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F I S C A L I M P A C T R E P O R T

SPONSOR HBIC

DATE TYPED 3/18/05

HB 1061/HBICS

SHORT TITLE Protection of Certain Small Businesses

SB

ANALYST Ford

APPROPRIATION

Appropriation Contained Estimated Additional Impact Recurring

or Non-Rec

Fund

Affected

FY05

FY06

FY05

FY06

$0.1

See Narrative

Various

(Parenthesis ( ) Indicate Expenditure Decreases)

Relates to SB 1060/aSPAC

SOURCES OF INFORMATION

LFC Files

SUMMARY

Synopsis of Bill

The House Business and Industry Committee substitute for House Bill 1061 creates new prefer-

ences in the state’s bidding process for small businesses and disadvantaged small businesses.

Small business is defined as a resident business that employs 20 or fewer employees. The pref-

erence provides that the small business shall be awarded a contract when its price is the lowest

bid when multiplied by a factor of .90. The total maximum preference awarded may not exceed

10%, even if combined with other preferences.

Disadvantaged small business is defined as a resident business, at least 51% of which is owned

by a woman, a military veteran who was not dishonorably discharged or any other minority per-

son (as defined by the minority business development agency of the U.S. department of com-

merce). The preference provides that a disadvantaged small business shall be awarded a contract

when its price is the lowest bid when multiplied by a factor of .85. The total preference shall not

exceed 15%. The definition does not limit the size of the business.

In order to receive a preference, small businesses and disadvantaged small businesses must qual-

ify with the state purchasing agent and receive a certificate number.

House Bill 1061/HBICS -- Page 2

The bill specifies that this section, which includes bid preferences for resident businesses, resi-

dent manufacturers, small businesses and disadvantaged small businesses, shall not apply to con-

struction, construction services, construction maintenance contracts or construction contracts

based on unit price, nor shall it apply to construction materials to be used in any of those con-

tracts.

Finally, the bill deletes references to a New York state business enterprise and removes provi-

sions of existing law that deem certain New York businesses as New Mexico businesses. These

provisions were originally included in the law because New York has a bidding preference recip-

rocity rule which would have disadvantaged New Mexico businesses bidding for New York con-

tracts. These provisions protected a particular business that had contracts with New York but

this business is no longer in existence.

Significant Issues

The committee substitute for House Bill 1061 establishes a preference for small businesses and

disadvantaged small businesses that would trump the preferences established for resident busi-

nesses and manufacturers.

While the bill refers to “disadvantaged small business,” the definition does not actually limit the

size of the business. Thus, a large corporation that is owned by a woman, veteran or minority

could qualify as a disadvantaged small business and receive a higher bid preference than qualify-

ing small businesses or resident businesses.

Writing on the previous version of the bill, the attorney general’s office (AGO) noted that pro-

curement preferences have been subject to court challenge:

“Race and gender based preferences have been challenged in the courts as violating federal

and state constitutional equal protection and privileges and immunities clauses. In City of

Richmond v. J. A. Croson Co. 488 U.S. 469 (1989), the United States Supreme Court invali-

dated a city ordinance requiring contractors to award at least 30% of the price of the contract

to “minority business enterprises”. The Supreme Court held that the city failed to demon-

strate a compelling interest in apportioning public contracting opportunities on the basis of

race. The Supreme Court applied the “strict scrutiny test” and held that a government seeking

to defend an affirmative action program from attack must prove that the program: 1) serves

the compelling governmental interest of remedying identified discrimination and 2) is nar-

rowly tailored to remedying only the discrimination found, with minimal benefit to those

who had not in fact suffered from discrimination and minimal harm to innocent third parties.

This analysis was confirmed by the Supreme Court in Adarand Constructors v. Pena (93-

1841), 515 U.S. 200 (1995) with regard to a similar federal program. This bill may be chal-

lenged under those principles.”

The bill does not make findings regarding the compelling governmental interest for establishing

race and gender based preferences. It is unclear whether this bill would meet the strict scrutiny

test established by the Supreme Court.

In its analysis of the previous bill, the general services department (GSD) noted that at least 25

states have reciprocal preference laws that would penalize New Mexico companies bidding in

those states because of the New Mexico preferences. If the penalty in other states is based on the

House Bill 1061/HBICS -- Page 3

size of the preference in New Mexico, a 15 percent New Mexico preference could significantly

burden any New Mexico business wanting to bid on contracts in another state. This could have

the effect of harming innocent third parties. These businesses may not be able to take advantage

of the significant bidding preference in New Mexico, and yet would still be disadvantagd in their

bids with other states.

FISCAL IMPLICATIONS

The bill will result in cost increases to state agencies as they will be required to award contracts

to higher bidders. The bill may also result in costs to the state purchasing agent to certify small

businesses and disadvantaged small businesses.

TECHNICAL ISSUES

The definition of disadvantaged small business does not limit the size of the business.

POSSIBLE QUESTIONS

Does the preference established in this bill meet the Supreme Court’s test for race and gender

based preferences.

Would the new preferences created in this bill have the unintended consequence of dampening

economic development by disadvantaging New Mexico businesses bidding for contracts in other

states.

Should the definition of “disadvantaged small business” include a limitation on the size of the

business.

Will the existence of relatively large preference discourage other resident businesses or small

businesses from submitting bids.

EF/lg