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ADOPT AN ORDINANCE AMENDING STOCKTON MUNICIPAL CODE, TITLE 3, CHAPTER 3.68 - BIDDING, CONTRACTING AND PURCHASING PROCEDURES, ARTICLE I - GENERAL PROVISIONS, SECTION 3.68.090- LOCAL BUSINESS PREFERENCE
RECOMMENDATION
It is recommended that the City Council adopt an ordinance amending Stockton Municipal Code, Title 3, Chapter 3.68 Bidding, Contracting and Purchasing Procedures, Article I, Section 3.68.090- Local Business Preference, which will give a five percent (5%) bid preference to businesses located within the City of Stockton, a two percent (2%) bid preference to businesses located within the County of San Joaquin, and eliminating the sales tax limitation, which currently prevents application of the preference to services.
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Summary
In 2005, in an effort to support new business and a stronger economy in the City of Stockton, the City Council adopted Stockton Municipal Code ("SMC") Section 3.68.090, Local Business Preference, which established a three percent (3%) local vendor bid preference to be used when awarding contracts for goods and services. The three percent (3%) bid preference is given to companies that are physically located within San Joaquin County and have a City of Stockton business license. In order to maximize local business preference within Stockton city limits, Council requested that staff review the existing ordinance and provide recommendations to that effect. On January 22, 2014, staff presented recommendations for a tiered preference which gives a five percent (5%) bid preference to businesses located within the City of Stockton and a two percent (2%) bid preference to businesses located within the County of San Joaquin, to the Council Legislative/Environmental Committee and the Committee voted to forward the recommendation for the tiered approach to Council for approval. The Council Legislative/Environmental Committee did not consider the elimination of the sales tax limitation; however, staff now recommends that Council approve the elimination of that limitation.
DISCUSSION
Background
On September 27, 2005, the City Council adopted SMC Section 3.68.090, Local Business Preference, Ordinance No. 011-05 (Attachment A - Local Business Preference Ordinance) in an effort to encourage new business, enhance the local economy, and support the business community. The ordinance provides a three percent (3%) bid preference to businesses that are physically located within San Joaquin County and have a valid business license with the City of Stockton.
On September 24, 2013, pursuant to SMC Section 3.168.160, Opening of Bids- Awards-Rejection of Bids, the City Council awarded a vehicle purchase contract to Tracy Ford as the lowest bidder, rather than a Stockton-based dealership. In response to that bid outcome, Council directed staff to review the City's existing Local Business Preference Ordinance and present recommended changes to the Council's Legislative Committee for review and consideration in order to address the issue of eligibility for bid preference as it relates to the physical location of the business.
Please note that the issue of offering preference to local businesses when bidding on City projects is distinct from the Local Hire Ordinance. This report does not address or suggest amendments to the Local Hire Ordinance adopted by the City Council in 2009 (SMC Section 3.68.100.) which requires all companies and persons who contract with the City of Stockton for construction or public works improvements to employ City of Stockton residents.
Present Situation
There are several considerations that a municipality must consider when exercising a local preference program.
First, the City must look at the funding source for the project since the ability of the City to exercise a local preference program is dependent upon whether the project is funded by the State or Federal government. Federally funded projects prohibit the use of local preference, finding local preference to be inconsistent with "the principles of free and open competition." This prohibition is rooted in the fact that the federal-aid program (23 U.S.C. 112 "Letting of Contracts") requires free and open competition and does not include permission for local preference as other code sections do. State-funded projects allow the use of local preference by virtue of the fact that the state code contains no such prohibition.
Second, the City must look at its own bidding procedures for limitations. For example, although competitive bidding is required for all public projects over $5,000 in General Law Cities, a Charter City, such as Stockton, is bound only by the limitations of its own Charter. In the City of Stockton, Article 20, Sections 2000 and 2002 of the City's Charter states that public projects which equal or exceed a specific dollar limit are subject to the competitive bidding process, are awarded to the lowest responsible bidder, and are eligible for local preference. The specific dollar limit is set each year in conjunction with the budget adoption, which is based on a Charter provision that increases the amount each year based on the Oakland/San Francisco Bay Area Consumer Price Index. The dollar limit established by Resolution 2013-06-25-1601-01 for fiscal year 2013-14 was $31,123.
Third, the City must look at what other cities are doing with regard to preference in order to have some context for the amounts and justifications being used.
As part of its research staff looked at eighteen cities in San Joaquin County and other California jurisdictions and found that of those eighteen cities, only two provide local preference to both the municipality and county (see notations below) with an average preference of 5.5%. Additionally, staff found that eleven of the eighteen cities researched apply the local business preference to both goods and services rather than applying the preference only to bid amounts subject to sales tax. The table below is a summary of Local Business Preference rates in San Joaquin County and other California jurisdictions:
Municipal Agency Local Preference
San Joaquin County 5%
Stockton 3%
Lodi 1%
Manteca 5%
Tracy (max. benefit of $3,000) 10%
Alameda County 5-10%
Burbank 1%
Concord 5%
Elk Grove 5%
Fremont 2.5%
Fresno 5%
Hayward 5%
Long Beach 10%
Los Angeles (City and County) 8%
Modesto 5%
Sacramento (City and unincorporated) 2-7%
San Francisco 5-15%
San Jose 5%
Santa Ana (City-7% and County-4%) 4-7%
And finally, the City must be cognizant of the legality of its preference as laid out by the Court in the context of the Equal Protection Clause. For example, in Associated General Contractors of California, Inc. v. City and County of San Francisco (1987) 813 F.2d 922, the Court made note of two ordinance findings relevant to the determination of whether or not a local business preference is a valid exercise of municipal authority under the Equal Protection Clause:
1) That local businesses seeking to enter into contracts with the City and County of San Francisco were at a competitive disadvantage with businesses from other areas because of the higher administrative costs of doing business in the City (e.g. higher taxes, higher rents, higher wages and benefits for labor, higher insurance rates, etc.); and
2) That the public interest would best be served by encouraging businesses to locate and remain in San Francisco through the provision of a minimal 'good faith' preference to local businesses in the awarding of City contracts.
The Court noted that the measures adopted by the City and County of San Francisco were legitimate because they were both measured and appropriate given the relatively slight preference, that the preference only applies to contracts to which the city is itself a party, and the definition was broad enough to allow foreign businesses to receive the preference if they acquire offices/distribution points in the city and share the burdens of a San Francisco location
Keeping in mind the factors/considerations related above, and the amounts and justifications used by other cities, it is clear that there must be some relevant, tangible measure between the amount of the preference and the realities of doing business in the municipality.
Therefore, in order to maximize local business preference within Stockton city limits, staff recommends that the local preference ordinance be amended to provide a tiered approach for awarding contracts to City of Stockton and San Joaquin County businesses. Additionally, staff recommends eliminating the sales tax limitation, which currently prevents application of the preference to services. Staff believes this approach will support both local and County-wide businesses and strengthen the regional economy as well (Attachment B - Proposed Amended Local Business Preference Ordinance).
Under the proposed tiered approach, businesses physically located within Stockton city limits would receive a 5% local preference and businesses within San Joaquin County would receive a 2% local preference. These preferences are separate and distinct and may not be combined to exceed five percent (5%). The difference between the two amounts will provide a greater incentive to Stockton businesses while continuing to support the County-wide economy.
At the direction of the Council legislative/Environmental Committee, staff researched the possibility of a greater than 5% preference in the City of Stockton. As part of its research, staff looked at how other cities justified preferences and applied those justifications to the City of Stockton. The results of these efforts showed that a greater than 5% preference could not be justified by the costs of doing business in the City of Stockton and might also detract from maintaining a competitive bid process.
The justifications that staff looked at included: sales tax revenue, business license tax fees, a recent fee study, and wage and property rates to determine whether or not Stockton could justify an amount higher than 5%. The results were as follows:
· A recent development fee study conducted by the San Joaquin Partnership compared Stockton's development fees with 21 cities in the Central Valley and Bay Area (Livermore and Pleasanton). Stockton ranked eighth in Office and Single Family development, tenth in Multi-family development, and twelfth in new Retail, Warehouse, and Manufacturing making it comparable with neighboring cities. However, a look at local business preference amounts for other cities located in San Joaquin County showed that no city, other than Tracy which has a a 10% preference but caps at $3,000 per bid, had a preference higher than 5%.
· Stockton's commercial property costs and wage rates are typically much lower than many Bay Area and Southern California communities making it difficult to justify a business preference higher than the recommended 5%.
Charter cities may exempt themselves from competitive bidding if the charter allows awards for "best bid" rather than "the lowest responsible bid." Pursuant to SMC Section 3.68.070, the City of Stockton allows public contracts to be awarded without competitive bidding where the City Council has approved findings which support and justify exceptions to the competitive bidding process.
Below are findings which support a tiered local business preference ordinance for businesses located within the City of Stockton and also within the County of San Joaquin:
1. There is the potential for an increase in sales tax revenue to the City since it will receive the full one-percent (1%) Bradley Burns tax, in addition to the one-quarter percent (0.25%) Measure W and three-quarter percent (0.75%) Measure A tax revenue for a total of two percent (2%), when purchasing from a local business.
2. Locally-owned businesses are more likely to recirculate the City's purchase dollars into payments to other local suppliers. Economists call this a "multiplier effect," because it steers more jobs and sales tax revenue into the community. Studies have found the multiplier benefits of local businesses to be up to three times those of non-local businesses.
Further, in a study prepared by Civic Economics, a reputable firm that conducts economic studies nationally, including the cities of Chicago, Austin, and San Francisco, it was found that for every $100 spent on local businesses, $73 stays in the local economy. However, if those same dollars are spent on non-local businesses only $43 stays local.
3. There are additional expenses that must be factored in when doing business in Stockton, such as a business license tax, property taxes, insurance rates, and development impact fees. Providing a local business preference will help to offset those costs.
4. Providing a local preference further serves as an incentive to encourage businesses to locate and/or expand in Stockton, which is in the public's best interest as it provides increased job opportunities in a community that has experienced high unemployment rates.
Based on the above, a tiered local business preference would serve to enhance the economy of both the City and County since businesses located within San Joaquin County, especially those located within the City of Stockton, contribute to the economic and social well-being of the entire community. Such businesses provide convenient services within the City and provide employment opportunities as well. In addition, the monies paid out and earned by local businesses tend to be largely expended within the City, which enhances the business climate.
Staff, together with the recommendation of the Council Legislative/Environmental Committee, now recommends that the City Council adopt an ordinance amending Stockton Municipal Code, Title 3, Chapter 3.68 Bidding, Contracting and Purchasing Procedures, Article I, Section 3.68.090- Local Business Preference, which will give a five percent (5%) bid preference to businesses located within the City of Stockton and a two percent (2%) bid preference to businesses located within the County of San Joaquin. Staff also recommends that Council eliminate the sales tax limitation currently contained in SMC Section 3.68.090, which currently prevents application of the preference to services.
PUBLIC NOTICE
A notice of this public hearing was published in The Record on March 7, 2014.
FINANCIAL SUMMARY
There is the potential to increase tax and business license revenue by providing a greater preference percentage to Stockton businesses and the attraction of new businesses to the City of Stockton. There is also the potential to increase the cost of purchasing goods and services by up to 5% by modifying the Local Business Preference Ordinance.
Attachment A - Local Business Preference Ordinance
Attachment B - Proposed Amended Local Business Preference Ordinance