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As previously requested, information relating to
local bidder preference was presented to Council
for its perusal by City Attorney Stein. No
action was taken by the Council on the matter,
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MEMORANDUM
To: Honorable Mayor and Council Members
From: Ron Stein, City Attorney
Re: Local Bidder Preference
Date: June 21, 1982
Attached hereto, please find the material that
I received from the City of Sacramento regarding
the calculation of the 1% sales tax returned to
a City in determining who is the lowest respon-
sible bidder.
Your comments will be appreciated,
RONALD M. STEIN
CITY ATTORNEY
RMS:vc
attachments
cc: Assistant City Manager
City Clerk c--s------
Finance Director
CITY OF SACRAMENTO`
DEPARTMENI OF LAW
812 TENTH STREET SACRAMENTO CA 93x/4
SUITE 20t TELEPHONE 19161449.%346 June 17, 1982
Mr. Ronald M. Stein
City Attorney
P. O. Box 320
Lodi, CA 95241
Dear Ron:
JAMES P. JACKSON
CITY ATTORNEY
THEODORE H. KOBEY, Jit.
ASSISTANT CITY ATTORNEY
LELIAND J. SAVAGE
SAMUEL L. JACKSON
WILLIAM P. CARNAZZO
STEPHEN B. NOCITA
DIANE B. BALTER
CHRISTINA PRIM
pEPUTY CITY ATTORNEYS
I enclose a copy of Lee Savage's opinion, with
attachments, relating to local bidder preference. I thought that
we had developed a written provision for consideration of the
local sales tax in our bid specifications. However, I am in error
on this, and we do not specifically include such a provision. We
do follow the policy of taking the local sales .tax into account.
As we discussed, the facts only rarely permit a local bidder to
take advantage of this policy.
I hope this material is of some help.
Zruly yours,
P . JACKSON
City Attorney
JPJ/p
Enclosures
JUN 21 1982
DEPARTMENT OF LAW
S12 TENTH ST. UcAwfNTQ CAUP. 9wt4
SMITE "V UUU V)ONE 010 &4430
March 25, 1977
Lloyd Connelly, Councilman
City of Sacramento
Sacramento, California
-w-4
JAM S3 P. JACKSON
CITY ATTORNEY
THEODORE H. KOSEY, JR.
AW&TAMT CITY ATTOwNIY
LEUANO J. SAVAGE
STEVEN R. METERS
TERENCE M. SROWN
ELIZABETH HASSARD SILVEl1
S. RUSSELL SEUX. JR.
DEPUTY CXTY ATTp1q M
In re: Your Inquiry of Whether the City Can
Give Local Bidders Preference
Dear Lloyd:
My research revealed no case exactly on point in regard to
your inquiry with respect to whether the City could give a local
bidder a fixed percentage preference over non -local bidders.
However, the point was the subject of a paper written in 1963
by Allen Grimes, then City Attorney of Modesto, for the League
of California. Cities. I have attached the pertinent pages of
the paper for your information. '
Since the Grimes' paper was written, the California Buy
American Act (former Government Code § 5 4300-4305) was ruled
unconstitutional in Bethlehem Steel Corp. v. Bd. of Commissioners
(1969) 276 Cal.App.2d 221. The Attorney General subsequently
issued an opinion stating that the reasoning of the court in
Bethlehem Steel applied to the California Preference Law (forme
Government Code § § 4300-4334) ; therefore, the California
Preference Law was unconstitutional (53 Ops Atty Gen 72,
February 11, 1970). Each of these was a law purporting to give
preference to products from "preferred" areas. The reasoning
may be applicable to preference to suppliers from "preferred"
areas, such as within the.City limits.
It would appear that while there is no case directly on point,
a local preference such as that suggested in your inquiry would be
subject to attack on several legal grounds. However, there is a
possible advantage which may be gained by local bidders by virtue
of the fact that it may be legal for the City to take into account
the fact that the City receives a one percent rebate on sales tax
paid by it on supplies purchased within the City of Sacramento.
By coincidence, this was the subject of an opinion which we were
in the process of preparing at the time we received your inquiry.
A copy of the opinion is attached.
Very truly yours,
495-D-- J. SAVAGE
LJS:kn Deputy City Attorney
Cc: Jack Crist
Attachments
i. all subco(.nactors performing work
in excess 1/2 of one percent of
the general contractor's bid on pub-
lic wor%s or improvements- Penalties
are cancellation of contract or assess
ing the general contractor with a
penalty in an amount not more than
10% of the amount of the subcontract
involved or both cancelling tine con-
tract and assessing the penalty."
4. Legality of Providing a Local Preference.
a. The legal question is whether a statutory
charter or ordinance provision authorizing
requiring the granting of a local preference=
is valid and constitutional?
(1) The first case I'm able to find
dealing with this subject is ghat
of Peonle v. Coler. 166 N. Y. 144,
59 N. E. 776, aff'd 68 N. Y. Supp.
767.
Here the Court stated that,
"Preference ... within a state
has been held to violate.._
the United States constituon."
The preerence held to be invalid
was a state law incorporated in a
local public works contract requir-
ing stone used for construction
purposes to be dressed or worked
in the State of New,York. Con-
tractor used stone not so dresses:
in performing a public works con-
tract with the city. In an action
of mandamus he was held entitled
to receive payment for full per-
formance of the contract notwith-
standing.
b. In the case of Schrey v. Allison Steel
Manufacturing Co. (Arizona) 255 P(2d)
604, an Arizona state statute provided
in letting bids for public works contracts,
bidders who paid state and county taxes
within the State of Arizona for two
successive years immediately prior to
the making of the bid shall be given
preference over bidders who have not
paid such taxes whenever the bid of
tie competing contractor is less than.
5% lower than the taxpaying bidder.
The Court found the legislation valid
and constitutional notwithstanding
-27-
l
the contentions th4e�.it was in viol,-
tion
iol, -tion o the equal 1;i•-otection privilege
and i.mnunities clauses of the U. S. f.
Constitution, that the classificatioa
was unreasonable, and that it amounted ( `
to a gift to publ_c funds.
r.
C. I'm informed (but have been unable
to substantiate) that the lacy depart-
ment of the City of Chicago rendered
an opinion in 1948 that a State of
Illinois statute making a 10% di'�-
ferential in favor of coal mines, in ;
that state was unconstitutional.
d. I'm advised that City Attorney Grady
Rawls of the City of Albany, Georgia,
rendered a legal opinion that a local
preference law was invalid, stating,
"L a w on competitive bidding is to
assure that the City receives the
h ig hest quality at the lowest
price. In my opinion if the com-
modity is available locally and is
acceptable quality and at a fair price,
it should be acquired locally. The ,
converse is true. That is to say,
if for any reason there are not ;
enough local suppliers of a product
to insure genuine competitive bidding,
then the Purchasing Department should
afford outside suppliers an opporunity
along with the local suppliers."
e. The latest and most interesting ruling j
on this subject is an opinion rendered ,
by Mr. harold1l. Kennedy, County Counsel
of the County of Los Angeles, dated
March -13, 1963. The question presented
to him by the County Purchasing Agent was
that an ordinance had been proposed that
the Pur,-:hasi:ig Agent shall buy from a local
dealer if the prices quoted by him do not
exceed by more than 5% the lowest price
quoted on tho same article by a non -
local dealer. 1rhether by "local dealer"
is meant a dealer having his place of
business in the County or in the State
is unimportant, Kennedy said, because
in our opinion, under either alternative
such an ordinance mould be invalid. ,
The County Counsel relied strongly on the
opinion, of the California District Ccurt f
of Appeal in the case of Lambert v. Fenelo*% i
(1938) 25 Cal Apr)(2d) 142, 77 P(2d) 268_
"In that case the county auditor filed a
requisition with the purchasing agent of
-2a-
_.,�..;,vr
l Orange County "< an 'IS inch carriage
L. C. Smith Stan'''d typewriter'
for use
in the audit --=4s "office. The purchasing
5
agent refrused to comply, but threatened
to buy_ a tl•;,)et:_:.:.er of another ria';e, in
order to ccra,,l,t tr:th a resolut_on o_ the
Board of Sunery cors ordering th3 purchasing
agent to g:_ve a,i equitable distribution
o` supplica t.nd equipment among the _-iins
o_ Orange Ca:n::y riaZsn and where practical.
The Superior Court found that because the
typists in and tor' s office were
more familiar with, this brand o_ typewriter
than any other; it was to the interezt of•
the county to have this part_cular tyna-
writer instead of any other ma?:e.
�
"ln affirniag tris judgment, the District
Court of. Appeal said at page 145:
'A discretion in the purchase of
county sunp? ics necessarily a::ists, but
is one u?iic:z must be reasonably e::er- t
cised =or the inutile good, a:1d ue nay {
assume for the purpooes of this
decision that such discretion rests with
the purche..iog agent. Tho purpose
of tha statutes which proviO.Y for the
appointment n-1 a purchasing agent and
define his 3 -,;ties is not only to
relieve t, --.e board of s4nerviso.:s frost
the deta-.2s involved in purchasing
necessary .»Hales, but to concentrate
these ma;.tc_ s in one office to the end
that si:n91_cs may be a: rchas2d in
quant -'t -"es, that the test n_jces may
be 6bt4_::e,l, ::iut waste clay be clininate
. d,:.
and that this phase of the county business
may be more e_onomically and efficiently
administered In the public interest. it
is easy t: .cc that this p;irpose wo-ald '
often be de=eai:cd if the anrouncea
policy o�: distributing patronage to
various ^irns ;n accordance with their
turn, as this policy was interpreted by
this anpcllant, dere to be susta=
:•'�EN.I?.w... l,ra..._.. .,w.i:�iEam!V?4S"AY�'!'1 +SK'�!°:•.'9?L?3`'�%H�i .. . � .- - `.. Win_-r�'�. YX .`.v2i�vaan.Y...w. _
t Where such a di( :etion exists a di_•'-
Terence in price,' *,x quality may properly
determine the e::t:rcise thereof. But
where articles are standardized to the
extent that quality and price are th,e
same., that particular reason for the
exercise of discretion no longer e::ists.'
"Where there is no reasonable argurnent
that any benefit will result to the
county by paying a higher purchase price
for an article where an article of equal
value can be purchased for less, the:,
in the language of the Lambert case, -
any reason for the exercise of discretion
no longer exists."
Mr. Kennedy stated, "Ile see no legal. dif-
ference in a policy to give every dealer
his turn and to prefer local dealers."
Interestingly, Ur. Kennedy concluded that
the reasoning in Lambert v. Fenelon, supra,
would also support the conclusion that the
county itself is subject to the limitation
that it does not permit the Board of Su_ner-
visors, under its charter or state law, ,
to adopt such a provision. Mr. Kennedy
found no authorization in state law which
supported any such authority as being
vested in the Board of Supervisors. He
concluded that while the State Legislature
may provide that in making purchasing
policies other than that in the best -interest
of the County nay be followed, the County,
by ordinance, nay not legally do so.
5. Recommended Policv.
National and state purchasing agents associations
are unanimous in condemning preference provisions
to local bidders. The best statement found oa this
subject is contained in a September, 1963, issue
of Cappo News, California Association of Public
Purchasing Officers, quoting from the Public Manage-
ment Journal of the National City Managers' Associa-
tion, July, 1963, issue as follows:
"'Buy Local' Policv_Hikes Costs
"In a recent memorandum to the mayor and city
council members, Hayne F. Anderson, city mana-
ger, Evanston, Illinois, outlined four reasons
against giving preferential treatment to local
vendors regarding city purchases. Anderson
pointed out that: (1) Ifnen a 'buy local' ,
policy raises the city's cost of supplies and
equipment, every household in the ci►.y is
required to pay more ta::es for the benefit
-30
of, at the most, sevl hundred local vendors.
(2) Com uetit_on ;.Or h.2 city's business is
lowered because outside vendors are likely
to decide again.-t bi_Idiing where the local
bidder is give:z pre_arc:itial treatment. (3)
The existence o: a 3 to 5 per cent p=eiererce
dif-ferential alloun a local vendor to quoi:e
a higher price t;ian he otherwise wo::ld a:zd
therefore to e::oloi't the city. (4) a City
that establishes a 'auy local' policy nus t
realize that its commercial houses and manu-
facturers would lose business if other cities
did the same thing. The city and economy as
• a Whole are best served by a free flow or goods
and as few ba--r i ers to Lree competition as
possible. An award may be made to a local
vendor even though his bid is not low if other
cost considerations, such as ease of selection,
pickup and delivery speed, and service and
maintenance, make it advantageous to buy
from him."
It is submitted that the only justifiable and proper
policy is to provide for a local preference only when,
considering all relevant factors in making a purchase,
the bids o: a local supplier is equal to that on
non -local suppliers.
6. Conclusion.
Based on analysis of the foregoing opinions and
authorities, the writer concludes that neither
California cities nor counties have the legal
authority to enact legislation to provide for
local preference. Moreover, it is the writer's
opinion that a provision in a city or county
charter authorizing such a preference is invalid
as in violation of the equal protection and
privilege and imr..unities clauses of the Constitu-
tion, an unreasonable classification, and a gift
of public fund o: this doctrine applies to a
governmental agency.
Q. Miscellaneous.
1. Confidential Nature of Prospective Bidders.
Former City Attorney Dion Holm of San Francisco
has ruled that in the absence of statute ordinance
or charter provision authorizing it, the Depart-
ment of Public V orks may not legally withhold
the names of prospective bidders on public
works and such lists are open to inspection
under the provisions of California Government
Code Section 1227. However, he further ruled
that an ordinance authorizing the withholding
of the names of prospective bidders or public
works could validly be adopted to prevent
possible collusion in bidding. (September 14,1961).
-31-
``;.�` ' `�y-= ►. ( CITY OF S aCRt' MM
DEPARTNIENT OF LAW
4t2 TIftT" ST. SACRAMENTO. CAUF. 959/1
SW'E "I TEIEM+ONf (910 "9.534
March 16, 1977
MEMORANDUM
TO: JACK CRIST, Director of Finance
FROM: LELIAND J. SAVAGE, Deputy City Attorney
JAMES P. JACKSON
OTY ATTORNEY
THEGOORe N. KOSEV.JP,
ASSISTANT MY ATTORNEY
IELIA-40 J. SAVAGE
STEVEN R. MEYERs
TERENCE M. 8Rp1NN
ELIZABETH HASSARO SILVER
S. RUSSELL SELM JR.
DEPUTY GTY ATTORNE S
RE: CONSIDERATION OF CITY SALES TAX REBATE IN DETERMINING THE
LOWEST RESPONSIBLE. BIDDER FOR CITY CONTRACTS
QUESTIONN PRESENTED
In determining who is the "lowest responsible bidder" for
purposes of awarding city contracts, is it permissible to take
Jinto account the one percent sales tax rebate the city receives
from sales tax paid to suppliers located within the City of
Sacramento?
ANSWER
Yes. Consideration of the sales tax rebate is a permissible
method of determining the lowest bidder as required by City Charter
Section 252. It does not constitute an illegal local preference
bidding systoo.
ANALYSIS
I. Consideration of sales tax rebate in determininci the
"lowest bid" does not constitute an illegal local preference.
Under Section 252 of the City Charter, any city contract
for supplies, equipment or the undertaking of a public project
amounting to more than $5,000, is subject to competitive bidding
requirements which mandate that the contract be awarded to the
"lowest responsible bidder."
Under a typical local preference bidding system, local
suppliers are given a percentage preference or advantage over
non -local bidders. A "bidding preference" has been defined as
"some advantage, preference or privilege accorded to a locality,
class of bids, or a competitor." There appears to be no local
privilege, preference or advantage in using the sales tax rebate
to calculate the lowest bid submitted, since all suppliers,
)EM0 TO Jr. CK `CRI ST
March 16, 1977
Page 2
local and non -local, would be treated the same from an economic
point of view. The supplier submitting the lowest responsible
bid will be awarded the contract. For example, if the preference
were five percent, any local bidder bidding less than five
percent higher than a competing non -local bid would be awarded
the contract, assuming other relevant factors are equal.
k'hen the City purchases supplies from a supplier located
outside the City, it pays six percent sales tax on the purchase
price. When the City purchases the same supplies for the same
price from a supplier located within the City, it pays the
same rate of sales tax; however, state law provides for a one
percent tax rebate.
If the sales tax rebate is taken into account, the ultimate
economic cost to the City would be less if the City purchased
the supplies from a local supplier. For example, if the City
buys $10,000 worth of supplies from a supplier located outside
the city, the total price includi,:g tax is $10,600 The same
purchase from a Sacramento firm would also cost $10,600.
However, the City would receive $100 back in its local sales
tax rebate, reducing the total economic cost to the City to
$10,500. In this situation, the local supplier would be the
low bidder and, assuming it qualifies as a "responsible bidder,"
itshouldbe awarded the contract.
Neither the City Charter nor the City Code set forth
specific guidelines or criteria for determining the "lowest" bid.
Consideration of sales tax rebates does not impair or modify
competitive bidding. Bidder responsibility and economic cost
remain the only permissible criteria for letting contracts.
1. -As the following figures shoe, any local bid lower
than $10,095.20, would cost the City less than a non -local bid
of $10,000:
Sacramento Bidder
$10,095.20 Bid
+ 605.70 6% Sales Tax
10,700.90 Gross Price
- 100.90 1% Local Rebate
$10,600.00 Total Cost to City
Iron -Local Bidder
$10,000.00 Bid
+ 600.00 6% Sales Tax
$10,600.00 Total Cost to City
1%CMO TO JACK CRI
March 16, 1977
( Page 3
There does not appear to be any California authority on
this point. Otherjurisdictions have decided cases which are
i
closely analogous n favor of taking into account the lowest
econonic cost. In Austin vs. Housinq Authority of the City of
Hartford (1956) 122 A.2d 399, the Supreme Court of Errors of
Connecticut upheld a municipality's consideration of projected
insurance dividends in calculating the ?.owest bid for city
insurance coverage. Company X submitted a bid for a fixed
five-year gross premium of $86,997.45. Company Y submitted a
gross premium bid of $114,567. However, Y stated it would pay
an estimated dividend of $57,283.50 over the five-year period;
X offered no dividends. The court concluded that while X's bid
of $89,997.45 was the lowest of all the bids which made no
deduction from gross premiums for dividends, Y's bid of $114,567
minus the $57,283.50 in projected dividends was the lowest net
premium bid.
Consideration of the sales tax rebate in calculating the
lowest bid appears to be closely analogous to consideration of
dividend refunds in the bidding process in Austin. In both cases
net economic cost, rather than monetary face value determines
the lowest bid. The court allowed inclusion of dividends in
( calculating the lowest net premium bid in spite of the fact that
the amount of the dividend refunds were speculative. Insurance
dividends are based on the return of the unused or unabsorbed
premium, and in this particular case, dividends were estimated
on the basis of the returns to policyholders over a period of the
ten preceding years. 122 A2d 399, 401. The sales tax rebate,
on the other hand, is not a projected figure, but rather a certain
cash return. This appears to provide even stronger justification
for including the tax rebate in calculating the lowest bid.
In Market Maintenance Co. Inc. vs. City of Newark (1960)
164 A2d 367, the New Jersey Superior Court, Appellate Division,
upheld the City's inclusion of a 1 percent "prompt payment
discount" in computing the lowest bid. The plaintiff submitted
a lump sum bid of $87,600 on the window washing contract. The
combined bids of four other bidders amounted to $88,219, but two
of thein offered discounts with the bid for a net rice bid of
$87,089.47 - some $511 less than plaintiff's bid.
2. It should be noted that in this particular case, there
was little uncertainty as to the inclusion of the discount in
the ultimate bid price. In awarding the bids, the City accompanied
its acceptance with a contract binding itself to pay the net sums
of the bids after discount within 20 days of invoice.
MEMO TO JACK CRIST
March 16, 1977
Page 4
The court concluded that consideration of the discount
was a lawful exercise of the authority of the Business Adminis-
trator in determining "which bid in given circumstances is
most advantageous to the city, and so the lowest bid..."
"(TJhe mere fact that alternative [payment] proposals are
sought does not of itself invalidate the bidding. (citations
omitted)" 164 A2d. 367, 369.
II. Consideration of the sales tax rebate in the bidding
process is within the proper discretiM of the City Council and
is presumed to be valid.
The determination of who is the lowest responsible bidder
lies within the judgment of the governing body and will not
be disturbed by the courts unless the decision was induced by
fraud or shown to be an arbitrary, unreasonable misuse of
discretion. Diablo Beacon Painting & Publishing vs. Concord,
(1964) 229 Cal.App.2d 505, Cyr vs. White, (1947) 83 Cal.App_
2d 22.
The court stated in Diablo Beacon Painting & Publishing
vs. Concord:
"In determining whether to accept a bid for a
public contract, public officers as a rule
perform not merely ministerial functions, but
duties of a judicial or discretionary nature,
and the courts in absence of fraud or an abuse
of discretion, will not ordinarily interfere,
so long as the officers comply with the
controlling constitutional or legislative
provisions." (229 Cal.App.2d 505, 508)
Thus a presumption of validity attaches to the determination
of the lowest responsible bidder which can only be overcome by
proof that the governing body acted without justification or
fraudulently. When measured against this standard, consideration
of the sales tax rebate in the bidding process would not seem to
be sufficient grounds for judicial intervention. It is not
contrary to constitutional, statutory, or charter provisions.
Secondly, the sales tax rebate is a reasonable factor to
include in determining the low bid. It is easily calculated,
and non-discriminatory.
Finally, consideration of the sales tax rebate leads to a
more precise measure of the ultimate economic cost of a bid_
tArguably, Section 252 of the City Charter which requires selection
of the lowest responsible bidder requires that the sales tax
rebate be included in the factors considered when determining
the lowest responsible bidder.
CONCLUSI OV
Me City may take into account the fact that the City
will receive a 1 percent sales tax rebate from sales tax paid
to supplier located within the City of Sacramento.
JAMES P. JACKSON
City Attorney
-.._.
By: ...1�
MLIAND J. SAVAGE
Deputy City Attorney
LJS:plf