SunnyvaleRTC

June 13, 2006

SUBJECT: Study Issue – Local Business Preference Policy relative to City Purchases (F0505-92)

REPORT IN BRIEF

The Sunnyvale Purchasing Ordinance grants local businesses a one percent preference when they participate in City bids for the purchase of goods (Sunnyvale Municipal Code Section 2.08.200). Council has requested that staff examine the existing policy and make recommendations for change, if appropriate, in order to encourage local firms to do business with the City. This report has been prepared in response to that request.

BACKGROUND

In 1949, the City of Sunnyvale Charter was adopted, including Section 1317 which established a centralized purchasing system for City departments. Shortly thereafter, the City Council adopted the City’s first Purchasing Ordinance which set forth the City’s procurement policies and procedures.

Over the years, only a few minor changes were made to the Purchasing Ordinance; and in 1990, the City Council adopted the City’s first local business preference policy as Ordinance No. 2344-90 (RTC No. 90-495). Ordinance No. 2344-90 contains additional “findings” that clarify the City’s purpose:

It is the policy of the City of Sunnyvale to promote the full and equal participation by local businesses, as contractors, in the provision of supplies, materials, equipment and other personal property on a contractual basis. The goal of the city is to encourage the award of such contracts to local businesses and to enhance their competitive status and capability as contractors of the City of Sunnyvale....... The City of Sunnyvale is utilizing a preference for local businesses in the award of contracts for supplies, materials, equipment and other personal property in order to encourage businesses to locate and remain in Sunnyvale and thereby increase the city’s tax revenue and employment opportunities.

Additionally, the reason for the selection of a one percent preference was stated:

Because the city derives a portion of the sales tax attributable to such purchases and leases equivalent to one percent of the purchase or lease price, the provision of the minimal preference established in this ordinance would not be economically disadvantageous to the city with respect to such purchases or leases.

With the exception of the adoption of a local business preference, the City’s Purchasing Ordinance remained fundamentally unchanged until 2000 when Council repealed the outdated 1949 ordinance and replaced it with a new ordinance designed to support the City’s needs into the 21^stcentury. Included in that new ordinance was a one percent local business preference policy very similar to the policy originally adopted in 1990.

EXISTING POLICY

Section 2.08.200 of the Sunnyvale Municipal Code authorizes the Purchasing Officer to “extend a bidding advantage to a local business in the form of a one percent price preference in the evaluation of bids or proposals for the procurement of goods.”

To qualify for this preference, a business must meet the following criteria:

Have one or more fixed offices and/or locally taxable distribution points within the boundaries of the City of Sunnyvale;
Have a Sunnyvale business street address; and
Hold a current and valid Sunnyvale business license.

Application of the existing policy occurs in the following manner: The City requests bids for the purchase of a piece of equipment. Bidder A, a non-Sunnyvale firm, submits a bid for $500.00. Bidder B, a Sunnyvale firm, submits a bid for $505.00. Ordinarily, a contract would be awarded to the lowest bidder. In this scenario, however, Bidder B would be given a bidding advantage of one percent which means that, for bid evaluation purposes only, Bidder B’s bid of $505.00 would be considered a bid of $499.95 ($505.00 minus one percent). The contract would be awarded to Bidder B as the lowest bidder. However, the actual contract amount would be $505.00 or $5.00 more than would have been paid to Bidder A, the low bidder.

DISCUSSION

The Sunnyvale Purchasing System

To put the City’s local business preference policy in perspective, it is important to understand the City’s overall purchasing process. For more than fifty years, the City has had a centralized purchasing system. Chapter 2.08 of the Sunnyvale Municipal Code is known as the “Purchasing Ordinance”, and the chapter is described in Section 2.08.020 as having the following four purposes:

To define the centralized purchasing system.
To provide for the fair and equitable treatment of all persons involved in the purchasing process.
To obtain the highest possible value in exchange for public funds.
To safeguard the quality and integrity of the purchasing system.

With these stated purposes in mind, the City strives to use a competitive bid or proposal process for significant purchases. Following is a high level summary of the City’s procurement process:

Anticipated

Cost

Procurement

Method

Award

Authority

$5,000 or Less

Simplified procedures; no bidding required.

City Manager

$50,000 or Less

Informal competitive bids or proposals. Verbal or written solicitation of three bidders, if possible.

May require bonds/insurance.

City Manager

More than $50,000

Formal competitive bids or proposals. May require bonds/insurance. Written solicitations. Bidding opportunity advertised. Sealed bids; public bid opening.

City Council

Although competitive bidding is the norm, the Sunnyvale Purchasing Ordinance exempts certain types of purchases from competitive bidding (Section 2.08.070). Examples of purchases exempt from bidding include professional services, sole source goods or services, membership dues, training, works of art, public library collection materials, and emergency procurements.

The City’s Purchase Volume

Each year, the City purchases a tremendous variety and quantity of goods and services. Using FY 2004/2005 as an example, the City expended approximately $82 million for purchased goods and services. Many of these purchases could only be made from limited or single sources, such as high volume water and wastewater treatment chemicals, electricity, natural gas, etc. Other purchases could only be made from other public agencies, such as water for resale. After deducting non-competitive purchases, such as utilities, purchases from other governmental agencies, etc., and using FY 2004/2005 expenditures as an example, staff determined that purchases valued at approximately $32 million were potentially available on a competitive basis. A summary of these types of purchases is included in this report as Attachment A. This attachment also includes the percentage of each type of purchase that was purchased from local businesses. That portion of Attachment A is discussed in the next section of this report.

It should be noted that the dollars and percentages shown in Attachment A are approximate and intended for trending purposes only. There are two reasons for this:

The purchase category selection is an imprecise process. Purchases are charged against two types of accounting codes: (1) A program activity code and (2) an expenditure category code. While selection of the first code can be made precisely, the second is a matter of judgment and often varies from person to person. For example, one employee might select the “Miscellaneous Services” category for catering, and another might select “Special Events”.
The identification of local business purchases was based upon payment addresses in the Accounts Payable system. These addresses are often different (i.e. the corporate headquarters address) from the actual business location.

Local Business Preference

In addition to supporting a centralized purchasing system, City Councils over the years have also given high priority to supporting local businesses. Viable local businesses are vital to the City’s economy as they create employment opportunities, increase sales tax revenues, and contribute to the overall livability of the community at large.

One way to support local businesses is to encourage them to sell their goods and services to the City and to provide a mechanism that gives them an advantage over non-Sunnyvale firms in the City’s bidding process. Local business preference programs, such as Sunnyvale’s, are common in the State of California although program details vary from city to city.

Staff recently reviewed the practices of many California cities and found that a number of cities (particularly those large enough to have purchasing departments) have some form of local business preference policies. These policies are summarized and included in this report as Attachment B. Of the 59 California cities identified as offering preferences to local businesses, 50 percent offer a one percent preference similar to Sunnyvale’s, 27 percent offer a five percent preference and 23 percent either offer some other percentage or take a different approach altogether.

The logic cited by cities who grant a one percent preference is that the one percent higher purchase price would be directly offset by the cities’ one percent share of the state sales tax, thereby making the preference “cost neutral”. This offset was cited by the Sunnyvale City Council in 1990 when it adopted the original local business preference (Ordinance No. 2344-90):

Nevertheless, as mentioned previously, many California cities offer preferences up to five percent, based upon the premise is that supporting local businesses is a legitimate public purpose even though it increases the cost of required goods and services. This position was supported by the Ninth Circuit Court in Associated General Contractors of California v. City and Co. of San Francisco. In that case, the court found that local businesses in San Francisco were at a competitive disadvantage due to the high administrative costs of doing business in the City (e.g. higher taxes, rents, wages, benefits, insurance rates, etc.). Although San Francisco’s local business preference program focuses on minority local businesses, it is arguable that Sunnyvale’s local businesses, while not necessarily minority businesses, suffer the same disadvantage. The challenge, however, is to identify a bidding advantage for local businesses that does not compromise the stated purposes of the City’s Purchasing Ordinance or place a burden on the City’s financial position.

Other Local Business Support

In addition to its current one percent bidding advantage, the City supports local businesses in a number of other ways. The Department of Finance Purchasing Division encourages local businesses to participate in the City’s bidding process using the following methods:

The City advertises its bidding opportunities on its website, using the Onvia DemandStar public procurement network. This network provides a mechanism by which businesses can be automatically notified when the City is seeking bids for the goods or services it provides. Local businesses can register with Onvia to receive Sunnyvale bid notifications at no charge.
The City’s Intranet purchasing manual instructs City employees to “Buy Sunnyvale”, whenever possible.
Purchasing staff routinely “goes the extra mile” to assist local businesses in understanding the City’s purchasing process. On several occasions, the City’s Business Page newsletter has explained how local businesses can participate in the City’s purchasing process; and the Purchasing Officer has explained the City’s purchasing process to interested local business representatives at several Sunnyvale Chamber of Commerce events. One-on-one assistance and coaching is also provided to local businesses who are inexperienced in the public purchasing process.
The City currently has dozens of open purchase orders with Sunnyvale firms. Typically, these contracts are used for small dollar purchases of a wide variety of products and services, as needed, during the contract term (typically one to three years). Whenever possible, contracts of this type are awarded to Sunnyvale firms.

The City’s Economic Development Division also assists local businesses by:

Assisting with the City permit process for tenant improvements, expansion, and relocation.
Providing ombudsman assistance to resolve issues and complaints and provide information on demographics or other types of information.
Working with businesses to develop roundtables and forums around issues that are of importance to business and discuss how the City can partner to address issues.
Conducting business visits to build relationships and learn about needs or concerns that an individual business may have.
Providing information about City programs and resources that are available to businesses, such as recycling, false alarm prevention, defibrilator training, etc.
Providing information about state, federal and non-profit resources, such as loan programs, employee training programs, how to build business skills (marketing, human resources, etc), networking opportunities, etc.
Promoting businesses to the community through “Shop Sunnyvale” promotions to encourage residents to shop locally.
Encouraging local businesses to buy from other Sunnyvale companies through promotions in the Business Page newsletter.

City Purchases from Local Businesses

As indicated in Attachment A, the City purchased more than $2 million in goods and services from Sunnyvale businesses last fiscal year. Services most frequently purchased locally include medical services, auto maintenance and repair, printing services, catering services for special events and vehicle towing services. Goods most frequently purchased locally include office supplies, photo equipment and supplies, and building and grounds maintenance products. Additionally, nearly one-third of the money spent on recreation instructors went to Sunnyvale businesses.

While this local purchase volume is significant, it represents only a small percentage of the $32 million available on a competitive basis. One of the reasons for this is that many of the products purchased are unavailable from Sunnyvale businesses. For example, the City purchases a large volume of asphaltic concrete each year. There are only three sources for asphaltic concrete in this area, none of which are located in Sunnyvale.

In addition, historically, many Sunnyvale businesses have simply chosen not to participate in the City’s competitive bidding process. In spite of Purchasing staff’s best efforts, the fact remains that the public bidding process can be intimidating with detailed bid forms, public bid openings, stringent contract terms and conditions, and a variety of other factors intended to protect taxpayer dollars. In addition, low bid profit margins are often low. In fact, most of the $2 million in local purchases during FY 2004/2005 was not competitively bid. Instead, this business volume consisted mostly of small dollar purchases, using the many open purchase orders mentioned previously, or other purchases that were exempt from bidding, such as recreation instructors.

Since there has been little local participation in the City’s bidding process, in reality, there has been few opportunities to apply the City’s existing one percent local business preference. It is possible that modifying this policy would result in additional participation.

Alternatives to Existing Policy

Although a one percent preference policy for purchases of goods is common among California cities, there are a variety of alternatives:

1. The existing one percent preference could be extended to services as well as goods. Should Council select this alternative, it is recommended that the preference apply only to non-professional services since professional services are either exempt from bidding or are purchased through a process that considers many factors in addition to cost. In addition, construction services for public works projects should be exempt due to a variety of potential conflicts under the California Public Contract Code.

Using the FY 2004/2005 expenditures for services as an example (after deducting expenditures for professional and construction services), this alternative would increase the amount of City business subject to a one percent local business preference by $10 million per year. However, since there would be no offsetting sales tax revenue, the cost of these services could be up to one percent higher than it is under the existing policy.

2. The preference for purchases of goods could be increased to some amount up to five percent. Taking into account the offsetting one percent in sales tax revenue and using five percent as an example, the net effect of this change would be an increase up to four percent in the cost of many of the products required to support City programs and services. Since one of the reasons cited by local businesses for not bidding on City contracts is the low profit margin inherent in low bids, this alternative accommodates a higher profit margin for local low bidders. However, in this situation, higher profits for local businesses translate into higher prices for the City.

3. The preference could be increased to some amount up to five percent and expanded to apply to purchases of both goods and services. For the reasons discussed previously, this would be the optimum preference policy in terms of increasing City contracts with local businesses, but would greatly increase the cost of goods and services.

4. The City could expand its local business outreach program to more proactively match local businesses with potential contract opportunities within the City. Although the Purchasing Division does reach out to local businesses in a variety of ways, this effort has been hampered in recent years by budget reductions and limited resources. Council may want to consider adding temporary staff or contract hours, possibly equivalent to a half-time position, specifically to seek out and assist potential local suppliers in successfully competing for City business. This additional funding could be used for a personal visit to potential local suppliers to systematically catalog the required goods and services available locally and to offer one-on-one training and assistance in the City’s purchasing process.

FISCAL IMPACT

1. Retaining the existing policy (one percent local business preference for the purchase of goods). As previously stated, retaining the City’s existing preference policy would be “cost neutral.”

2. Extending the existing one percent preference to services. Since an estimated $10 million in service contracts would be subject to the one percent local business preference with no offsetting sales tax revenue, the potential annual fiscal impact of paying one percent more for services is approximately $100,000.

3. Increasing the preference for the purchase of goods to some amount up to five percent. As stated on Attachment A, in FY 2004/2005, expenditures for goods was $7,611,500. Based upon this total and using a five percent preference as an example, the potential annual fiscal impact of paying up to four percent more for goods (one percent is offset by sales tax revenue) is $304,460, assuming that all contracts for goods would be awarded to local businesses. In reality, the actual impact would be less than this amount since many of the goods required by the City are simply not available from Sunnyvale businesses.

4. Increasing the preference by some amount up to five percent and extending the preference to services as well as goods. Using the adjusted potential annual value of service contracts ($9,934,500), the total potential cost of a five percent preference for services is $496,725. When the potential fiscal impact of a five percent preference for goods ($304,460) is added to that amount, the total potential fiscal impact of a five percent preference for both goods and services is $801,185.

5. Expanding the local business outreach program within the Purchasing Division. The actual cost of this alternative would depend upon the number of hours and the staffing level determined to be appropriate for this activity. However, it is estimated that the cost of the initial business contacts and subsequent training and assistance, where appropriate, would not exceed $50,000.

Should Council decide to modify the existing policy by increasing the percentage or expanding its application, the increased costs for purchased goods and services would be mitigated by the potential benefits to the community at large, such as additional employment opportunities due to increased local sales, more consumer spending in response to increased employment, etc.

Conclusion

Should the City’s local business preference be increased, it is likely that more local businesses would participate in the City’s bidding process and that more contracts would be awarded to local businesses. It can reasonably be assumed that the higher the preference, the higher the likelihood of increased local interest in City contracts, resulting in more contracts awarded to local businesses.

Although awarding more contracts to Sunnyvale firms is one way the City can support local businesses, contracts resulting from a preference in excess of one percent equate to higher prices for purchased goods and services. In light of the budget constraints experienced by the City in the past few years and the slow economic recovery in this area, increasing the City’s local business preference at this time may not be in the City’s best interest.

PUBLIC CONTACT

Notice has been provided through the publication and posting of the City Council Agenda. In addition, all Reports to Council are available in the Library and on the City’s internet home page.

ALTERNATIVES

1. Make no changes in the City’s local business preference policy at this time.

2. Extend the City’s one percent local business preference policy to include non-professional services (exclusive of construction services for public works projects).

3. Increase the City’s local business preference to some amount up to five percent for the purchase of goods.

4. Increase the City’s local business preference policy to some amount up to five percent for the purchase of goods and expand the policy to include non-professional services (exclusive of construction services for public works projects).

5. Expand the local business outreach program within the Purchasing Division by funding additional temporary staffing or contract hours in an amount not to exceed $50,000 and direct staff to prepare a follow up Report to Council in July 2007 recommending continuation, modification or elimination of this effort, based upon FY 2006/2007 results.

RECOMMENDATION

Staff recommends Alternatives No. 1 and 5: Make no changes in the City’s local business preference policy at this time and expand the local business outreach program within the Purchasing Division.

Prepared by:

Elaine Wesely

Purchasing Officer

Reviewed by:

Mary J Bradley

Director, Finance

Approved by:

Amy Chan

City Manager

Attachments

A. FY 2004/2005 Expenditures (.pdf)

B. Local Business Preference Practices of California Cities (.pdf)