SR 11-01-2011 4CCity of City Council Report
Santa Mouiea
City Council Meeting: November 1, 2011
Agenda Item: 4 -C
To: Mayor and City Council
From: Gigi Decavalles- Hughes, Acting Director of Finance
Subject: Study Session on the Existing Local Business Preference on Competitive
Bids
Recommended Action
Staff recommends that the City Council:
1) Review and comment on the City's existing local business preference on
competitive bids; and
2) Provide direction on alternatives to promote local businesses within the City's
purchasing policies.
Executive Summary
Municipal Code provisions require the City to award a one percent price preference to
Santa Monica businesses when determining the best bidder. This price preference,
when originally established on September 14, 1999, matched the City's local sales tax
rate. State and local legislation enacted in the past decade has impacted the City's
local sales tax rate and necessitates an evaluation of this local business preference
provision of the Municipal Code. This report requests that Council provide direction to
staff on whether to modify local preference standards.
Discussion
On September 13, 2011 the City Council requested that staff evaluate, investigate and
suggest a course of action to potentially enhance the City's existing local business
preference in order to reflect Measure Y and any other tax rate changes. Staff reviewed
the existing provisions of the municipal code, investigated the local business preference
programs of other cities and researched the timeline of changes to the City's local sales
tax rate.
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Santa Monica's Local Business Preference Program
Sections 2.24.090 and 2.24.100 of the Santa Monica Municipal Code stipulate that "the
Purchasing Agent shall award a one percent price preference when determining the
best bid to all City businesses submitting bids upon which will be levied a State of
California sales tax. The Purchasing Agent shall administer the bidding preference so
that bid amounts received from City businesses are reduced by one percent solely to
determine the rank order of the bids in the selection process. If, after the one percent
preference is applied, a City business has submitted a bid that is equal to or is lower
than all other bids, the Purchasing Agent shall award the contract to the City business
so long as it is otherwise the best bidder." This price preference only applies to
purchases for supplies, material and equipment. It does not apply to maintenance,
construction or professional services contracts.
Summary of Programs from Other Cities:
Beverly Hills, CA
The City of Beverly Hills does not have a local business preference program.
Burbank, CA
The City of Burbank Municipal Code requires that in case of a tied bid proposal, the bid
be awarded to local businesses. In addition to the municipal code provisions, Burbank
staff indicated that city administrative policy requires a one percent price preference be
applied to proposals of all local businesses prior to evaluation. This applies to both
material purchase and construction contracts
Culver City, CA
Culver City's municipal code stipulates that contracts for the purchase of equipment,
goods or supplies will be awarded to a local business if the bid difference between the
local business and the business based outside the city is less than the city's tax benefit
from local sales taxes. Culver City staff indicated that they use one percent as a rule of
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thumb for materials purchases. No price preferences are applied to construction
contracts.
Glendale, CA
The City of Glendale's municipal code does not include provisions for a local business
preference program. Glendale city staff indicated that purchasing policies and
guidelines provide a one percent price preference for local businesses when purchasing
materials. No price preference is provided for construction contracts.
Pasadena, CA
The City of Pasadena municipal code provides a preference to local businesses equal
to the amount the city will receive in sales tax revenues. The "Pasadena First, Buy
Local" program currently awards a one percent preference to competitively bid contracts
$25,000 and over for that portion of the bid that is subject to sales tax where it is
determined that the City would receive a refund from such sales tax. For competitively
selected professional services and other unique services, the City of Pasadena awards
a preference equal to five percent of the overall evaluation to the local business.
West Hollywood, CA
The City of West Hollywood grants a preference of four percent to local bidders /vendors
when awarding purchase orders and contracts for supplies and equipment. This four
percent preference may not exceed $5,000 for any single purchase order or contract.
West Hollywood city staff indicated that this preference does not apply to construction
contracts.
City of Los Angeles, CA
The Los Angeles City Council approved a Local Business Preference ordinance on
October 14, 2011. To qualify as local, a business must have a work space within Los
Angeles County, must be headquartered in the County or have at least fifty employees
or fifty percent of full -time employees working within the County at least sixty percent of
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their time on an annual basis. The ordinance applies an eight percent preference to
local businesses' bids for contracts in excess of $150,000. The ordinance also applies
an eight point proposal evaluation preference for local businesses submitting proposals.
Another provision of the ordinance provides up to a five percent preference for non -local
businesses that contract with local subcontractors, depending on the percentage of
work to be performed by the latter. Although their ordinance identifies local businesses
as those in Los Angeles County, the Los Angeles City Council has instructed their staff
to look into drafting a charter amendment that would limit the benefits of this ordinance
to businesses in the City of Los Angeles only.
The research results on other cities' programs are summarized in table 1 below:
Tahla 1
Review of City's Local Sales Tax
The total amount of the City's sales tax levied is 9.25 %. This includes the base rate of
7.25% and 0.5% each for Proposition A, Proposition C, Measure R and Measure Y.
On November 2, 2010, Santa Monica voters approved Measure Y, enacting a half cent
transaction and use tax, and Measure YY, which advised that one half of the revenue
from Measure Y should be used to support public education in the City. Subsequent to
the passage of Measures Y and YY, the City entered into a Master Facilities Use
Agreement with the Santa Monica /Malibu Unified School District (SMMUSD), whereby
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PRICE PREFERENCE
Materials Purchases
Construction Contracts
Santa Monica
1%
-
Beverly Hills
-
Burbank
1%
1%
Culver City
1%
-
Glendale
1 %
-
Pasadena
1%
1%
West Hollywood
4%
-
Los Angeles
8%
8%
Review of City's Local Sales Tax
The total amount of the City's sales tax levied is 9.25 %. This includes the base rate of
7.25% and 0.5% each for Proposition A, Proposition C, Measure R and Measure Y.
On November 2, 2010, Santa Monica voters approved Measure Y, enacting a half cent
transaction and use tax, and Measure YY, which advised that one half of the revenue
from Measure Y should be used to support public education in the City. Subsequent to
the passage of Measures Y and YY, the City entered into a Master Facilities Use
Agreement with the Santa Monica /Malibu Unified School District (SMMUSD), whereby
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one -half of the Measure Y taxes will be paid to SMMUSD in exchange for the City's joint
use of certain SMMUSD facilities. The initial term of the agreement is ten years with an
option to renew for subsequent ten year periods. The net benefit to the City is a 0.25%
increase in tax revenue.
In addition to maintaining consistency with revenue generated from local sales taxes, a
price preference may also serve as an incentive for businesses to remain in the City.
Some of the other benefits that are gained by the City when awarding contracts to local
businesses include:
• Local job growth and retention
• Increase in expenditures in the local private sector
• Increased sales tax revenue
• Increased business license fees due to increased local business revenues
• Incentive for firms to relocate to Santa Monica
• Reduced carbon footprints
Participation of Local Businesses in the City's Competitive Process
Staff considered the frequency of local business participation in the City's bid process
and evaluated the application of the local price preference. Prior purchases which
involved proposals from local businesses included print jobs and vehicle purchases.
Neither of these instances, however, resulted in an altered award decision.
Although no tracking records exist to identify product purchases impacted by the price
preference, staff estimates that less than one percent of all contracts and purchase
orders processed by the Finance Department over the last few years represent a
condition where the price preference altered the award decision. This assessment is
consistent with those of other cities evaluated.
Factors that may have lead to infrequent application and impacted the success of the
price preference include the availability of local businesses that cater to the City's
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needs, and the low probability of contract bid proposals being within one percent of
each other. Another important factor for consideration is that the City awards contracts
and purchase orders to the best bidder, not the lowest, responsible bidder. This means
that when the application of the price preference results in the local business being the
lowest bidder, staff still needs to evaluate the local business to ensure that it is indeed
the best bidder based on product availability, track record, relevant experience,
compliance with specifications, ability to deliver on time, and other evaluation criteria.
Alternative Strategy
In addition to awarding a price preference that is based on the sales tax that the city
receives, other opportunities exist to provide additional benefits to local businesses.
Policies can be developed in which confirmation of local business status becomes a
standard evaluation criterion during the evaluation of bids. As an example, proposed
evaluation criteria could award 10 points to the local business bid proposals and 0
points to the non -local business bid proposal. This provides a boost in the local
business bid proposal's evaluation point total in addition to a lowered price proposal
during the initial bid evaluation process. This benefit could apply to material purchases,
construction contracts or professional services.
Leqal Considerations
The City Attorney's office advises that laws affording bid preferences are subject to
legal challenge and must be based on appropriate findings to minimize legal risks. This
point is illustrated by Associated General Contractors v. City and County of San
Francisco, 813 F.2d 922 (9th Cir., 1987), in which general contractors challenged the
validity of a city ordinance that established an affirmative action program giving
preferences to minority, women and locally owned businesses. The court held that
these preferences conflicted with a charter provision requiring that contracts be
awarded to the lowest reliable and responsible bidder. The court also explained that the
locally -owned preference did not violate Equal Protection guarantees, but only because
it was based on findings that San Francisco businesses were disadvantaged by the high
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administrative costs of doing business in that city and that the city had an interest in
encouraging business to stay within its borders despite those high costs. Associated
General Contractors was followed most recently in Amertitle Inc. v. Gilliam County (U.S.
Dist. Court, Oregon, CV09- 318 -SU, 4/26/11). In that case, plaintiff brought a civil rights
action challenging a county's local preference policy on the grounds that it violated both
the federal Commerce Clause and Equal Protection guarantees. In denying the
county's motion for summary judgment, the court explained that for the policy to be
upheld as constitutional, the county would have to establish legitimate purposes as in
Associated General Contractors. Additionally, the District Court noted that the local law
upheld in Associated General Contractors afforded only a "modest" preference.
Options for Council Direction
If Council is supportive of continuing with a local business price preference, the
following options are available:
• Prepare an amendment to the Municipal Code that increases the local business
price preference to 1.25 %, equal to the portion of the sales and use tax that is
refunded to the City;
• Take no further action and maintain the current I% price preference.
• Implement a policy where confirmation of local business status becomes a
standard criterion in the City's bid evaluation process for material purchases,
construction contracts and professional services.
III
Financial Impacts & Budget Actions
This report does not have any financial impacts. However, implementation of Council's
direction may impact future purchases.
Prepared by: Rick Valle, P.E., Principal Civil Engineer (Mgmt. Rotation Program)
Approved:
)Gig
Acting Director of Finance
Forwarded to Council:
Rod Gould
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City Manager