The region, however, also
experienced the most significant decrease in bankruptcy
filings year over year from Q1 2011 to Q1 2012-more than a 40%
decline in some MSAs.
6)Related Legislation : The following is a list of related
legislation.
a) AB 31 (Price) Small Business Contract Preferences and
Enforcement : This bill made several key changes to state
procurement procedures including increasing the maximum
contract threshold amount for awards to a small business
and DVBE, under a specific streamlined procurement process,
from $100,000 to $250,000. Further, the bill required
contractors that made contract commitments to include small
business or DVBE participation to report the final percent
of the contract actually paid to these entities. Status:
The bill was signed by the Governor, Chapter 212, Statutes
of 2009.
b) AB 926 (Ruskin) Loss Leader Notice Requirements : This
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bill required certain advertising of state contracting
opportunities to include a specified statement relating to
an existing prohibition against the use of "loss leaders."
Specifically, the bill requires every solicitation that
appears in the California State Contracts Register
including informational technology equipment to contain the
following statement, "It is unlawful for any person engaged
in business within this state to sell or use any article or
product as a "loss leader." Status: The bill was signed
by the Governor, Chapter 490, Statutes of 2009.
c) AB 761 (Coto) Small Business Preference for
Infrastructure Bonds : 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: The bill
was signed by the Governor, Chapter 611, Statutes of 2007.
d) SB 115 (Florez) DVBE Procurement Preferences : This bill
made various changes to the DVBE Program, including
requiring DGS to establish a state agency-wide mandatory
DVBE participation incentive. The bill also requires the
DGS Small Business Advocate to provide specified services
to small businesses and certified DVBEs. Additionally,
this bill requires DGS to adopt a streamlined reporting
procedure for state agencies to use in reporting their DVBE
participation to the Department of Veterans Affairs.
Status: The bill was signed by the Governor, Chapter 451,
Statutes of 2005.
REGISTERED SUPPORT / OPPOSITION :
Support
California Small Business Association (joint-sponsor)
Coalition of Small and Disabled Veteran Businesses
(joint-sponsor)
California Asian Pacific Chamber of Commerce
Opposition
None received
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Analysis Prepared by : Toni Symonds / J., E.D. & E. / (916)
319-2090