STAFF REPORT TO THE CITY COUNCIL
DATE: Regular Meeting of September 12, 2023
TO: Mayor and Members of the City Council
SUBMITTED BY: Patrick Tang, City Attorney
SUBJECT: Local Small Business Preference for Goods and Services
RECOMMENDED ACTION
Review and discuss report; provide direction to staff.
BACKGROUND:
At the Council meeting of December 13, 2022, the Council approved Mayor Alex Walker-Griffin’s request to schedule a discussion on the merits of developing a Local Small Business Preference Program to promote local businesses located in and/or in the vicinity of Hercules. As a starting point for discussion, this report is intended to provide general information regarding Local Small Business Preference programs.
DISCUSSION:
Ordinances providing preferences to local firms for the purchase of certain goods and services are generally considered to be legally permissible. However, where a contract is required to be given by law to the lowest responsible bidder (for instance public works contracts subject to Public Contracts Code low bid requirements), a preference in favor of local businesses is not valid.
Local Small Business Preference programs are permitted if the city council makes adequate findings to establish that the regulation is rationally related to a legitimate government interest. The Attorney General has opined that local small business preference ordinances for goods and services not subject to lowest bid requirements do not conflict with state public bidding statutes. 72 Ops. Cal Atty Gen 86 (1989). California Public Contract Code Section 2002 expressly allows for small business preferences and sets forth detailed requirements for such programs, stating in part:
“(a) Notwithstanding any other provision of law requiring a local agency to award contracts to the lowest responsible bidder, any local agency may do any of the following in facilitating contract awards to small businesses:
(1) Provide for a small business preference in construction, the procurement of goods, or the delivery of services where responsibility and quality are equal.
The local agency shall set the percent and financial value of a preference. The maximum percentage of a preference shall be 7 percent of the lowest responsible bidder meeting specifications and the maximum financial value shall be one hundred fifty thousand dollars ($150,000) for any bid…….” How a Local Preference Works. While there are a number of variations, typically a Local Small Business Preference Program will include the following:
Purpose: Adopt contracting practices to promote a healthy local economy by preserving and supporting local businesses; typically this takes the form of a 5% preference for a local business when bidding for goods and services otherwise not required to be given by law to the lowest responsible bidder.
Determine the types of businesses eligible for the preference; typically to be considered a “local business” eligible for a preference, the business must have its principal business office located within the city. Sometimes a satellite office staffed with one or more full time employees is sufficient to meet the “local business” designation.
The preference can be awarded when the lowest responsible bidder is a local business and is within a certain percentage (not to exceed 7 percent) of the lowest responsible bidder who is not a local business. When a local business and a non-local business submit equivalent bids, the city will typically give preference to the local business.
By way of example, the City of San Pablo has included within its Purchasing and Payables Guidelines the following provision for a Local Preference:
“5.5 LOCAL PREFERENCE Purchasing goods and services from local vendors is desired because it stimulates the local economy and recognizes that our local vendors are valued members of our community. For the purchase of goods or services, excluding public works contracts or procurements subject to the Federal Procurement Requirements, if factors such as quality, previous performance, and availability are equal among vendors, a vendor whose business is located in City of San Pablo shall be awarded a contract if their quote or bid is within 5% of the low bid (SPMC §3.16.100.C).” Establishing, implementing, and maintaining a Local Small Business Preference Program would require the Council to first decide on the scope of the program, and might take some time for staff to fully integrate into the City’s current contracting protocols and procedures.
CONCLUSION:
Public Contract Code Section 2002 authorizes local agencies to provide a small business preference when there is no requirement to award the contract to the lowest responsible bidder (in other words, excepting public works contracts); however, there are detailed statutory requirements set forth in that section that must be met.
FISCAL IMPACT:
If a Local Business Preference were to be adopted, there would be staff and legal expenses related to the development and implementation of the policy, and the procurement of goods and services subject to the policy could become marginally more expensive.
ATTACHMENTS:
Public Contract Code Section 2002
San Pablo Municipal Code Section 3.16.100 “Lowest Responsible Bidder and Local Business Preference” https://sanpabloca.gov/DocumentCenter/View/3339/Purchasing-Policy?bidId=