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

SPONSOR Martinez

DATE TYPED 3/10/05

HB

SHORT TITLE Protection of Certain Small Businesses

SB 1060/aSPAC

ANALYST Ford

APPROPRIATION

Appropriation Contained Estimated Additional Impact Recurring

or Non-Rec

Fund

Affected

FY05

FY06

FY05

FY06

$0.1

See Narrative

General Fund

Various other

Funds

(Parenthesis ( ) Indicate Expenditure Decreases)

Duplicates HB 1061

SOURCES OF INFORMATION

LFC Files

Responses Received From

Attorney General (AGO)

SUMMARY

Synopsis of SPAC Amendment

The Senate Public Affairs Committee amendment changes the definition of “disadvantaged small

business” to apply to any resident business that employs 20 or fewer employees, irrespective of

whether the owner is a woman, a military veteran or a minority. The amendment reduces the

bidding preference factor by requiring that bids from disadvantaged small businesses be multi-

plied by a factor of .90, instead of .80, when being compared to other bids.

Synopsis of Original Bill

Senate Bill 1060 creates a preference in the bidding process for “disadvantaged small busi-

nesses” which are defined as New Mexico resident businesses employing 20 or fewer people and

owned by a woman, military veteran or minority. The preference provides that the disadvan-

taged small business shall be awarded a contract when its price is the lowest bid when multiplied

by a factor of .80.

Senate Bill 1060/aSPAC -- Page 2

Significant Issues

Current law provides a bidding preference for resident businesses, resident manufacturers and

resident contractors. Contracts are awarded when their bids are made lower than the lowest non-

resident bid when multiplied by a factor of .95.

Section 13-1-22 NMSA 1978 requires resident businesses or resident manufacturers to receive a

certificate from the state purchase agent. This section allows the purchasing agent to verify the

claims of the businesses. Section 13-4-2 NMSA 1978 provides a similar process for resident

contractors.

Senate Bill 1060 establishes a preference for disadvantaged small businesses that would trump

the preferences established for resident businesses and manufacturers. The bill provides that a

contract shall be awarded to a disadvantaged small business when it is made lower than the low-

est non-resident or resident business bid when multiplied by a factor of .80. This is significantly

higher than the preference provided to resident businesses and resident manufacturers.

The bill does not require a disadvantaged small business to receive prior certification before re-

ceiving preference in the bidding process. Thus, it may be difficult for agencies to be certain that

the claims of the business are true.

The bill also does not define “owned” in the definition of a disadvantaged small business, creat-

ing the possibility that a woman, military veteran or minority could own a very small portion of a

business and qualify as a disadvantaged small business. This may open the door for manipula-

tion by businesses that could grant fractional ownership to someone for the sole purpose of gain-

ing the sizeable bidding preference.

The AGO notes that the bill is unclear as to the preference because it does not amend Section 13-

1-22 (See “Technical Issues.”).

The bill does not specify how bids of disadvantaged small businesses are to be compared to the

bids of resident businesses and resident manufacturers. Would the contracting agency compare

the bids after all bids have been reduced by the applicable preference factor. Or is the lowered

bid of the disadvantaged small business to be compared to the actual bid of the resident business.

The AGO notes that procurement preferences have been subject to court challenge, writing:

“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-

Senate Bill 1060/aSPAC -- Page 3

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

lenged under those principles.”

The bill makes no findings as to the compelling governmental interest that justifies race and gen-

der based preferences.

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 cost increases as agencies may have to verify the

status of the business claiming preference.

ADMINISTRATIVE IMPLICATIONS

State agencies will have to amend their procurement processes to accommodate the new bidding

preference, which may include establishing a verification process for businesses claiming to be

disadvantaged small businesses.

CONFLICT, DUPLICATION, COMPANIONSHIP, RELATIONSHIP

This bill duplicates House Bill 1061.

TECHNICAL ISSUES

The AGO notes that the intent of this bill is not clear because the bill does not amend Section 13-

1-22 NMSA 1978. The existing bidding preference is established by a combination of this sec-

tion and Section 13-1-21 NMSA 1978.

The definition of disadvantaged small business is vague.

POSSIBLE QUESTIONS

Should the definition of disadvantaged small business be clarified to prevent abuse of the bidding

preference.

Should businesses wishing to claim a preference be required to obtain some kind of certification

from the state purchasing agent.

EF/lg:yr