BILL ANALYSIS �
AB 2278
Page 1
Date of Hearing: April 30, 2014
ASSEMBLY COMMITTEE ON JOBS, ECONOMIC DEVELOPMENT AND THE ECONOMY
Jose Medina, Chair
AB 2278 (Weber) - As Introduced: February 21, 2014
SUBJECT : State agency contracts: small business
SUMMARY : Increases the maximum financial value of an individual small
business bid preference and the aggregate value that may be applied to
a bid package that includes more than one preference. The bill also
modifies the base of that calculation from being the lowest responsible
bidder to the lowest responsible non-small business bidder.
Specifically, this bill :
1)Increases the maximum financial value of the 5% small business
procurement preference from $50,000 to $350,000.
2)Increases the maximum financial value of all combined preferences
from $100,000 to $400,000 for any bid that includes a small business
preference.
3)Modifies the calculation of the small business 5% preference by
basing it on the bid of the lowest responsible non-small business
bidder rather than just the lowest responsible bidder. A responsible
bidder is a bid that is fully compliant with all contract
requirements.
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), which includes certifying and implementing
targeted preference programs for certified small businesses,
microbusinesses, and disabled veteran owned business enterprises
(DVBEs).
2)Authorizes a 5% preference for state contract bidders that are either
a certified small or microbusiness or a larger business that commits
to using a certified small or microbusiness in effecting the
contract. This 5% is calculated based on the bid of the lowest
responsible bidder, which may be a small or non-small business.
3)Authorizes a 5% preference for a state contact bidder that agrees to
perform the contract work in a designated "distressed area" and 1% to
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4% workforce bidding preference in specified state service and
commodity contracts valued in excess of $100,000.
4)Authorizes contracting departments to offer a DVBE incentive. The
application of an incentive varies from that of the small business
and Target Area Contract Preference (TACPA) both when it is
incorporated into competitive solicitations and how the incentive
percentages are determined and calculated. Unlike preferences where
there is a 5% standardized value included to competitive
solicitations, discretion is left to departments to determine
incentive percentages for a particular transaction based upon a
business strategy to achieve their annual goal.
5)Defines a small business as 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.
FISCAL EFFECT : Unknown
COMMENTS :
1)Author's Purpose : According to the author, "Small businesses are the
lifeblood of the economy in California. According to the Public
Policy Institute of California, small businesses comprise more than
98.3% of all businesses, and are responsible for employing more than
57.9% of all workers in the state.
Currently, California small businesses get a 5% preference when
bidding on state contracts. However, currently the ceiling for the
preference is $50,000. This means that the preference starts losing
its value for contracts valued over $1 million. E.g., at $1,000,000 a
small business could beat a nonsmall business with a bid of
$1,050,000. At $3,000,000, the small can win with a bid of
$3,050,000 and so on. California small businesses have less-and-less
benefit from the preference in higher value contracts, which are more
difficult to prepare bids for, and where small businesses need the
help most. AB 2278 increases the ceiling to $350,000. This gives
California small businesses a fighting chance at contracts up to $7
million; a good size contract for a small business."
2)Framing the Policy Issue : This bill increases the maximum dollar
value of the 5% small business preference from $50,000 to $350,000
and adjusts the current aggregate value of all preferences to reflect
the increase. In proposing this change three policy issues are
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raised.
The first issue is whether the current financial limit allows
small businesses to successfully compete for state contracting
opportunities as either a prime or as a subcontractor? Evidence
and commentary by DGS suggests that the $50,000 limitation is too
low given the increasing size of state contracts.
The second issue flows from the first, in that, if the current
$50,000 financial limit is too low for small businesses to
compete, wouldn't the same be true for the financial caps on other
5% procurement preferences, including the 5% preference for
bidders undertaking contracts in low-income areas and hiring
economically disadvantage individuals?
The third issue is perhaps an unintended consequence of the
measure, but a core public policy issue none the less. Does the
Legislature wish to change the current level playing field among
preferences and give some groups of bidders a greater advantage?
And, in making this policy choice, should small businesses be
raised above contracting in high poverty areas and hiring targeted
populations, or using recycled content in state purchases.
The analysis includes additional discussion on these policy areas.
Comment 8 includes amendment recommendations.
1)The Role of Small Businesses within the California Economy :
California's dominance in many economic areas is based, in part, on
the significant role small businesses play in the state's $2 trillion
economy. 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. California small businesses comprised 96% of the
state's 60,000 exporters in 2009, which accounted for over 44% of
total exports in the state. Nationally, small businesses represented
only 31.9% of total exports. These numbers include the export of
only goods and not services.
Businesses with no employees make up the single largest component of
businesses in California, 2.8 million out of an estimated 3.5 million
firms in 2010. As these businesses grow, they continue to serve as
an important component of California's dynamic $2 trillion economy.
Microenterprises, meaning businesses with less than five employees
represent approximately 93% of all businesses in the state, or
approximately 3.2 million of all businesses.
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State procurement law defines a small business as being independently
owned and operated with a principle office in California, having less
than 100 employees, and having had average annual gross receipts over
the previous three years of less than $10 million. According to the
U.S. Census Bureau, businesses in California with less than 100
employees comprise nearly 98% of all businesses and employ
approximately 38% of all workers.
California's non-employer and small employer firms create jobs,
generate taxes, and revitalize communities. In hard economic times,
smaller size businesses often function as economic engines. In this
most recent recession the trend continued, with the number of
nonemployer firms increasing from 2.6 million firms ($137 billion in
revenues) for 2008 to 2.8 million firms ($138 billion in revenues)
for 2010. In the post-recession economy, small businesses are
expected to become increasingly important due to their ability to be
more flexible and better suited to meet niche market needs.
Their small size, however, results in certain challenges in meeting
regulatory requirements, accessing capital, and marketing their goods
and services.
2)Small Business Procurement Act : The Small Business Procurement Act,
administered through DGS, was implemented more than 30 years ago to
establish a small business preference within the state's procurement
process that would increase the number of contracts between the state
and small businesses. A DBVE component was added in 1989.
The Small Business Procurement Act states that it is the policy of
the State of California that the state aid the interests of small
businesses in order to preserve free competitive enterprise and to
ensure that a fair portion of the total purchases and contracts of
the state be placed with these enterprises. The statute further
states that DVBE participation is strongly encouraged to address the
special needs of disabled veterans seeking rehabilitation and
training through entrepreneurship, and to recognize the sacrifices of
California's disabled military veterans. Statute sets an annual 3%
DVBE participation goal, and a 25% goal for small and microbusinesses
(through executive order).
Unfortunately, participation rates have not been as high as desired,
with state agencies meeting the 25% small business goal and DVBE 3%
goal, in only four out of the last 11 years. In the most recent
report on procurement, 2011-12, DGS reported that the state had
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entered into $7.4 billion in contracts with $1.8 billion (24.16%)
being awarded to small businesses and $337 million (4.67%) to DVBEs.
3)How State Procurement Preferences Work : In order to assist agencies
in reaching state participation goals, bidders for state contracts
may include 5% procurement preferences. The value of any single 5%
preference is limited to $50,000 and the combined value of one or
more preference cannot exceed 15% or $100,000, whichever is lower.
The state currently recognizes two preferences based on the type of
business and one preference based on the location of the business.
Business type preferences include a 5% preference for bids that
include a small business or microbusiness as either a prime or
subcontractor. The geographically-based TACPA provides a 5%
preference for completing the contract in an economically distressed
area and up to an additional 4% for hiring economically disadvantaged
workers.
The state also offers a DVBE business incentive, which is similar to
a preference, but the exact percentage value is determined by the
contracting entity on a per bid basis and applied at a different
point in the bid review process than the 5% procurement process. It
is not uncommon for a bidder to apply a combination of preferences
and the DVBE inventive in his or her bid package.
When a small business preference is claimed, it is calculated as 5%
of the net bid price of the lowest responsible bidder. As an
example, Bidder A is the lowest responsible bidder with a $5 million
bid and does not qualify for the small business preference. The
contracting agency would multiply $5 x 0.05 = $250,000. Because of
the financial cap, the preference would be limited to $50,000.
Bidder B is a certified small business and submits a $5.2 million
bid. In evaluating Bidder B's bid price, the contracting department
would subtract the preference adjustment from the net bid price ($5.2
million - $50,000 = $5.15 million). In this example, under existing
law, the nonsmall business bidder, Bidder A, would be awarded the
contract.
AB 2278 proposes to change the procurement process by increasing the
financial cap of the small business preference to $350,000. Applying
the AB 2278 proposed change to the example above, Bidder B would now
be awarded the contract because the full benefit of the 5% preference
would be calculated. More specifically, Bidder B's adjusted bid
would be $4.95 million, which is lower than Bidder A's $5 million bid
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($5.2 million - $250,000).
While a 5% preference was sufficient to have the small business be
awarded the contract, sometimes the differences between bids are
larger and existing law allows for the combining of preferences.
Applying the TACPA preference would provide for an additional 5%
preference. AB 2278 does not change the financial value for
applying an additional preference.
Please note the preference does not change the actual bid price, the
calculations are performed in order to compare and rank bids.
4)Challenges in Meeting Procurement Goals : If small businesses are so
important to the California economy, why has it been so hard for
state agencies to meet the small business and DVBE procurement goals
(85% of DVBE are small)? Every year, Members craft a range of bills
to improve outreach, increase preferences, and use their bully pulpit
to help increase small business and DVBE participation rates. Over
the years, direct and innovative approaches have been added including
mandating small business and DVBE liaisons at every agency,
establishing official state-level Small Business and DVBE Advocates,
and requiring the state join a national on-line contracting platform
(BidSync).
The 2011-12 Statewide Consolidated Annual Report offers some
interesting insights. As an example, only 86% of the mandatory
reporting entities actually reported their contracting activity to
DGS. Of those that did report: mandatory reporters awarded 24.16% of
their contracts to small businesses (failed to meet the goal) and
4.67% to DVBEs (met the goal).
The DGS report suggests that part of the challenge in increasing
small business and DVBE participation lies with helping the state's
largest contracting agencies have more outreach and be more
effective. In 2011-12, 62% of all state contracts were awarded by
the Department of Corrections, the Department of Transportation, the
Franchise Tax Board, and the Department of Health Care Services
(DHCS). The top 10 agencies were awarded 80% of all contracts by
dollar amount. This means that regardless of the efforts of the
Department of Education (76.23%) and Labor and Workforce Agency
(40.59%), the state's largest contracting entities must do a better
job in contracting with small and microbusiness if the state is going
to reach its goal. The chart below shows the top 10 contracting
departments.
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--------------------------------------------------------------
| Top 10 Contracting Agencies in 2011-12 |
--------------------------------------------------------------
|------------------+----------+--------+-----------+-----------|
| Departments | Total |Percenta| Small | DVBE |
| | Contact | ge of | Business |Participati|
| | Dollars |Statewid| and | on |
| | | e |Microbusine|Percentage |
| | |Contract| ss | |
| | | ing |Participati| |
| | | | on | |
| | | |Percentage | |
|------------------+----------+--------+-----------+-----------|
|All Mandatory |$7,434,297| | 24.16% | 4.67% |
|Reporters |,407 | | | |
|------------------+----------+--------+-----------+-----------|
|Corrections and |1,960,625,| 26% | 22.34% | 5.32% |
|Rehabilitation |290 | | | |
|------------------+----------+--------+-----------+-----------|
|Transportation |1,872,767,| 25% | 23.53% | 4.04% |
| |028 | | | |
|------------------+----------+--------+-----------+-----------|
|Franchise Tax |442,705,91| 6% | 21.11% | 4.57% |
|Board |1 | | | |
|------------------+----------+--------+-----------+-----------|
|Health Care |397,931,11| 5% | 5.41% | 0.97% |
|Services |1 | | | |
|------------------+----------+--------+-----------+-----------|
|State Hospitals |320,585,67| 4% | 36.27% | 4.46% |
| |6 | | | |
|------------------+----------+--------+-----------+-----------|
|Water Resources |295,652,44| 4% | 29.26% | 8.98% |
| |9 | | | |
|------------------+----------+--------+-----------+-----------|
|Finance |217,578,97| 3% | 26.06% | 5.48% |
|(primarily the |7 | | | |
|FI$CAL) | | | | |
|------------------+----------+--------+-----------+-----------|
|General Services |187,246,00| 3% | 38.54% | 9.64% |
| |7 | | | |
|------------------+----------+--------+-----------+-----------|
|Parks and |163,909,72| 2% | 36.06% | 2.82% |
|Recreation |5 | | | |
|------------------+----------+--------+-----------+-----------|
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|Motor Vehicles |116,203,30| 2% | 24.46% | 5.97% |
| |6 | | | |
|------------------+----------+--------+-----------+-----------|
|Top 10 Total |$5,975,205| | 23.65% | 3.7% |
| |,480 | | | |
--------------------------------------------------------------
--------------------------------------------------------------
| Source: 2011-12 Statewide Consolidated Annual Report |
|prepared by DGS |
--------------------------------------------------------------
According to DGS, the state's inability to reach its small business
procurement goal in 2011-12 is directly attributable to DHCS' poor
performance. In the report year, DHCS issued a multiyear contract
for Medi-Cal Dental Services worth $300 million per year without any
small business or DVBE participation. Had the agency met their small
business goals on this one contract, DHCS would have had a 21% small
business participation rate, instead of the reported 5%. DGS
suggests that DHCS focus on certifying the individual dentists that
will be subcontracting under the master Delta Dental contract,
otherwise this single contract will continue to hold down the state's
overall participation rates for years to come.
5)Using State Procurement Dollars for Community Reinvestment : As noted
above, the small business preference is one of several preferences
and incentives authorized under California law. Another important
preference is TACPA, which provides a preference to businesses that
undertake the contract in high poverty areas and hire targeted
populations including the formally incarcerated, disadvantaged youth,
and veterans.
Given that both the TACPA and small business preferences have the
same percentage and financial cap, changing only one of the financial
caps creates a confusing procurement policy that lacks transparency
to the public who may wish to use the 5% preferences in obtaining
state contracts.
More importantly, from a community development perspective, AB 2278
changes an unbiased policy between supporting small businesses and
encouraging reinvestment in low income neighborhoods to asking policy
makers to move the support for small businesses ahead of the pursuit
of employment opportunities for disadvantaged individuals. This is a
problematic policy choice.
6)Technical Amendments : AB 2278 increases the maximum financial value
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of the small business preference including the higher preference
value to bids that use more than one preference that includes the
small business preference.
Technical amendments are needed to make similar changes to other
state preferences that can be combined with the small business
preference. These amendments would result in the maximum value of
all preferences in a bid package to be $400,000 i.e. $350,000 maximum
value for 5% small business preference and $50,000 for the maximum
value of any other 5% preference.
7)Related Legislation : Below is a list of related legislation. While
there has been an abundance of effort by the Legislature to increase
small and microbusiness participation in state contracting, a
majority of the measures fail to advance from the fiscal committees.
a) AB 31 (Price) Public Contracts: Small Business Procurement and
Contract Act: This bill increased the maximum contract threshold
amount for awards to small businesses (SME), including
microbusiness, and disabled veteran-owned business enterprises
(DVBE) under the states streamlined procurement process, from
$100,000 to $250,000, as specified. It required contractors to
report the contract amount allocated to SMEs and DVBE 's with
which they made contract commitments. Status: Signed by the
Governor, Chapter 212, Statutes of 2009.
b) AB 172 (Weber) State Contracting Microbusiness: This bill
would have increased the microbusiness procurement preference from
5% to 7% for state contracts to purchase goods, services,
information technology, and construction of state facilities, and
allowed the preference to be awarded to either a microbusiness
bidder or a non-microbusiness bidder that uses a microbusiness
subcontractor. Status: Held on the Suspense File of the Assembly
Committee on Appropriations, 2013.
c) AB 550 (Brown) State Procurement Procedures for Small
Businesses: This bill would have made key changes to state
procurement procedures for the purpose of increasing small
business, including microbusiness, and disabled veteran-owned
business enterprise participation rates. Status: Held on the
Suspense File of the Assembly Committee on Appropriations, 2013.
d) AB 1734 (Jones-Sawyer) Public Contracts and Small Business and
DVBE Participation: This bill
requires each state agency to establish and achieve a 25% small
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business participation goal and increases the annual procurement
participation goal for disabled veteran business enterprises
(DVBEs) from 3% to 5% of the value of state contracts: Status:
Scheduled to be heard in the Assembly Committee on Accountability
and Administrative Review.
e) AB 1783 (Perea) Streamlining Small Business Certification:
This bill required the Department of General Services to publish
on the department's website, and make available to local agencies,
a list of small businesses and microbusinesses that have been
certified as such by the department. Status: Signed by the
Governor, Chapter 114, Statutes of 2012.
f) SB 67 (Price) Small Business Participation in Public Contracts:
This bill would have authorized the Department of General
Services to direct all state entities to establish an annual goal
of achieving no less than 25% small business participation in
state procurement contracts, as specified. Status: Held in the
Assembly Committee on Appropriations, 2011.
g) SB 733 (Price) High Speed Rail: This bill would have required
the California High-Speed Rail Authority (HSRA) to include in its
January 1, 2012 business plan a strategy for ensuring
California-certified small business participation in contracts
awarded with state and federal funds during all phases of the
high-speed rail project. It also required the HSRA to have a
strategy for working with the Employment Development Department to
ensure that at least 25% of the project workforce at each worksite
is from the local workforce. Status: Held in Senate Committee on
Appropriations, 2011.
REGISTERED SUPPORT / OPPOSITION :
Support
California Association for Micro Enterprise Opportunity
California Small Business Association
The American Federation of State, County, and Municipal Employees
Opposition
None Received
Analysis Prepared by : Toni Symonds / J., E.D. & E. / (916) 319-2090
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