REPORT TO THE CITY COUNCIL
DATE: Regular Meeting of June 25, 2024
TO: Mayor and Members of the City Council
VIA: Dante Hall, City Manager
SUBMITTED BY: Patrick Tang, City Attorney
Christina Lawrence, Special Counsel
SUBJECT: Update on Local Business Preference
Program for Goods and Services
RECOMMENDED ACTION:
Review and discuss report; provide direction to City Attorney’s office and staff.
BACKGROUND:
As follow up to a request by the City Council, the City Attorney at the Council meeting of September 12, 2023, provided a general overview of local small business preferences for goods and services, including an example of a local preference program implemented in the City of San Pablo that could serve as a model for development of a preference program in the City of Hercules. At the September 12th meeting, the Council requested more information on the City of San Pablo’s program, including the success of the program, implementation, and impacts on staff. This report provides an update to Council on local preference programs, including information related to the City’s existing Local Preference Program, as set forth in its Purchasing Guidelines, and additional information related to the City of San Pablo’s local business preference program.
DISCUSSION:
City of Hercules’ Existing Local Preference Program
Following the last meeting on the subject, the City Attorney’s office discovered that in 2019, the City adopted revised Purchasing Guidelines, which include a Local Preference Program. Section 7.5 of the Purchasing Guidelines provide as follows:
7.5 Local Preference
(A) For the purchase of goods or services, excluding public works contracts, when two or more proposals or quotes are the same, in unit, quality, service and total cost, preference should be given to the vendor who operates within the planning area as defined in the City’s General Plan if the quote for services or taxable goods is:
less than $10,000 and is within 5% of the lowest quote; more than $10,000 up to $500,000 and is within 3% of the lowest quote; more than $500,000 up to $1,000,000 and within 2% of the lowest quote; more than $1,000,000 and within 1% of the lowest quote. (B) Notwithstanding the foregoing, for procurements subject to the Federal Procurement Requirements the City may not consider or use geographical preferences in the evaluation of bids or proposals, except as provided in 2 CFR § 200.319.
The City’s existing Local Preference Program applies to the purchase of goods and services, excluding public works and federally-funded procurements (since local preferences are typically prohibited for those procurements). It provides that preference should be given to a local vendor (defined as a vendor who operates within the planning area as defined in the City’s General Plan) if the local vendor’s quote is within a certain percentage of the lowest quote and is generally the same in all material respects to the lowest quote (in terms of quality, quantity, etc.).
Example: The City requests quotes from service providers to perform janitorial services for City buildings for a three-year term.
Quote 1: A non-local vendor submits a quote to perform the services for a not-to-exceed amount of $600,000 for the full term.
Quote 2: A local vendor submits a quote to perform the services for a not-to-exceed amount of $610,000 for the full term.
Quote 3: A local vendor submits a quote to perform the services for a not-to-exceed amount of $620,000 for the full term.
Assuming the contract for janitorial services is awarded based on the lowest quote, application of the preference would result in award to the local vendor that submitted Quote 2, since Quote 2 is within 2% of the lowest quote.
City staff is not aware of any situations in which the City’s Local Preference Program has been implemented or applied. In order to better integrate the preference program into the City’s procurement procedures, it would be advisable to adopt a preference program by ordinance, so that it can be codified in the City’s Municipal Code. Staff can also engage in efforts to promote awareness of the City’s preference program among local businesses, which may include public outreach and updating the City’s website to include information on the preference.
City of San Pablo Local Preference Program
The City Attorney’s office contacted the City of San Pablo for more information on its preference program, including the success of the program, implementation, and impacts on staff.
Much like the City’s local preference, the City of San Pablo’s preference applies to procurements for goods and services, excluding public works or procurements subject to state or federal funding. San Pablo applies a 5% preference, up to a maximum of $5,000, to bids submitted by small local businesses, provided the bids are otherwise equal in responsibility and quality. The preference applies for purposes of determining the lowest responsible bidder for award of a contract. San Pablo defines a “small local business” as a business that has a place of business within the city; a valid, current business license issued by the city; and that either employs fewer than fifty employees or has average annual gross receipts of two million dollars or less, as evidenced by a local small business affidavit that the business submits with its bid.
Example: San Pablo requests bids for a service provider to perform janitorial services for its buildings for a three-year term.
Bid 1: A non-local business submits a bid to perform the services for a not-to-exceed amount of $600,000 for the full term.
Bid 2: A “small local business” submits a bid to perform the services for a not-to-exceed amount of $610,000 for the full term.
Bid 3: A “small local business” submits a bid to perform the services for a not-to-exceed amount of $620,000 for the full term.
In this example, assuming San Pablo awards the contract on a “low bid” basis, application of the preference would not result in award to a small local business. The 5% preference is capped at a maximum amount of $5,000. Thus, for purposes of comparing bids, Bid 2 is evaluated as $605,000 and Bid 3 is evaluated as $615,000.
In terms of the success of the preference in awarding contracts to local businesses, San Pablo has found that few local businesses have benefitted from the preference. There are a couple potential reasons for this, including that San Pablo may have a limited “small local business” base that can respond to solicitations; San Pablo’s preference factor may not have much of an impact for purposes of comparing the monetary value of bids or quotes, particularly in light of the $5,000 cap; and San Pablo often receives state or federal grant funding, which limits its ability to apply the preference to grant-funded procurements.
The City of San Pablo representative was uncertain as to the number of businesses that had benefited from the preference, and as to the types of businesses benefitting from the preference. The representative also indicated that the city applied the preference on a recent procurement for services, but the pricing proposed by each respondent was high, such that the city’s 5% preference (capped at $5,000) did not affect the ultimate award of the contract.
In terms of the impact on staff and implementation, San Pablo indicated that applying the preference does not require much staff time. Typically, the city articulates the possibility of application of the preference to local businesses in the solicitation document. When evaluating bids or quotes, for those respondents that submit a “local business affidavit” as required for the preference, San Pablo confirms the businesses status as a “small local business” and then applies the preference percentage to the pricing proposed by that business for purposes of evaluating and comparing pricing among all respondents.
ANALYSIS:
If the Council is interested in retaining the existing Local Preference Program set forth in Section 7.5 of the City’s Purchasing Guidelines, staff and the City Attorney’s Office recommend adopting the program by ordinance, so that it can be codified in the Municipal Code to increase staff and the public’s awareness of the program and allow better integration of the program with contracting processes. Staff and the City Attorney’s office could also incorporate any desired changes to the program during that process, such as expanding the definition of “local” to include businesses in neighboring communities and/or incorporating a “small” business element. City staff can also promote awareness of the preference program among local businesses, which may include public outreach and updating the City’s website.
FISCAL IMPACT:
If Council directs additional measures regarding a local business preference program, there may be staff and legal expenses associated with the development and implementation of those additional measures. Additionally, depending on the type of additional measures adopted, the procurement of goods and services may become marginally more expensive.
ATTACHMENTS:
City’s Purchasing Guidelines
Report to the City Council from the September 12, 2023 Meeting