The Small Business Procurement and Contract Act requires the Director of General Services and the heads of other state agencies that enter into contracts for the acquisition of goods, services, and information technology and for the construction of state facilities to establish goals for the participation of small businesses and microbusinesses in these contracts, to provide for a small business preference in the award of these contracts, to give special consideration and special assistance to small businesses, and, whenever possible, to make awards to small businesses, as specified. Existing law defines a small business for these purposes as, among other things, an independently owned and operated business that is not dominant in its field of operation that has average annual gross receipts of $10 million, as may be adjusted to reflect changes in the California Consumer Price Index, or less over the previous 3 years. Existing law defines a microbusiness as a small business which, together with affiliates, has average annual gross receipts of $2.5 million, as may be adjusted to reflect changes in the California Consumer Price Index, or less over the previous 3 years. Existing law requires the director to conduct a biennial review of those average annual gross receipt levels and authorizes the director to adjust the average annual gross receipts threshold to reflect changes in the California Consumer Price Index for all items. Existing law requires a contractor requesting a small business or microbusiness preference to do so under penalty of perjury.

This bill would revise those definitions by increasing the dollar amount threshold for a small business to $15 million and for a microbusiness to $5 million and would require those dollar amounts to be adjusted to reflect changes in the California Consumer Price Index biennially. The bill would further revise the definition of small business by specifying that, for the purposes of public works contracts, small business means a business with 200 or fewer employees and average annual gross receipts of $25 million or less. The bill would allow directors of the department and other state agencies to count contractors that would be considered a small business or microbusiness under the changes made by this bill for the year this bill is enacted if the directors are unable to make the small business participation goals under the existing laws. The bill would allow more contractors to qualify as a small business or microbusiness, thus expanding the group of contractors authorized to request a preference filed under penalty of perjury. By expanding the crime of perjury, this bill would impose a state-mandated local program.

This bill would incorporate additional changes to Sections 14837 and 14838 of the Government Code proposed by SB 1219 that would become operative if this bill and SB 1219 are enacted and this bill is enacted last.

The California Constitution requires the state to reimburse local agencies and school districts for certain costs mandated by the state. Statutory provisions establish procedures for making that reimbursement.

This bill would provide that no reimbursement is required by this act for a specified reason.

The Small Business Procurement and Contract Act requires the Director of General Services and the heads of other state agencies that enter into contracts for the acquisition of goods, services, and information technology and for the construction of state facilities to establish goals for the participation of small businesses and microbusinesses in these contracts, to provide for a small business preference in the award of these contracts, to give special consideration and special assistance to small businesses, and, whenever possible, to make awards to small businesses, as specified. Existing law defines a small business for these purposes as, among other things, an independently owned and operated business that is not dominant in its field of operation that has average annual gross receipts of $10 million, as may be adjusted to reflect changes in the California Consumer Price Index, or less over the previous 3 years. Existing law defines a microbusiness as a small business which, together with affiliates, has average annual gross receipts of $2.5 million, as may be adjusted to reflect changes in the California Consumer Price Index, or less over the previous 3 years. Existing law requires the director to conduct a biennial review of those average annual gross receipt levels and authorizes the director to adjust the average annual gross receipts threshold to reflect changes in the California Consumer Price Index for all items. Existing law requires a contractor requesting a small business or microbusiness preference to do so under penalty of perjury.

This bill would revise those definitions by increasing the dollar amount threshold for a small business to $15 million and for a microbusiness to $5 million and would require those dollar amounts to be adjusted to reflect changes in the California Consumer Price Index biennially. The bill would further revise the definition of small business by specifying that, for the purposes of public works contracts, small business means a business with 200 or fewer employees and average annual gross receipts of $25 million or less. The bill would allow directors of the department and other state agencies to count contractors that would be considered a small business or microbusiness under the changes made by this bill for the year this bill is enacted if the directors are unable to make the small business participation goals under the existing laws. The bill would allow more contractors to qualify as a small business or microbusiness, thus expanding the group of contractors authorized to request a preference filed under penalty of perjury. By expanding the crime of perjury, this bill would impose a state-mandated local program.

The California Constitution requires the state to reimburse local agencies and school districts for certain costs mandated by the state. Statutory provisions establish procedures for making that reimbursement.

This bill would provide that no reimbursement is required by this act for a specified reason.

The Small Business Procurement and Contract Act requires the Director of General Services and the heads of other state agencies that enter into contracts for the acquisition of goods, services, and information technology and for the construction of state facilities to establish goals for the participation of small businesses and microbusinesses in these contracts, to provide for a small business preference in the award of these contracts, to give special consideration and special assistance to small businesses, and, whenever possible, to make awards to small businesses, as specified. Existing law defines a small business for these purposes as, among other things, an independently owned and operated business that is not dominant in its field of operation that has average annual gross receipts of $10 million, as may be adjusted to reflect changes in the California Consumer Price Index, or less over the previous 3 years. Existing law defines a microbusiness as a small business which, together with affiliates, has average annual gross receipts of $2.5 million, as may be adjusted to reflect changes in the California Consumer Price Index, or less over the previous 3 years. Existing law requires the director to conduct a biennial review of those average annual gross receipt levels and authorizes the director to adjust the average annual gross receipts threshold to reflect changes in the California Consumer Price Index for all items. Existing law requires a contractor requesting a small business or microbusiness preference to do so under penalty of perjury.

This bill would revise those definitions by increasing the dollar amount threshold for a small business to $15 million and for a microbusiness to $5 million and would require those dollar amounts to be adjusted to reflect changes in the California Consumer Price Index biennially. The bill would further revise the definition of small business by specifying that, for the purposes of public works contracts, small business means a businesses business with 200 or fewer employees and average annual gross receipts of $25 million or less. The bill would allow directors of the department and other state agencies to count contractors that would be considered a small business or microbusiness under the changes made by this bill for the year this bill is enacted if the directors are unable to make the small business participation goals under the existing laws. The bill would allow more contractors to qualify as a small business or microbusiness, thus expanding the group of contractors authorized to request a preference filed under penalty of perjury. By expanding the crime of perjury, this bill would impose a state-mandated local program.

The California Constitution requires the state to reimburse local agencies and school districts for certain costs mandated by the state. Statutory provisions establish procedures for making that reimbursement.

This bill would provide that no reimbursement is required by this act for a specified reason.

The Small Business Procurement and Contract Act requires the Director of General Services and the heads of other state agencies that enter into contracts for the acquisition of goods, services, and information technology and for the construction of state facilities to establish goals for the participation of small businesses and microbusinesses in these contracts, to provide for a small business preference in the award of these contracts, to give special consideration and special assistance to small businesses, and, whenever possible, to make awards to small businesses, as specified. Existing law defines a small business for these purposes as, among other things, an independently owned and operated business that is not dominant in its field of operation that has average annual gross receipts of $10 million, as may be adjusted to reflect changes in the California Consumer Price Index, or less over the previous 3 years. Existing law defines a microbusiness as a small business which, together with affiliates, has average annual gross receipts of $2.5 million, as may be adjusted to reflect changes in the California Consumer Price Index, or less over the previous 3 years. Existing law requires the director to conduct a biennial review of those average annual gross receipt levels and authorizes the director to adjust the average annual gross receipts threshold to reflect changes in the California Consumer Price Index for all items. Existing law requires a contractor requesting a small business or microbusiness preference to do so under penalty of perjury.

This bill would revise those definitions by increasing the dollar amount threshold for a small business to $30 million $15 million and for a microbusiness to $5 million and would require those dollar amounts to be adjusted to reflect changes in the California Consumer Price Index biennially. The bill would further revise the definition of small business by specifying that, for the purposes of public works contracts, small business means a businesses with 200 or fewer employees and average annual gross receipts of $25 million or less. The bill would allow directors of the department and other state agencies to count contractors that would be considered a small business or microbusiness under the changes made by this bill for the year this bill is enacted if the directors are unable to make the small business participation goals under the existing laws. The bill would allow more contractors to qualify as a small business or microbusiness, thus expanding the group of contractors authorized to request a preference filed under penalty of perjury. By expanding the crime of perjury, this bill would impose a state-mandated local program.

The California Constitution requires the state to reimburse local agencies and school districts for certain costs mandated by the state. Statutory provisions establish procedures for making that reimbursement.

This bill would provide that no reimbursement is required by this act for a specified reason.

The Small Business Procurement and Contract Act requires the Director of General Services and the heads of other state agencies that enter into contracts for the acquisition of goods, services, and information technology and for the construction of state facilities to establish goals for the participation of small businesses and microbusinesses in these contracts, to provide for a small business preference in the award of these contracts, to give special consideration and special assistance to small businesses, and, whenever possible, to make awards to small businesses, as specified. Existing law defines a small business for these purposes as, among other things, an independently owned and operated business that is not dominant in its field of operation that has average annual gross receipts of $10 million, as may be adjusted to reflect changes in the California Consumer Price Index, or less over the previous 3 years. Existing law defines a microbusiness as a small business which, together with affiliates, has average annual gross receipts of $2.5 million, as may be adjusted to reflect changes in the California Consumer Price Index, or less over the previous 3 years. Existing law requires the director to conduct a biennial review of those average annual gross receipt levels and authorizes the director to adjust the average annual gross receipts threshold to reflect changes in the California Consumer Price Index for all items. Existing law requires a contractor requesting a small business or microbusiness preference to do so under penalty of perjury.

This bill would revise those definitions by increasing the dollar amount threshold for a small business to $30 million and for a microbusiness to $5 million and would require those dollar amounts to be adjusted to reflect changes in the California Consumer Price Index biennially. The bill would allow directors of the department and other state agencies to count contractors that would be considered a small business or microbusiness under the changes made by this bill for the year this bill is enacted if the directors are unable to make the small business participation goals under the existing laws. The bill would allow more contractors to qualify as a small business or microbusiness, thus expanding the group of contractors authorized to request a preference filed under penalty of perjury. By expanding the crime of perjury, this bill would impose a state-mandated local program.

The California Constitution requires the state to reimburse local agencies and school districts for certain costs mandated by the state. Statutory provisions establish procedures for making that reimbursement.

This bill would provide that no reimbursement is required by this act for a specified reason.

 VETO  

Bill No: SB 1176

Author:

:

Vote:

SENATE GOVERNMENTAL ORG. COMMITTEE: 12-0, 4/12/16

AYES: Hall, Berryhill, Block, Gaines, Galgiani, Glazer, Hernandez, Hill, Hueso, Lara, McGuire, Vidak

NO VOTE RECORDED: Runner

SENATE APPROPRIATIONS COMMITTEE: 7-0, 5/27/16

AYES: Lara, Bates, Beall, Hill, McGuire, Mendoza, Nielsen

SENATE FLOOR: 38-0, 5/31/16

AYES: Allen, Anderson, Bates, Beall, Berryhill, Block, Cannella, De León, Fuller, Gaines, Galgiani, Glazer, Hall, Hancock, Hernandez, Hertzberg, Hill, Hueso, Huff, Jackson, Lara, Leno, Leyva, Liu, McGuire, Mendoza, Monning, Moorlach, Morrell, Nguyen, Nielsen, Pan, Pavley, Roth, Stone, Vidak, Wieckowski, Wolk

NO VOTE RECORDED: Mitchell, Runner

SENATE FLOOR: 39-0, 8/29/16

AYES: Allen, Anderson, Bates, Beall, Berryhill, Block, Cannella, De León, Fuller, Gaines, Galgiani, Glazer, Hall, Hancock, Hernandez, Hertzberg, Hill, Hueso, Huff, Jackson, Lara, Leno, Leyva, Liu, McGuire, Mendoza, Mitchell, Monning, Moorlach, Morrell, Nguyen, Nielsen, Pan, Pavley, Roth, Stone, Vidak, Wieckowski, Wolk

ASSEMBLY FLOOR: 80-0, 8/24/16 - See last page for vote

SUBJECT:

SOURCE: Author

DIGEST: This bill revises the definition of “small business” and “microbusiness” for purposes of the Small Business Procurement and Contract Act (Act) by increasing the dollar amount threshold for a small business to $15 million and for a microbusiness to $5 million and requires those dollar amounts to be adjusted to reflect changes in the California Consumer Price Index (CPI) biennially. In addition, this bill revises the definition of small business by specifying that, for the purposes of public works contracts, a small business means a business with 200 or fewer employees and average annual gross receipts of $25 million or less over the previous three years.

ANALYSIS:

Existing law:

1. Grants, through the Act, preference for small businesses and microbusiness in the award of a contract for goods, services, or information technology to the state and in the construction of state facilities.
2. Permits a state agency and the California State University to award specified types of contracts with a value of between $5,000 and $250,000 to a certified small business, including a microbusiness and a disabled veteran business enterprise, without complying with certain competitive bidding requirements, provided the agency obtains price quotations from at least 2 small businesses, including microbusinesses, or 2 disabled veteran business enterprises.
3. Establishes the Office of Small Business and Disabled Veteran Business Enterprise Services and prescribes duties for the office, which include maintaining a bidders list of small businesses and disabled veteran businesses and identifying which small businesses also qualify as microbusinesses.
4. Prescribes penalties for small businesses or microbusinesses that provide incorrect information or withhold information that leads to its incorrect classification as such an entity and is awarded a contract because of the classification. Penalties include the repayment of the amount of the bid preference, in addition to a penalty up to 10% of the contract amount, reimbursement of the costs of investigating the fraud, prohibiting the business to participate in state contracts for between 3-10 years, and, if the fraud is found to be willful and knowing, the business is subject to a civil penalty of between $10,000-$30,000 for the first offense, and $30,000-$50,000 for subsequent offenses.
5. Defines a “small business” to mean an independently owned and operated business that is not dominant in its field of operation, the principal office of which is located in California, the officers of which are domiciled in California, and which, together with affiliates, has 100 or fewer employees, and average annual gross receipts of $10 million or less over the previous three years, or is a manufacturer, as defined, and has 100 or fewer employees.
6. Defines a “microbusiness” as a small business which, together with affiliates, has average annual gross receipts of $2.5 million or less over the previous three years, or is a manufacturer, as defined, with 25 or fewer employees.
7. Defines a “disabled veteran business enterprise ” (DVBE) to mean an enterprise that is at least 51% owned by one or more disabled veterans and the daily business operations are managed and controlled by one or more disabled veterans. For certification purposes a “disabled veteran” is a veteran of the U.S. military, naval, or air service who resides in California and has a service-connected disability of at least 10% or more.
8. Requires the Director of General Services (DGS) to conduct a biennial review of the average annual gross receipt levels and authorizes the Director to adjust the average annual gross receipts threshold to reflect changes in the California CPI index for all items.
9. Requires a contractor requesting a small business or microbusiness preference to do so under penalty of perjury.

This bill:

1. Revises the definition of “small business” and “microbusiness” for purposes of the Act by increasing the dollar amount threshold for a small business to $15 million and for a microbusiness to $5 million and requires those dollar amounts to be adjusted to reflect changes in the CPI.
2. Revises the definition of “small business” by specifying that, for the purposes of public works contracts, a small business means a business with 200 or fewer employees and average annual gross receipts of $25 million or less over the previous three years.
3. Defines “public works contracts” to mean contracts awarded through competitive bids or otherwise for the erection, construction, alteration, repairs, or improvement of any kind upon real property.
4. Allows DGS and other state agencies to count contractors that would be considered a small business or microbusiness under the changes made by this bill for the year in which this subdivision takes effect if the directors are unable to meet the small business participation goals under existing laws.
5. Allows more contractors to qualify as a small business or microbusiness, thus expanding the group of contractors authorized to request a preference filed under penalty of perjury.
6. Includes language which incorporates amendments should this bill and SB 1219 (Hancock, 2016) both be enacted.
7. Makes various findings and declarations pertaining to the importance of small businesses in the State of California.

Background

Purpose of the bill. According to the author, “the proposed adjustment takes into consideration inflation, the benefits of increased competition as more small businesses become eligible for state contracting preferences and the recognition that the state, with $29.5 billion in unissued general obligation bonds for infrastructure projects, is currently inconsistently meeting its 25% small business participation goal. And, with the state engaging in massive, costly and lengthy construction projects, the current revenue limits may disqualify many relatively small businesses after they receive their first substantial subcontracts.”

Current Thresholds. Current law defines a small business as, among other things, an independently owned and operated business with average annual gross receipts of $10 million or less over the previous three years. It defines a microbusiness as, among other things, a small business with average annual gross receipts of $2.5 million or less over the previous three years.

However because current law allows the Director of DGS to adjust the average annual gross receipts threshold to reflect changes in the CPI the current threshold for a small business is $14 million and $3.5 million for microbusinesses. As of December 2015, there were 26,404 businesses in California which DGS had certified as small businesses for purposes of the Act. It is unclear how many more businesses would qualify as small businesses with a $25 million threshold for public works contracts. However, it should be expected that businesses which currently qualify as small businesses would face competition from businesses that would now qualify under the provisions of this bill.

Participation Goals. On March 29, 2006, Executive Order S-02-06 by Governor Schwarzenegger established a minimum participation goal of 25% for small businesses/microbusinesses and directed DGS to monitor the progress of all agencies, departments, boards and commissions towards meeting the 25% small business participation goal. It should be noted that there is currently no microbusiness participation goal; rather the 25% participation goal for small businesses is a combination of small businesses and microbusinesses. Also, though DGS implements various strategies to aid departments’ achievement of their participation goals, there is no statutory penalty for not meeting the goal.

Every year, DGS releases a Consolidated Annual Report (CAR) on contracting dollars that state departments award to small businesses. There are 154 mandatory reporting departments, those that are under DGS’ statutory purchasing authority, that are required to report and another 31 state departments that report voluntarily, departments that are not under DGSs statutory purchasing authority.

According to the 2014-15 CAR, mandatory reporting departments exceeded the statewide goal; reporting 25.61% participation by small businesses/ microbusinesses. It should be noted that the report does not give a detailed breakdown of small businesses/microbusinesses, but rather the 25.61% is a combination of both small businesses/microbusinesses for mandatory reporting departments. Over the last five years, the average for all mandatory state departments has been 24.78% with a high of 28.35% in fiscal year 2013-14 and a low of 22.12% in fiscal year 2010-2011.

Related/Prior Legislation

SB 1219 (Hancock, 2016) includes “employment social enterprise,” which are businesses that provide jobs for individuals who have experienced significant barriers to employment, within the Act for the purpose of allowing them to participate in state contracting bid preferences provided to certified small business enterprises. (Vetoed by Governor Brown)

AB 1218 (Weber, 2015) makes significant adjustments to contracting performance goals and program participation reporting associated with the DVBE Program. (Held on the Senate Suspense File)

AB 1568 (Grove, 2014) would have required state agencies that opt to acquire goods, services, or information technology through a specified small business /DVBE contracting option to solicit at least three quotes, and obtain at least two quotes before awarding the contracts. (Held on the Senate Suspense File)

SB 297 (Roth, 2014) would have increased the annual statewide participation goal for DVBE state contracts from 3% to 5%. (Held in Assembly Jobs, Economic Development and the Economy Committee)

FISCAL EFFECT: Appropriation: Fiscal Com.: Local:

According to the Assembly Appropriations Committee, one-time General Fund costs, in the range of $5.5 million to $7.5 million, to make programming changes to FI$Cal to modify system functionality to the new category of small business in the processing of procurements. As a point of comparison, developing the certification systems for the small business and disabled veteran business enterprise programs cost roughly $8 million.

In addition, ongoing administrative costs to DGS of approximately $270,000 (special funds) to support two positions to handle additional workload associated with the new subcategory of contractors on public works projects.

Finally, DGS indicates the costs of raising the threshold for small businesses and microbusinesses are minor and absorbable.

SUPPORT: (Verified 10/18/16)

California Hispanic Chamber of Commerce

Coalition of Small and Disabled Veteran Businesses

Greater Los Angeles African American Chamber of Commerce

Los Angeles County Business Federation

Los Angeles Latino Chamber of Commerce

OPPOSITION: (Verified 10/18/16)

None received

ARGUMENTS IN SUPPORT: According to the Los Angeles County Business Federation, “California State Departments already have trouble meeting their small business goals due to the lack of small business firms available for large infrastructure projects. With billions more in infrastructure projects in development, it will take more than 500-600 qualified small businesses to be certified under the current standards to be able to complete for planned mega-projects. The departments responsible for these projects will not be able to meet their small business goals with the current pool of small businesses.”

GOVERNOR'S VETO MESSAGE:

I am returning Senate Bills 1176 & 1219 without my signature.

SB 1176 revises the definition of "small business" and "microbusiness" for purposes of the Small Business Procurement and Contract Act. SB 1219 establishes a new procurement preference for employment social enterprises.

While the goal of these bills are well-intentioned, the implementation of these bills require an expensive modification to FI$Cal at a time when the state must focus its resources on the project's successful deployment.

ASSEMBLY FLOOR: 80-0, 8/24/16

AYES: Achadjian, Alejo, Travis Allen, Arambula, Atkins, Baker, Bigelow, Bloom, Bonilla, Bonta, Brough, Brown, Burke, Calderon, Campos, Chang, Chau, Chávez, Chiu, Chu, Cooley, Cooper, Dababneh, Dahle, Daly, Dodd, Eggman, Frazier, Beth Gaines, Gallagher, Cristina Garcia, Eduardo Garcia, Gatto, Gipson, Gomez, Gonzalez, Gordon, Gray, Grove, Hadley, Harper, Roger Hernández, Holden, Irwin, Jones, Jones-Sawyer, Kim, Lackey, Levine, Linder, Lopez, Low, Maienschein, Mathis, Mayes, McCarty, Medina, Melendez, Mullin, Nazarian, Obernolte, O'Donnell, Olsen, Patterson, Quirk, Ridley-Thomas, Rodriguez, Salas, Santiago, Steinorth, Mark Stone, Thurmond, Ting, Wagner, Waldron, Weber, Wilk, Williams, Wood, Rendon

Prepared by:

10/25/16 14:29:21

**** END ****

 UNFINISHED BUSINESS  

Bill No: SB 1176

Author:

:

Vote:

SENATE GOVERNMENTAL ORG. COMMITTEE: 12-0, 4/12/16

AYES: Hall, Berryhill, Block, Gaines, Galgiani, Glazer, Hernandez, Hill, Hueso, Lara, McGuire, Vidak

NO VOTE RECORDED: Runner

SENATE APPROPRIATIONS COMMITTEE: 7-0, 5/27/16

AYES: Lara, Bates, Beall, Hill, McGuire, Mendoza, Nielsen

SENATE FLOOR: 38-0, 5/31/16

AYES: Allen, Anderson, Bates, Beall, Berryhill, Block, Cannella, De León, Fuller, Gaines, Galgiani, Glazer, Hall, Hancock, Hernandez, Hertzberg, Hill, Hueso, Huff, Jackson, Lara, Leno, Leyva, Liu, McGuire, Mendoza, Monning, Moorlach, Morrell, Nguyen, Nielsen, Pan, Pavley, Roth, Stone, Vidak, Wieckowski, Wolk

NO VOTE RECORDED: Mitchell, Runner

ASSEMBLY FLOOR: 73-0, 8/19/16 - See last page for vote

SUBJECT:

SOURCE: Author

DIGEST: This bill revises the definition of “small business” and “microbusiness” for purposes of the Small Business Procurement and Contract Act (Act) by increasing the dollar amount threshold for a small business to $15 million and for a microbusiness to $5 million and requires those dollar amounts to be adjusted to reflect changes in the California Consumer Price Index (CPI) biennially. In addition, this bill revises the definition of small business by specifying that, for the purposes of public works contracts, a small business means a business with 200 or fewer employees and average annual gross receipts of $25 million or less over the previous three years.

Assembly Amendments (1) add Assembly Member Gonzalez as coauthor, and (2) add language which incorporates amendments should this bill and SB 1219 (Hancock, 2016) both be enacted.

ANALYSIS:

Existing law:

1. Grants, through the Act, preference for small businesses and microbusiness in the award of a contract for goods, services, or information technology to the state and in the construction of state facilities.
2. Permits a state agency and the California State University to award specified types of contracts with a value of between $5,000 and $250,000 to a certified small business, including a microbusiness and a disabled veteran business enterprise, without complying with certain competitive bidding requirements, provided the agency obtains price quotations from at least 2 small businesses, including microbusinesses, or 2 disabled veteran business enterprises.
3. Establishes the Office of Small Business and Disabled Veteran Business Enterprise Services and prescribes duties for the office, which include maintaining a bidders list of small businesses and disabled veteran businesses and identifying which small businesses also qualify as microbusinesses.
4. Prescribes penalties for small businesses or microbusinesses that provide incorrect information or withhold information that leads to its incorrect classification as such an entity and is awarded a contract because of the classification. Penalties include the repayment of the amount of the bid preference, in addition to a penalty up to 10% of the contract amount, reimbursement of the costs of investigating the fraud, prohibiting the business to participate in state contracts for between 3-10 years, and, if the fraud is found to be willful and knowing, the business is subject to a civil penalty of between $10,000-$30,000 for the first offense, and $30,000-$50,000 for subsequent offenses.
5. Defines a “small business” to mean an independently owned and operated business that is not dominant in its field of operation, the principal office of which is located in California, the officers of which are domiciled in California, and which, together with affiliates, has 100 or fewer employees, and average annual gross receipts of $10 million or less over the previous three years, or is a manufacturer, as defined, and has 100 or fewer employees.
6. Defines a “microbusiness” as a small business which, together with affiliates, has average annual gross receipts of $2.5 million or less over the previous three years, or is a manufacturer, as defined, with 25 or fewer employees.
7. Defines a “disabled veteran business enterprise ” (DVBE) to mean an enterprise that is at least 51% owned by one or more disabled veterans and the daily business operations are managed and controlled by one or more disabled veterans. For certification purposes a “disabled veteran” is a veteran of the U.S. military, naval, or air service who resides in California and has a service-connected disability of at least 10% or more.
8. Requires the Director of General Services (DGS) to conduct a biennial review of the average annual gross receipt levels and authorizes the Director to adjust the average annual gross receipts threshold to reflect changes in the California CPI index for all items.
9. Requires a contractor requesting a small business or microbusiness preference to do so under penalty of perjury.

This bill:

1. Revises the definition of “small business” and “microbusiness” for purposes of the Act by increasing the dollar amount threshold for a small business to $15 million and for a microbusiness to $5 million and requires those dollar amounts to be adjusted to reflect changes in the CPI.
2. Revises the definition of “small business” by specifying that, for the purposes of public works contracts, a small business means a business with 200 or fewer employees and average annual gross receipts of $25 million or less over the previous three years.
3. Defines “public works contracts” to mean contracts awarded through competitive bids or otherwise for the erection, construction, alteration, repairs, or improvement of any kind upon real property.
4. Allows DGS and other state agencies to count contractors that would be considered a small business or microbusiness under the changes made by this bill for the year in which this subdivision takes effect if the directors are unable to meet the small business participation goals under existing laws.
5. Allows more contractors to qualify as a small business or microbusiness, thus expanding the group of contractors authorized to request a preference filed under penalty of perjury.
6. Includes language which incorporates amendments should this bill and SB 1219 (Hancock, 2016) both be enacted.
7. Makes various findings and declarations pertaining to the importance of small businesses in the State of California.

Background

Purpose of the bill. According to the author, “the proposed adjustment takes into consideration inflation, the benefits of increased competition as more small businesses become eligible for state contracting preferences and the recognition that the state, with $29.5 billion in unissued general obligation bonds for infrastructure projects, is currently inconsistently meeting its 25% small business participation goal. And, with the state engaging in massive, costly and lengthy construction projects, the current revenue limits may disqualify many relatively small businesses after they receive their first substantial subcontracts.”

Current Thresholds. Current law defines a small business as, among other things, an independently owned and operated business with average annual gross receipts of $10 million or less over the previous three years. It defines a microbusiness as, among other things, a small business with average annual gross receipts of $2.5 million or less over the previous three years.

However because current law allows the Director of DGS to adjust the average annual gross receipts threshold to reflect changes in the CPI the current threshold for a small business is $14 million and $3.5 million for microbusinesses. As of December 2015, there were 26,404 businesses in California which DGS had certified as small businesses for purposes of the Act. It is unclear how many more businesses would qualify as small businesses with a $25 million threshold for public works contracts. However, it should be expected that businesses which currently qualify as small businesses would face competition from businesses that would now qualify under the provisions of this bill.

Participation Goals. On March 29, 2006, Executive Order S-02-06 by Governor Schwarzenegger established a minimum participation goal of 25% for small businesses/microbusinesses and directed DGS to monitor the progress of all agencies, departments, boards and commissions towards meeting the 25% small business participation goal. It should be noted that there is currently no microbusiness participation goal; rather the 25% participation goal for small businesses is a combination of small businesses and microbusinesses. Also, though DGS implements various strategies to aid departments’ achievement of their participation goals, there is no statutory penalty for not meeting the goal.

Every year, DGS releases a Consolidated Annual Report (CAR) on contracting dollars that state departments award to small businesses. There are 154 mandatory reporting departments, those that are under DGS’ statutory purchasing authority, that are required to report and another 31 state departments that report voluntarily, departments that are not under DGSs statutory purchasing authority.

According to the 2014-15 CAR, mandatory reporting departments exceeded the statewide goal; reporting 25.61% participation by small businesses/ microbusinesses. It should be noted that the report does not give a detailed breakdown of small businesses/microbusinesses, but rather the 25.61% is a combination of both small businesses/microbusinesses for mandatory reporting departments. Over the last five years, the average for all mandatory state departments has been 24.78% with a high of 28.35% in fiscal year 2013-14 and a low of 22.12% in fiscal year 2010-2011.

Related/Prior Legislation

SB 1219 (Hancock, 2016) includes “employment social enterprise,” which are businesses that provide jobs for individuals who have experienced significant barriers to employment, within the Act for the purpose of allowing them to participate in state contracting bid preferences provided to certified small business enterprises. (Pending on the Senate Floor)

AB 1218 (Weber, 2015) makes significant adjustments to contracting performance goals and program participation reporting associated with the DVBE Program. (Held on the Senate Suspense File)

AB 1568 (Grove, 2014) would have required state agencies that opt to acquire goods, services, or information technology through a specified small business /DVBE contracting option to solicit at least three quotes, and obtain at least two quotes before awarding the contracts. (Held on the Senate Suspense File)

SB 297 (Roth, 2014) would have increased the annual statewide participation goal for DVBE state contracts from 3% to 5%. (Held in Assembly Jobs, Economic Development and the Economy Committee)

FISCAL EFFECT: Appropriation: Fiscal Com.: Local:

According to the Assembly Appropriations Committee, one-time General Fund costs, in the range of $5.5 million to $7.5 million, to make programming changes to FI$Cal to modify system functionality to the new category of small business in the processing of procurements. As a point of comparison, developing the certification systems for the small business and disabled veteran business enterprise programs cost roughly $8 million.

In addition, ongoing administrative costs to DGS of approximately $270,000 (special funds) to support two positions to handle additional workload associated with the new subcategory of contractors on public works projects.

Finally, DGS indicates the costs of raising the threshold for small businesses and microbusinesses are minor and absorbable.

SUPPORT: (Verified 8/24/16)

California Hispanic Chamber of Commerce

Coalition of Small and Disabled Veteran Businesses

Greater Los Angeles African American Chamber of Commerce

Los Angeles County Business Federation

Los Angeles Latino Chamber of Commerce

OPPOSITION: (Verified 8/24/16)

None received

ARGUMENTS IN SUPPORT: According to the Los Angeles County Business Federation, “California State Departments already have trouble meeting their small business goals due to the lack of small business firms available for large infrastructure projects. With billions more in infrastructure projects in development, it will take more than 500-600 qualified small businesses to be certified under the current standards to be able to complete for planned mega-projects. The departments responsible for these projects will not be able to meet their small business goals with the current pool of small businesses.”

ASSEMBLY FLOOR: 73-0, 8/19/16

AYES: Achadjian, Alejo, Travis Allen, Arambula, Atkins, Baker, Bloom, Bonilla, Bonta, Brough, Brown, Burke, Calderon, Campos, Chang, Chau, Chávez, Chiu, Chu, Cooley, Cooper, Dababneh, Dahle, Daly, Eggman, Frazier, Beth Gaines, Gallagher, Eduardo Garcia, Gatto, Gipson, Gomez, Gonzalez, Gordon, Gray, Grove, Hadley, Harper, Roger Hernández, Irwin, Jones, Jones-Sawyer, Lackey, Levine, Linder, Lopez, Low, Maienschein, Mayes, McCarty, Medina, Melendez, Mullin, Nazarian, O'Donnell, Olsen, Patterson, Quirk, Ridley-Thomas, Rodriguez, Salas, Santiago, Steinorth, Mark Stone, Thurmond, Ting, Wagner, Waldron, Weber, Wilk, Williams, Wood, Rendon

NO VOTE RECORDED: Bigelow, Dodd, Cristina Garcia, Holden, Kim, Mathis, Obernolte

Prepared by:

8/25/16 17:45:10

**** END ****

SENATE THIRD READING

STR Bill Id:SB 1176

Author:(Galgiani and Hueso)

As Amended Ver:August 19, 2016

Majority vote

SENATE VOTE: 38-0

SUMMARY: Expands the number of businesses which can utilize the special provisions in the Small Business Procurement and Contract Act when bidding on a state contract. This bill modifies the definition of a small business and microbusiness by increasing the maximum revenue limits and the number of employees, as specified. Specifically, this bill:

1. Increases the average annual gross revenue limit for businesses eligible for state small business procurement benefits and incentives, as follows:
   1. The revenue cap for small businesses is increased from $10 million to $15 million; and
   2. The revenue cap for microbusinesses is increased from $2.5 million to $5 million.
2. Establishes a new category of small business for the purpose of bidding on state public works projects, including the erection, construction, alteration, repair, or improvement of any kind, upon real property, as specified. The new category of small business is identical to the existing category, except that the business may employ up to 200 employees and have average annual gross receipts of up to $25 million over the preceding three years.
3. Requires rather than authorizes the Department of General Services (DGS) to adjust the average annual gross receipt levels to reflect the changes in the California Consumer Price Index.
4. Includes two technical sections, which incorporate amendments to Government Code Sections 14837 and 14838, should this bill and SB 1219 (Hancock) of the current legislative session both be enacted.

EXISTING LAW:

1. Designates the Department of General Services (DGS) as the administrator of the state Small Business Procurement and Contract Act (Small Business Procurement 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 business, microbusiness, or a larger business that commits to using a certified small business or microbusiness in undertaking the contract. This 5% is calculated based on the bid of the lowest responsible bidder.
3. Designates DGS as the administrator of the state Small Business Procurement and Contract Act, which includes certifying and implementing targeted preference programs for certified small businesses, microbusinesses, and DVBEs.
4. Authorizes a 5% preference for state contract bidders that are either a certified small business, microbusiness, or a larger business that commits to using a certified small business or microbusiness in undertaking the contract. This 5% is calculated based on the bid of the lowest responsible bidder, which may be a small or non-small business.
5. Authorizes a state agency and the California State University to award specified types of contracts with a value of between $5,000 and $250,000 to a certified small business, including a microbusiness and a disabled veteran business enterprise, without complying with certain competitive bidding requirements, provided the agency obtains price quotations from at least two small businesses, including microbusinesses, or two DVBEs.
6. Defines, for the purposes of the Small Business Act, that a:
   1. "Small business" is 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 receipts for the three previous years.
   2. "Microbusiness" is a small business which, together with affiliates, has average annual gross receipts of $2.5 million or less over the previous three years, or is a manufacturer, as defined, with 25 or fewer employees.

DGS is required to conduct a biennial review of the average annual gross receipt levels for small businesses and authorizes DGS to adjust those levels to reflect changes in the California Consumer Price Index for all items.

1. Defines a DVBE to mean an enterprise that is at least 51% owned by one or more disabled veterans and the daily business operations are managed and controlled by one or more disabled veterans. For certification purposes a "disabled veteran" is a veteran of the United States military, naval, or air service who resides in California and has a service-connected disability of at least 10% or more.

FISCAL EFFECT: According to the Assembly Committee on Appropriations the fiscal effect of this bill would be:

1. According to DGS, one-time General Fund costs, in the range of $5.5 million to $7.5 million, to make programming changes to FI$Cal to modify system functionality to the new category of small business in the processing of procurements.
2. Ongoing administrative costs to DGS of approximately $270,000 (special funds) to support two positions to handle additional workload associated with the new subcategory of contractors on public works projects.
3. DGS indicates the costs of raising the threshold for small businesses and microbusinesses are minor and absorbable.

COMMENTS: Small businesses play an essential role within the California economy, contributing the most net new jobs, offering an alternative to un- and underemployment, and helping to disburse the financial advantages of the state's globally connected economy. State procurement opportunities represent an important economic tool to support small business development. In the last 15 report periods, the state has met the 25% small business procurement participation goal only five times including the 2013-14 fiscal year.

Over the next five years, the state is anticipated to initiate over $50 billion in construction projects related to transportation and community services including health care, education, courts, and recreation. To the extent that they can qualify, these construction projects represent excellent business opportunities for small businesses. This bill expands the number of business which would be able to compete for state contracts under the Small Business Procurement and Contract Act rules. The policy committee analysis includes background on the role small businesses play within the overall economy, current small business procurement activities, and related legislation.

Analysis Prepared by: Toni Symonds / J., E.D., & E. / (916) 319-2090 FN: 0004626

SENATE THIRD READING

STR Bill Id:SB 1176

Author:(Galgiani and Hueso)

As Amended Ver:August 15, 2016

Majority vote

SENATE VOTE: 38-0

SUMMARY: Expands the number of businesses which can utilize the special provisions in the Small Business Procurement and Contract Act when bidding on a state contract. This bill modifies the definition of a small business and microbusiness by increasing the maximum revenue limits and the number of employees, as specified. Specifically, this bill:

1. Increases the average annual gross revenue limit for businesses eligible for state small business procurement benefits and incentives, as follows:
   1. The revenue cap for small businesses is increased from $10 million to $15 million; and
   2. The revenue cap for microbusinesses is increased from $2.5 million to $5 million.
2. Establishes a new category of small business for the purpose of bidding on state public works projects, including the erection, construction, alteration, repair, or improvement of any kind, upon real property, as specified. The new category of small business is identical to the existing category, except that the business may employ up to 200 employees and have average annual gross receipts of up to $25 million over the preceding three years.
3. Require rather than authorizes the Department of General Services (DGS) to adjust the average annual gross receipt levels to reflect the changes in the California Consumer Price Index.

EXISTING LAW:

1. Designates the Department of General Services (DGS) as the administrator of the state Small Business Procurement and Contract Act (Small Business Procurement 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 business, microbusiness, or a larger business that commits to using a certified small business or microbusiness in undertaking the contract. This 5% is calculated based on the bid of the lowest responsible bidder.
3. Designates DGS as the administrator of the state Small Business Procurement and Contract Act, which includes certifying and implementing targeted preference programs for certified small businesses, microbusinesses, and DVBEs.
4. Authorizes a 5% preference for state contract bidders that are either a certified small business, microbusiness, or a larger business that commits to using a certified small business or microbusiness in undertaking the contract. This 5% is calculated based on the bid of the lowest responsible bidder, which may be a small or non-small business.
5. Authorizes a state agency and the California State University to award specified types of contracts with a value of between $5,000 and $250,000 to a certified small business, including a microbusiness and a disabled veteran business enterprise, without complying with certain competitive bidding requirements, provided the agency obtains price quotations from at least two small businesses, including microbusinesses, or two DVBEs.
6. Defines, for the purposes of the Small Business Act, that a:
   1. "Small business" is 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 receipts for the three previous years.
   2. "Microbusiness" is a small business which, together with affiliates, has average annual gross receipts of $2.5 million or less over the previous three years, or is a manufacturer, as defined, with 25 or fewer employees.

DGS is required to conduct a biennial review of the average annual gross receipt levels for small businesses and authorizes DGS to adjust those levels to reflect changes in the California Consumer Price Index for all items.

1. Defines a DVBE to mean an enterprise that is at least 51% owned by one or more disabled veterans and the daily business operations are managed and controlled by one or more disabled veterans. For certification purposes a "disabled veteran" is a veteran of the United States military, naval, or air service who resides in California and has a service-connected disability of at least 10% or more.

FISCAL EFFECT: According to the Assembly Committee on Appropriations the fiscal effect of this bill would be:

1. According to DGS, one-time General Fund costs, in the range of $5.5 million to $7.5 million, to make programming changes to FI$Cal to modify system functionality to the new category of small business in the processing of procurements.
2. Ongoing administrative costs to DGS of approximately $270,000 (special funds) to support two positions to handle additional workload associated with the new subcategory of contractors on public works projects.
3. DGS indicates the costs of raising the threshold for small businesses and microbusinesses are minor and absorbable.

COMMENTS: Small businesses play an essential role within the California economy, contributing the most net new jobs, offering an alternative to un- and underemployment, and helping to disburse the financial advantages of the state's globally connected economy. State procurement opportunities represent an important economic tool to support small business development. In the last 15 report periods, the state has met the 25% small business procurement participation goal only five times including the 2013-14 fiscal year.

Over the next five years, the state is anticipated to initiate over $50 billion in construction projects related to transportation and community services including health care, education, courts, and recreation. To the extent that they can qualify, these construction projects represent excellent business opportunities for small businesses. This bill expands the number of business which would be able to compete for state contracts under the Small Business Procurement and Contract Act rules. The policy committee analysis includes background on the role small businesses play within the overall economy, current small business procurement activities, and related legislation.

Analysis Prepared by: Toni Symonds / J., E.D., & E. / (916) 319-2090 FN: 0004030

Date of Hearing: August 3, 2016

ASSEMBLY COMMITTEE ON APPROPRIATIONS

Lorena Gonzalez, Chair

SBPCA Bill Id:SB 1176

Author:(Galgiani) – As Amended Ver:April 21, 2016

Urgency: No State Mandated Local Program: Yes Reimbursable: No

SUMMARY:

This bill increases the average annual gross revenue limit for small businesses from $10 million to $15 million and for microbusinesses from $2.5 million to $5 million, in order to be eligible for state small business procurement benefits and incentives. Specifically, this bill:

1. Establishes a new category of small business for the purpose of bidding on state public works projects, including the erection, construction, alteration, repair, or improvement of any kind, upon real property, as specified. Specifies business may employ up to 200 employees and have average annual gross receipts of up to $25 million over the preceding three years.
2. Requires, rather than authorizes, the Department of General Services (DGS) to biannually adjust the average annual gross receipt levels to reflect the changes in the California Consumer Price Index.

FISCAL EFFECT:

1. One-time General Fund costs, in the range of $5.5 million to $7.5 million, to make programming changes to FI$Cal to modify system functionality to the new category of small business in the processing of procurements. As a point of comparison, developing the certification systems for the small business and disabled veteran business enterprise programs cost roughly $8 million.
2. Ongoing administrative costs to DGS of approximately $270,000 (special funds) to support two positions to handle additional workload associated with the new subcategory of contractors on public works projects.
3. DGS indicates the costs of raising the threshold for small businesses and microbusinesses are minor and absorbable.

COMMENTS:

1. Purpose. According to the author, given the type and complexity of projects the state is currently building, or will build in the near future – dams, water systems, rail - the technical expertise many construction businesses must maintain has increased requiring companies to invest in greater amounts of human and technical capital, thus limiting the entry of small construction companies from being considered a small business for state contracting purposes. With regard to the requirement for DGS to biennially adjust the revenue limits based on the CCPI, the author notes that limits have not been adjusted for 7 years.
2. Comments. This bill would create a split system of small business certification. Firms with less than 100 employees and $15 million in revenue would continue to qualify as small businesses for all contracts. Other firms with 101-200 employees and/or $15-25 million in revenue would qualify as small businesses only for the purposes of public works contracts. DGS would need to establish a separate certification for this new category in Fi$Cal which they estimate will cost between $5.5 million and $7.5 million. SB 1219 (Hancock), pending in this committee, proposes to add a new subcategory to the Small Business Procurement and Contract Act. DGS has provided the same cost estimate for this bill related to adjustments to Fi$Cal.
3. Related legislation. SB 1219 (Hancock), pending in this committee, includes employment social enterprises within the Small Business Procurement and Contract Act, starting July 1, 2017, for the purpose of allowing them to participate in state contracting bid preferences.

Analysis Prepared by: Misty Feusahrens / APPR. / (916) 319-2081

Date of Hearing: June 21, 2016

ASSEMBLY COMMITTEE ON JOBS, ECONOMIC DEVELOPMENT, AND THE ECONOMY

Eduardo Garcia, Chair

SBPCA Bill Id:SB 1176

Author:(Galgiani) – As Amended Ver:April 21, 2016

SENATE VOTE: 38-0

SUBJECT: Small Business Procurement and Contract Act: business size

SUMMARY: Expands the number of businesses which can utilize the special provisions in the Small Business Procurement and Contract Act when bidding on a state contract. The bill modifies the definition of a small business and microbusiness by increasing the maximum revenue limits and the number of employees, as specified. Specifically, this bill:

1. Finds and declares a number of statements relating the importance of entrepreneurship, including, but not limited to, the following:
   1. The essence of the American economic system of private enterprise is to be free, open, and to have transparent competition. The preservation and expansion of that competition are basic to the economic well-being of this state, and that well-being cannot be realized unless the actual and potential capacity of small business enterprises are encouraged and developed;
   2. It is the policy of the state to aid the interests of small business enterprises in order to preserve reasonable and just prices and free competitive enterprise, to ensure that a fair proportion of the total purchases and contracts or subcontracts for commodities, supplies, technology, property, and services, including, but not limited to, renewable energy, wireless telecommunications, broadband, smart grid, rail, and other mega infrastructure projects, for regulated state departments are awarded to small business enterprises, and to maintain and strengthen the overall economy of the state;
   3. The opportunity for full participation in our free enterprise system by small business enterprises is essential if this state is to attain social and economic equality for those businesses and improve the functioning of the state economy. It is in the interest of the state to expeditiously improve the economically disadvantaged position of small business owners and employees;
   4. The position of small business enterprises can be substantially improved by expanding the definition of a small business that would allow these businesses to amass the capital and expertise necessary to compete for state procurement opportunities; and
   5. The long-term economic viability of this state depends substantially upon the ability of small businesses to be successful.
2. Expresses legislative intent that modifying the definition of a small business for state contracting purposes does the following:
   1. Encourages greater economic opportunity for small businesses;
   2. Promotes competition among state departments that issue contracts in order to enhance economic efficiency in the procurement of state services; and
   3. Clarifies and expands the program for procurement by state departments for small business enterprises.
3. Increases the average annual gross revenue limit for businesses eligible for state small business procurement benefits and incentives, as follows:
   1. The revenue cap for small businesses is increased from $10 million to $15 million; and
   2. The revenue cap for microbusinesses is increased from $2.5 million to $5 million.
4. Establishes a new category of small business for the purpose of bidding on state public works projects, including the erection, construction, alteration, repair, or improvement of any kind, upon real property, as specified. The new category of small business is identical to the existing category, except that the business may employ up to 200 employees and have average annual gross receipts of up to $25 million over the preceding three years.
5. Requires rather than authorizes the Department of General Services (DGS) to adjust the average annual gross receipt levels to reflect the changes in the California Consumer Price Index.

EXISTING LAW:

1. Designates the Department of General Services (DGS) as the administrator of the state Small Business Procurement and Contract Act (Small Business Procurement 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 business, microbusiness, or a larger business that commits to using a certified small business or microbusiness in undertaking the contract. This 5% is calculated based on the bid of the lowest responsible bidder.
3. Designates DGS as the administrator of the state Small Business Procurement and Contract Act, which includes certifying and implementing targeted preference programs for certified small businesses, microbusinesses, and DVBEs.
4. Authorizes a 5% preference for state contract bidders that are either a certified small business, microbusiness, or a larger business that commits to using a certified small business or microbusiness in undertaking the contract. This 5% is calculated based on the bid of the lowest responsible bidder, which may be a small or non-small business.
5. Authorizes a state agency and the California State University to award specified types of contracts with a value of between $5,000 and $250,000 to a certified small business, including a microbusiness and a disabled veteran business enterprise, without complying with certain competitive bidding requirements, provided the agency obtains price quotations from at least two small businesses, including microbusinesses, or two DVBEs.
6. Defines, for the purposes of the Small Business Act, that a:
   1. "Small business" is 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 receipts for the three previous years.
   2. "Microbusiness” is a small business which, together with affiliates, has average annual gross receipts of $2.5 million or less over the previous three years, or is a manufacturer, as defined, with 25 or fewer employees.

DGS is required to conduct a biennial review of the average annual gross receipt levels for small businesses and authorizes DGS to adjust those levels to reflect changes in the California Consumer Price Index for all items.

1. Defines a DVBE to mean an enterprise that is at least 51% owned by one or more disabled veterans and the daily business operations are managed and controlled by one or more disabled veterans. For certification purposes a “disabled veteran” is a veteran of the U.S. military, naval, or air service who resides in California and has a service-connected disability of at least 10% or more.

FISCAL EFFECT: Unknown

POLICY ISSUE FRAME

Small businesses play an essential role within the California economy, contributing the most net new jobs, offering an alternative to un- and underemployment, and helping to disburse the financial advantages of the state's globally connected economy. State procurement opportunities represent an important economic tool to support small business development. In the last 15 report periods, the state has met the 25% small business procurement participation goal only five times including the 2013-14 fiscal year.

Over the next five years, the state is anticipated to initiate over $50 billion in construction projects related to transportation and community services including health care, education, courts, and recreation. To the extent that they can qualify, these construction projects represent excellent business opportunities for small businesses. This bill expands the number of business which would be able to compete for state contracts under the Small Business Procurement and Contract Act rules. The analysis includes background on the role small businesses play within the overall economy, current small business procurement activities, and related legislation.

COMMENTS:

1. Author's Purpose: According to the author, "SB 1176 updates the average annual gross receipts limit California small and micro businesses must adhere to as a condition for certification to participate in certain state procurement programs. The measure proposes to statutorily increase the three-year average annual gross receipts limit requirement from $10 million to 15 million for small businesses and $2.5 million to $5 million for micro businesses.

For businesses involved in public works projects, the limit is raised to $25 million and up to 200 employees. Given the type and complexity of projects the state is currently building, or will build in the near future – dams, water systems, rail - the technical expertise many construction businesses must maintain has increased requiring companies to invest in greater amounts of human and technical capital, thus limiting the entry of relative small construction companies from being considered a small business for state contracting purposes.

And, lastly the proposed measure also requires the Director of General Services to biennially adjust the revenue limits based on the California Consumer Price Index. The limits have not been adjusted for 7 years, since late 2009. The percent change in the California Consumer Price Index from 1998 to 2015, for example is 52.5%. Meaning, $10 million in 1998 has the same purchasing power of $15.25 million in 2015 dollars.

This proposed adjustment to the small business definition takes into consideration inflation, the benefits of increased competition as more small businesses become eligible for state contracting preferences and the recognition that the state, with $29.7 billion in unissued general obligation bonds for infrastructure projects, has not always met its 25% small business participation goals for all departments. "

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 $2.4 trillion economy. Two separate studies, one by the U.S. Census Bureau and another by the Kaufman Foundation, found that net job growth was strongest among businesses with less than 20 employees. Among other advantages, small businesses are crucial in the state's international competitiveness and are an important means for dispersing the positive economic impacts of trade and development within the California economy.

Nonemployer firms make up the single largest component of businesses in California, 2.9 million out of an estimated 3.8 million firms in 2014, with the highest number of businesses (515,814) in the professional, scientific, and technical services industry sector. As these non-employer businesses grow, they continue to serve as a key driver of California's dynamic economy. Excluding nonemployer firms, businesses with less than 20 employees comprise nearly 90% of all businesses and employ over 18% of all workers. These 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 3.1 million firms ($162.4 billion in revenues) for 2014. 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, competing for large-size contracts and marketing their goods and services.

1. Small Business Procurement Act: The Small Business Procurement and Contract Act, administered through DGS, was established 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. Today, approximately 80% of DVBEs have dual certification as a small business or microbusiness.

The Small Business Procurement and Contract 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 2010 executive order sets a 25% goal for small businesses and microbusinesses.

The charts below show small business and microbusiness aggregate procurement participation rates for fiscal years 2011-12, 2012-13, and 2013-14 from mandatory reporting agencies (including Caltrans).

Unfortunately, participation rates have not been as high as desired, with state agencies meeting the 25% small business goal in only five out of the last 15 report years. Further, in comparing year to year numbers, it is important to note that not all of the mandatory reporting agencies provided annual data to DGS for inclusion in the report. As an example, only 80% of the mandatory reporters provided data for 2013-14.

1. Increasing Small Business and DVBE Procurement Participation: Every year, Members of the Legislature introduce a range of bills to improve outreach and small business participation in state contracting. 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 continually trying to update the state automated procurement platform (F$SCAL).

Among other challenges is the high concentration of contracting within a few departments including several which bid contracts for specialized services. According to the 2013-14 Statewide Consolidated Annual Report, by DGS, the top 10 contracting agencies awarded more than 83% of contract dollars in 2013-14. The data suggests that having department specific strategies to increase small business participation will be required to more consistently meet the 25% goal.

In 2013-14, 61% of all state contracts were awarded by the Department of Corrections (SDCR), the Department of Transportation, and the Department of Health Care Services (DHCS). This means that regardless of the efforts of the California School Finance Authority (88.04% of the $99.677 contracts awarded) and California Transportation Commission (89.44% of the $14,291 in contracts awarded), the state's largest contracting entities must do a better job of contracting with small businesses and microbusinesses if the state is going to consistently meet its mission of offering small businesses meaningful procurement opportunities. The chart below shows information on the contracting activities of the top 10 contracting departments for 2013-14.

In 2013-14, as shown above, DHCS contracted with small business for only 2.36% of its contracting activities. In fact, the Health and Human Services Agency had the lowest overall small business and microbusiness participation rates among all other agencies in the state. If California is going to meet and exceed its small business and DVBE goals, high contract volume agencies like Department of Transportation will need to substantially exceed the 25% and 3% targets.

1. Changes in Small Business Procurement: SB 1176 proposes to increase the limit on annual average gross revenues of the business over the previous three years. For small businesses, the limit is increased from $10 million to $15 million. The limit on microbusinesses is increased by $2.5 million, moving from $2.5 million to $5 million. Small businesses participating in contracts for public works projects would be allowed to have $25 million in gross receipts and the maximum number employees could be as high as 200. While DGS has had the authority to make annual increases in gross receipts, the department has chosen not to exercise this authority. SB 1176 would also mandate that these revenue limits are annually reviewed and increased to meet the California Consumer Price Index. The author contends these increases are necessary to ensure that there is a robust field of small businesses in which to compete for small businesses.

As of December 2015, there were 26,404 businesses in California which DGS had certified as small businesses with approximately 80% of these businesses being also certified as a DVBE. DGS is unable to identify the number of contracts that may be impacted by this policy change. Since 2012, overall small business participation has ranged between 22% and 28%.

1. Impact on the Number of Eligible Small Businesses: This bill would create a split system of small business certification. Firms with less than 100 employees and $15 million in revenue would continue to qualify as small businesses for all contracts. Other firms (with 101-200 employees and/or $15-25 million in revenue) would qualify as small businesses only for the purposes of public works contracts. DGS would ultimately need to establish a separate certification for firms with 101-200 employee and/or $15-25 million in revenue.

As noted in a prior Comment, firms with 99 or less employees comprise 97.4% of all firms with employees in the state. Businesses with between 100 and 200 employees include an additional 7,543 firms or less than 1% of all firms. In terms of the raw number of businesses impacted, the changes proposed in SB 1176 do not appear to be significant. This broader category of small business could, however, represent a meaningful change in the capacity of eligible businesses who bid on state public works contracts.

1. Related Legislation: Below is a list of the related bills.
   1. 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 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 DVBEs with which they made contract commitments. Status: Signed by the Governor, Chapter 212, Statutes of 2009.
   2. 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.
   3. AB 351 (Jones-Sawyer) 25% Small Business Goal: This bill would have required each state agency to establish and achieve a 25% small business participation goal. Status: Held on Suspense in the Assembly Committee on Appropriations, 2015.
   4. 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.
   5. AB 1125 (Weber) State Agency Small Business Contracts: This bill would have increased the maximum financial value of an individual small business bid preference on specified state contracts from $50,000 to $100,000. Status: Held on Suspense in the Assembly Committee on Appropriations, 2015.
   6. AB 1734 (Jones-Sawyer) Public Contracts and Small Business and DVBE Participation: This bill would have required each state agency to establish and achieve a 25% small business participation goal and increases the annual procurement participation goal for DVBEs from 3% to 5% of the value of state contracts: Status: Held in the Assembly Committee on Appropriations, 2014.
   7. 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.
   8. AB 2278 (Weber) Small Business Procurement Preferences: This bill would have revised the maximum small business bid preference amount and made related changes to the maximum value of all procurement preferences. Status: Held in the Assembly Committee on Appropriations, 2014.
   9. 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.
   10. 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 Asian Chamber of Commerce

California Hispanic Chamber of Commerce

Coalition of Small and Disabled Veteran Businesses

Greater Los Angeles African American Chamber of Commerce

Los Angeles County Business Federation

Los Angeles Latino Chamber of Commerce

Opposition

None Received

Analysis Prepared by: Toni Symonds / J., E.D., & E. / (916) 319-2090

 THIRD READING  

Bill No: SB 1176

Author:

:

Vote:

SENATE GOVERNMENTAL ORG. COMMITTEE: 12-0, 4/12/16

AYES: Hall, Berryhill, Block, Gaines, Galgiani, Glazer, Hernandez, Hill, Hueso, Lara, McGuire, Vidak

NO VOTE RECORDED: Runner

SENATE APPROPRIATIONS COMMITTEE: 7-0, 5/27/16

AYES: Lara, Bates, Beall, Hill, McGuire, Mendoza, Nielsen

SUBJECT:

SOURCE: Author

DIGEST: This bill revises the definition of “small business” and “microbusiness” for purposes of the Small Business Procurement and Contract Act (Act) by increasing the dollar amount threshold for a small business to $15 million and for a microbusiness to $5 million and requires those dollar amounts to be adjusted to reflect changes in the California Consumer Price Index (CPI) biennially. In addition, this bill revises the definition of small business by specifying that, for the purposes of public works contracts, a small business means a business with 200 or fewer employees and average annual gross receipts of $25 million or less over the previous three years.

ANALYSIS:

Existing law:

1. Grants, through the Act, preference for small businesses and microbusiness in the award of a contract for goods, services, or information technology to the state and in the construction of state facilities.
2. Permits a state agency and the California State University to award specified types of contracts with a value of between $5,000 and $250,000 to a certified small business, including a microbusiness and a disabled veteran business enterprise, without complying with certain competitive bidding requirements, provided the agency obtains price quotations from at least 2 small businesses, including microbusinesses, or 2 disabled veteran business enterprises.
3. Establishes the Office of Small Business and Disabled Veteran Business Enterprise Services and prescribes duties for the office, which include maintaining a bidders list of small businesses and disabled veteran businesses and identifying which small businesses also qualify as microbusinesses.
4. Prescribes penalties for small businesses or microbusinesses that provide incorrect information or withhold information that leads to its incorrect classification as such an entity and is awarded a contract because of the classification. Penalties include the repayment of the amount of the bid preference, in addition to a penalty up to 10% of the contract amount, reimbursement of the costs of investigating the fraud, prohibiting the business to participate in state contracts for between 3-10 years, and, if the fraud is found to be willful and knowing, the business is subject to a civil penalty of between $10,000-$30,000 for the first offense, and $30,000-$50,000 for subsequent offenses.
5. Defines a “small business” to mean an independently owned and operated business that is not dominant in its field of operation, the principal office of which is located in California, the officers of which are domiciled in California, and which, together with affiliates, has 100 or fewer employees, and average annual gross receipts of $10 million or less over the previous three years, or is a manufacturer, as defined, and has 100 or fewer employees.
6. Defines a “microbusiness” as a small business which, together with affiliates, has average annual gross receipts of $2.5 million or less over the previous three years, or is a manufacturer, as defined, with 25 or fewer employees.
7. Defines a “disabled veteran business enterprise ” (DVBE) to mean an enterprise that is at least 51% owned by one or more disabled veterans and the daily business operations are managed and controlled by one or more disabled veterans. For certification purposes a “disabled veteran” is a veteran of the U.S. military, naval, or air service who resides in California and has a service-connected disability of at least 10% or more.
8. Requires the Director of General Services (DGS) to conduct a biennial review of the average annual gross receipt levels and authorizes the Director to adjust the average annual gross receipts threshold to reflect changes in the California CPI index for all items.
9. Requires a contractor requesting a small business or microbusiness preference to do so under penalty of perjury.

This bill:

1. Revises the definition of “small business” and “microbusiness” for purposes of the Act by increasing the dollar amount threshold for a small business to $15 million and for a microbusiness to $5 million and requires those dollar amounts to be adjusted to reflect changes in the CPI.
2. Revises the definition of “small business” by specifying that, for the purposes of public works contracts, a small business means a business with 200 or fewer employees and average annual gross receipts of $25 million or less over the previous three years.
3. Defines “public works contracts” to mean contracts awarded through competitive bids or otherwise for the erection, construction, alteration, repair, or improvement of any kind upon real property.
4. Allows DGS and other state agencies to count contractors that would be considered a small business or microbusiness under the changes made by this bill for the year in which this subdivision takes effect if the directors are unable to meet the small business participation goals under existing laws.
5. Allows more contractors to qualify as a small business or microbusiness, thus expanding the group of contractors authorized to request a preference filed under penalty of perjury.
6. Makes various findings and declarations pertaining to the importance of small businesses in the State of California.

Background

Purpose of the bill. According to the author, “the proposed adjustment takes into consideration inflation, the benefits of increased competition as more small businesses become eligible for state contracting preferences and the recognition that the state, with $29.5 billion in unissued general obligation bonds for infrastructure projects, is currently inconsistently meeting its 25% small business participation goal. And, with the state engaging in massive, costly and lengthy construction projects, the current revenue limits may disqualify many relatively small businesses after they receive their first substantial subcontracts.”

Current Thresholds. Current law defines a small business as, among other things, an independently owned and operated business with average annual gross receipts of $10 million or less over the previous three years. It defines a microbusiness as, among other things, a small business with average annual gross receipts of $2.5 million or less over the previous three years.

However because current law allows the Director of DGS to adjust the average annual gross receipts threshold to reflect changes in the CPI the current threshold for a small business is $14 million and $3.5 million for microbusinesses. As of December 2015, there were 26,404 businesses in California which DGS had certified as small businesses for purposes of the Act. It is unclear how many more businesses would qualify as small businesses with a $25 million threshold for public works contracts. However, it should be expected that businesses which currently qualify as small businesses would face competition from businesses that would now qualify under the provisions of this bill.

Participation Goals. On March 29, 2006, Executive Order S-02-06 by Governor Schwarzenegger established a minimum participation goal of 25% for small businesses/microbusinesses and directed DGS to monitor the progress of all agencies, departments, boards and commissions towards meeting the 25% small business participation goal. It should be noted that there is currently no microbusiness participation goal; rather the 25% participation goal for small businesses is a combination of small businesses and microbusinesses. Also, though DGS implements various strategies to aid departments’ achievement of their participation goals, there is no statutory penalty for not meeting the goal.

Every year, DGS releases a Consolidated Annual Report (CAR) on contracting dollars that state departments award to small businesses. There are 154 mandatory reporting departments, those that are under DGS’ statutory purchasing authority, that are required to report and another 31 state departments that report voluntarily, departments that are not under DGSs statutory purchasing authority.

According to the 2014-15 CAR, mandatory reporting departments exceeded the statewide goal; reporting 25.61% participation by small businesses/ microbusinesses. It should be noted that the report does not give a detailed breakdown of small businesses/microbusinesses, but rather the 25.61% is a combination of both small businesses/microbusinesses for mandatory reporting departments. Over the last five years, the average for all mandatory state departments has been 24.78% with a high of 28.35% in fiscal year 2013-14 and a low of 22.12% in fiscal year 2010-2011.

Small Business Procurement and Contract Act. The Act was implemented in 1973 to establish a small business preference within the state’s procurement process. The goal is to increase the number of contracts between the state and small businesses. The Act states that it is the policy of the State of California to 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.

Upon meeting eligibility requirements, certified small businesses and micro- businesses are entitled to a 5% bid preference on applicable state solicitations. Certified small businesses and microbusinesses are eligible for the State’s Small Business Participation Program. The program sets a goal for the use of small businesses in at least 25% of the State’s overall annual contract dollars.

In addition, under the Prompt Payment Act (PPA), the State must pay a certified small business or microbusiness higher interest penalties for late payment of an undisputed invoice. The PPA also permits state agencies to use a streamline process, known as the small business/DVBE Option, by contracting directly with California certified small businesses/microbusinesses for goods, services, information technology and Public Works Projects. The solicitation must be valued at more than $5,000 and the State agency must obtain price quotes from at least two California certified small businesses/microbusinesses.

Related/Prior Legislation

SB 1219 (Hancock, 2016) includes “employment social enterprise,” which are businesses that provide jobs for individuals who have experienced significant barriers to employment, within the Act for the purpose of allowing them to participate in state contracting bid preferences provided to certified small business enterprises. (Pending on the Senate Floor)

AB 1218 (Weber, 2015) makes significant adjustments to contracting performance goals and program participation reporting associated with the DVBE Program. (Held on the Senate Suspense File)

AB 1568 (Grove, 2014) would have required state agencies that opt to acquire goods, services, or information technology through a specified small business /DVBE contracting option to solicit at least three quotes, and obtain at least two quotes before awarding the contracts. (Held on the Senate Suspense File)

SB 297 (Roth, 2014) would have increased the annual statewide participation goal for DVBE state contracts from 3% to 5%. (Held in Assembly Jobs, Economic Development and the Economy Committee)

AB 218 (Dickinson, Chapter 699, Statutes of 2013) prohibited a state or local agency from asking employment applicants to disclose information regarding their conviction history until the agency has determined an applicant meets the position’s minimum employment qualifications.

AB 177 (Ruskin, Chapter 342, Statutes of 2010) increased and conformed penalties for persons who falsely engage in activities relating to the Act.

AB 31 (Price, Chapter 212, Statutes of 2009) increased the maximum contract threshold amount for awards to small businesses, including microbusinesses, and DVBEs under the state’s streamlined procurement process, from $100,000 to $250,000, as specified.

FISCAL EFFECT: Appropriation: Fiscal Com.: Local:

According to the Senate Appropriations Committee, DGS would incur unknown, likely major, costs to implement the provisions of this bill. These include one-time FI$Cal programming costs associated with modifying the IT system’s small business certification system; one-time workload associated with updating regulations, the State Contracting Manual, and various training materials and templates; and ongoing workload associated with processing additional certification applications from the newly eligible firms.

SUPPORT: (Verified 5/27/16)

California Hispanic Chamber of Commerce

Coalition of Small and Disabled Veteran Businesses

Greater Los Angeles African American Chamber of Commerce

Los Angeles County Business Federation

Los Angeles Latino Chamber of Commerce

OPPOSITION: (Verified 5/27/16)

None received

ARGUMENTS IN SUPPORT: According to the Los Angeles County Business Federation, “California State Departments already have trouble meeting their small business goals due to the lack of small business firms available for large infrastructure projects. With billions more in infrastructure projects in development, it will take more than 500-600 qualified small businesses to be certified under the current standards to be able to complete for planned mega-projects. The departments responsible for these projects will not be able to meet their small business goals with the current pool of small businesses.”

Prepared by:

5/28/16 17:11:57

**** END ****

SENATE COMMITTEE ON

Senator Ricardo Lara, Chair

2015 - 2016 Regular Session

SB 1176 (Galgiani) - Small Business Procurement and Contract Act: business size

This bill meets the criteria for referral to the Suspense File.

Bill Summary:

SB 1176 would revise the definition of “small business” and “microbusiness” for purposes of the Small Business Procurement and Contract Act by (1) increasing the dollar amount threshold for a small business and microbusiness to $30 million and $5 million respectively, and (2) requiring those dollar amounts to be adjusted to reflect changes in the California Consumer Price Index (CPI), as specified.

Fiscal Impact:

The Department of General Services (DGS) would incur unknown, likely major, costs to implement the provisions of the bill. These costs include (1) one-time FI$Cal programming costs associated with modifying the IT system’s small business certification system; (2) one-time workload associated with updating regulations, the State Contracting Manual, and various training materials and templates; and (3) ongoing workload associated with processing additional certification applications from the newly eligible firms.

Background:

Under current law, a “small business” (SB) is defined as an independently owned and operated business that meets the following criteria: (1) it is not dominant in its field of operation, (2) its principal office is located in California, the officers of which are domiciled in California, and which, together with affiliates, has 100 or fewer employees, and (3) has average annual gross receipts of $14 million or less over the previous three years, or is a manufacturer, as defined, and has 100 or fewer employees. Current law defines a “microbusiness” (MB) as a small business which, together with affiliates, has average annual gross receipts of $3.5 million or less over the previous three years, or is a manufacturer, as defined, with 25 or fewer employees. Current law allows DGS to raise the dollar threshold through administrative action to reflect inflation, and DGS has an active rulemaking proceeding to, among other things, raise the threshold to $15 million.

Once certified as a small business, a firm qualifies as a small business regardless of the type of contract it is bidding on or participating in. Small businesses receive a 5 percent bid preference, increased interest on late payments, and eligibility to participate in solicitations under the “Small Business/DVBE Option.”

The Small Business/Disabled Veterans Business Enterprise (DVBE) Option is an optional contracting method under which departments can award contracts up to specified dollar limits after obtaining responsive, timely quotes from two small businesses or two disabled veteran business enterprises. The dollar limits are $250,000 for goods, services, and information technology and $291,000 for construction.

Proposed Law:

This bill would, among other things, do all of the following:

• Revise the definition of SB and MB by increasing the dollar amount threshold for a SB to $30 million and for a MB to $5 million. The bill would require those dollar amounts to be adjusted biennially to reflect changes in the CPI.
• For the purposes of public works contracts, contracts awarded through competitive bids or otherwise for the erection, construction, alteration, repair, or improvement of any kind upon real property, define “small business” to mean an independently owned and operated business that is not dominant in its field of operation, the principal office of which is located in California, the officers of which are domiciled in California, and which, together with affiliates, has 200 or fewer employees, and average annual gross receipts of twenty-five million dollars ($25,000,000) or less over the previous three years.

Related Legislation:

SB 1219 (Hancock, 2016) includes “employment social enterprise,” which are businesses that provide jobs for individuals who have experienced significant barriers to employment, within the Small Business Procurement and Contract Act (Act) for the purpose of allowing them to participate in state contracting bid preferences provided to certified small business enterprises. The bill is currently pending in this Committee.

Staff Comments:

As of December 2015, there were 26,404 businesses in California which DGS had certified as small businesses. That number would increase under the bill, the extent of which is unknown. Since 2012, overall small business participation has ranged between 22 and 28 percent.

This bill would create a split system of small business certification. Firms with less than 100 employees and $15 million in revenue would continue to qualify as small businesses for all contracts. Other firms (with 101-200 employees and/or $15-25 million in revenue) would qualify as small businesses only for the purposes of public works contracts. DGS would ultimately need to establish a separate certification for firms with 101-200 employee and/or $15-25 million in revenue. This would lead to increased programming costs for Fi$Cal, the extent of which is unknown but likely to range in the hundreds of thousands of dollars minimally.

All else equal, making more firms eligible for the small business preference (at least for public works contracts) is likely to result in more bidders qualifying for the preference. The fiscal impact of this is difficult to estimate, in part because DGS does not have data on the number of firms that would qualify for “public works contract” certification under the bill.

Any local government costs resulting from the mandate in this measure are not state-reimbursable because the mandate only involves the definition of a crime or the penalty for conviction of a crime.

-- END --

SENATE COMMITTEE ON GOVERNMENTAL ORGANIZATION

Senator Isadore Hall, III

Chair

2015 - 2016 Regular

Bill No: SB Hearing Date: 4/12/2016

SUBJECT:

DIGEST: This bill revises the definition of “small business” and “microbusiness” for purposes of the Small Business Procurement and Contract Act (Act) by increasing the dollar amount threshold for a small business to $30 million and for a microbusiness to $5 million and requires those dollar amounts to be adjusted to reflect changes in the California Consumer Price Index (CPI) biennially.

ANALYSIS:

Existing law:

1. Grants, through the Small Business Procurement and Contract Act, preference for small businesses and microbusiness in the award of a contract for goods, services, or information technology to the state and in the construction of state facilities.
2. Permits a state agency and the California State University to award specified types of contracts with a value of between $5,000 and $250,000 to a certified small business, including a microbusiness and a disabled veteran business enterprise, without complying with certain competitive bidding requirements, provided the agency obtains price quotations from at least 2 small businesses, including microbusinesses, or 2 disabled veteran business enterprises.
3. Establishes the Office of Small Business and Disabled Veteran Business Enterprise Services and prescribes duties for the office, which include maintaining a bidders list of small businesses and disabled veteran businesses and identifying which small businesses also qualify as microbusinesses.
4. Prescribes penalties for small businesses or microbusinesses that provide incorrect information or withhold information that leads to its incorrect classification as such an entity and is awarded a contract because of the classification. Penalties include the repayment of the amount of the bid preference, in addition to a penalty up to 10 percent of the contract amount, reimbursement of the costs of investigating the fraud, prohibiting the business to participate in state contracts for between 3-10 years, and, if the fraud is found to be willful and knowing, the business is subject to a civil penalty of between $10,000-$30,000 for the first offense, and $30,000-$50,000 for subsequent offenses.
5. Defines a “small business” (SB) to mean an independently owned and operated business that is not dominant in its field of operation, the principal office of which is located in California, the officers of which are domiciled in California, and which, together with affiliates, has 100 or fewer employees, and average annual gross receipts of $10 million or less over the previous three years, or is a manufacturer, as defined, and has 100 or fewer employees.
6. Defines a “microbusiness” (MB) as a small business which, together with affiliates, has average annual gross receipts of $2.5 million or less over the previous three years, or is a manufacturer, as defined, with 25 or fewer employees.
7. Defines a “disabled veteran business enterprise ” (DVBE) to mean an enterprise that is at least 51% owned by one or more disabled veterans and the daily business operations are managed and controlled by one or more disabled veterans. For certification purposes a “disabled veteran” is a veteran of the U.S. military, naval, or air service who resides in California and has a service-connected disability of at least 10% or more.
8. Requires the Director of General Services (DGS) to conduct a biennial review of the average annual gross receipt levels and authorizes the Director to adjust the average annual gross receipts threshold to reflect changes in the California Consumer Price Index for all items.
9. Requires a contractor requesting a small business or microbusiness preference to do so under penalty of perjury.

This bill:

1. Revises the definition of “small business” and “microbusiness” for purposes of the Small Business Procurement and Contract Act by increasing the dollar amount threshold for a small business to $30 million and for a microbusiness to $5 million and requires those dollar amounts to be adjusted to reflect changes in the CPI.
2. Allows the DGS and other state agencies to count contractors that would be considered a small business or microbusiness under the changes made by this bill for the year this bill is enacted if the directors are unable to meet the small business participation goals under existing laws.
3. Allows more contractors to qualify as a small business or microbusiness, thus expanding the group of contractors authorized to request a preference filed under penalty of perjury.
4. Makes various findings and declarations pertaining to the importance of small businesses in the State of California.

Background

Purpose of the bill. According to the author, “the proposed adjustment takes into consideration inflation, the benefits of increased competition as more small businesses become eligible for state contracting preferences and the recognition that the state, with $29.5 billion in unissued general obligation bonds for infrastructure projects, is currently inconsistently meeting its 25% small business participation goal. And, with the state engaging in massive, costly and lengthy construction projects, the current revenue limits may disqualify many relatively small businesses after they receive their first substantial subcontracts.”

Current Thresholds. Current law defines a small business as, among other things, an independently owned and operated business with average annual gross receipts of $10 million or less over the previous three years. It defines a microbusiness as, among other things, a small business with average annual gross receipts of $2.5 million or less over the previous three years.

However because current law allows the Director of DGS to adjust the average annual gross receipts threshold to reflect changes in the CPI the current threshold for a SB is $14 million and $3.5 million for MBs. This bill will increase those thresholds to $30 million for SBs and $5 million for MBs as well as require, and not simply allow, the Director of DGS to adjust those dollar amounts to reflect changes in the CPI.

As of December 2015, there were 26,404 businesses in California which DGS had certified as small businesses for purposes of the Act. It is unclear how many more businesses would qualify as small businesses with a $30 million threshold. However, it should be expected that businesses which currently qualify as small businesses would face competition from businesses that would now qualify under the $30 million threshold.

Participation Goals. On March 29, 2006, Executive Order S-02-06 by Governor Schwarzenegger established a minimum participation goal of 25 percent for SBs/MBs and directed DGS to monitor the progress of all agencies, departments, boards and commissions towards meeting the 25 percent small business participation goal. It should be noted that there is currently no MB participation goal; rather the 25 percent participation goal for small businesses is a combination of SBs and MBs. Also, though DGS implements various strategies to aid departments’ achievement of their participation goals, there is no statutory penalty for not meeting the goal.

Every year, DGS releases a Consolidated Annual Report (CAR) on contracting dollars that state departments award to small businesses. There are 154 mandatory reporting departments, those that are under DGS’ statutory purchasing authority, that are required to report and another 31 state departments that report voluntarily, departments that are not under DGSs statutory purchasing authority.

According to the 2014-15 CAR, mandatory reporting departments exceeded the statewide goal; reporting 25.61% participation by SBs/MBs. It should be noted that the report does not give a detailed breakdown of SBs/MBs, but rather the 25.61% is a combination of both SBs/MBs for mandatory reporting departments. Over the last five years, the average for all mandatory state departments has been 24.78% with a high of 28.35% in fiscal year 2013-14 and a low of 22.12% in fiscal year 2010-2011.

As the numbers demonstrate, over the past five years the state has, if rounded up, averaged 25%, or the intended participation goal for mandatory reporting departments. This an average across all mandatory reporting departments and not for specific departments.

Small Business Procurement and Contract Act. The Small Business Procurement and Contract Act was implemented in 1973 to establish a small business preference within the state’s procurement process. The goal is to increase the number of contracts between the state and small businesses. The Act states that it is the policy of the State of California to 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.

Upon meeting eligibility requirements, certified small businesses and micro- businesses are entitled to a five percent bid preference on applicable state solicitations. Certified small businesses and microbusinesses are eligible for the State’s Small Business Participation Program. The program sets a goal for the use of small businesses in at least 25% of the State’s overall annual contract dollars.

In addition, under the Prompt Payment Act, the State must pay a certified small business or microbusiness higher interest penalties for late payment of an undisputed invoice. The Act also permits state agencies to use a streamline process, known as the SB/DVBE Option, by contracting directly with California certified SBs/MBs for goods, services, information technology and Public Works Projects. The solicitation must be valued at more than $5,000 and the State agency must obtain price quotes from at least two California certified SBs/MBs.

Prior/Related Legislation

SB 1219 (Hancock, 2016) includes “employment social enterprise,” which are businesses that provide jobs for individuals who have experienced significant barriers to employment, within the Small Business Procurement and Contract Act (Act) for the purpose of allowing them to participate in state contracting bid preferences provided to certified small business enterprises. (Pending in Senate Governmental Organization Committee)

AB 1218 (Weber, 2015) would make significant adjustments to contracting performance goals and program participation reporting associated with the DVBE Program. (Held on the Senate Suspense File)

AB 1568 (Grove, 2014) would have required state agencies that opt to acquire goods, services, or information technology through a specified SB/DVBE contracting option to solicit at least three quotes, and obtain at least two quotes before awarding the contracts. (Held on the Senate Suspense File)

SB 297 (Roth, 2014) would have increased the annual statewide participation goal for DVBE state contracts from three percent to five percent. (Held in Assembly Jobs, Economic Development and the Economy Committee)

AB 218 (Dickinson, Chapter 699, Statutes of 2013) prohibits a state or local agency from asking employment applicants to disclose information regarding their conviction history until the agency has determined an applicant meets the position’s minimum employment qualifications.

AB 177 (Ruskin, Chapter 342, Statutes of 2010) increased and conformed penalties for persons who falsely engage in activities relating to the Act.

AB 31 (Price, Chapter 212, Statutes of 2009) increased the maximum contract threshold amount for awards to small businesses, including microbusinesses, and DVBEs under the state’s streamlined procurement process, from $100,000 to $250,000, as specified.

FISCAL EFFECT: Appropriation: No Fiscal Com.: Yes Local: Yes

SUPPORT:

California Hispanic Chamber of Commerce

Greater Los Angeles African American Chamber of Commerce

Los Angeles County Business Federation

OPPOSITION:

None received

ARGUMENTS IN SUPPORT: According to the Los Angeles County Business Federation, “California State Departments already have trouble meeting their small business goals due to the lack of small business firms available for large infrastructure projects. With billions more in infrastructure projects in development, it will take more than 500-600 qualified small businesses to be certified under the current standards to be able to complete for planned mega-projects. The departments responsible for these projects will not be able to meet their small business goals with the current pool of small businesses.”