Assessing the Use of Local Preferences in Local Government Contracting By Kendra Jensen A paper submitted to the faculty of The University of North Carolina at Chapel Hill in partial fulfillment of the requirements for the degree of Master of Public Administration Spring 2011 This paper represents work done by a UNC-Chapel Hill Master of Public Administration student. It is not a formal report of the Institute of Government, nor is it the work of School of Government Faculty Executive Summary Local preference policies give local vendors an advantage in public contracting. While North Carolina local governments authority is limited in adopting formal local preference policies, local governments in other states have been practicing formal local preference for some time. This study gauges the extent to which North Carolina local governments practice local preference formally or informally, and studies the types and perceived effectiveness of local preference policies used outside of the state. Finally, this paper identifies considerations and makes policy design recommendations for local governments considering a formal local preference policy.
I. Introduction In February 2010, Governor Perdue signed Executive Order 50, a local preference policy (LLP), which gives North Carolina businesses the opportunity to match the lowest bid on contracts for the purchase of goods. The intent of Executive Order 50 is to promote business contracts with the State of North Carolina, to stimulate economic development and to create jobs. 1 Executive Order 50 only addresses state agencies and does not extend to North Carolina local governments. As of 2009, 27 states had a legal preference for in-state bidders, similar to North Carolina s Executive Order 50. 2 Many local governments are following suit and adopting their own local preference policies to promote economic development. Among the states authorizing local governments to adopt their own LPP are Georgia and South Carolina, whose policies have potential to affect businesses and public agencies in North Carolina. North Carolina local governments are required to follow competitive bidding requirements under N.C.G.S. 143-129 for formal bidding processes and N.C.G.S. 143-131 for informal bidding processes. 3 These laws require contracts to be awarded to the lowest responsible bidder. This requirement precludes North Carolina local governments from adopting LPPs. However, it may be possible for local governments to adopt policies for contracts not covered by the bidding statutes, including service contracts and construction and purchasing contracts costing less than $30,000 (Appendix A). Because the ability to adopt LPPs by North Carolina local governments is limited by contract type and price, many local governments have expressed interest in approaching the legislature to broaden their authority. 4 This paper gauges the extent to which North Carolina local governments are using local preferences within their legal authority informally or formally. This paper also studies the types of LPPs adopted outside of North Carolina and the perceived effectiveness of these policies in meeting economic development goals. The purpose of this study is to guide North Carolina local governments as they consider the use of LPPs and outline the potential structure, perceived effectiveness and implications of such policies. II. Background Local preference policies give local vendors an advantage over non-local vendors in the local government contracting process. Local preferences may be granted through a formal policy such as an ordinance, statute or resolution, or informally through an unwritten policy or practice. Local governments use a variety of strategies to grant preferences to local vendors. This study focuses on three types of formal LPPs. The first strategy is to offer a price-match opportunity to the local vendor whose bid is within a designated percentage of the lowest, nonlocal bid. The local vendor has the opportunity to come down in price to match the non-local bid within a specified timeframe and is subsequently awarded the contract. The second strategy is also implemented when the local bid is within a certain percentage of the non-local bid. If the local vendor is within the specified percentage, the contract is awarded to the local vendor at the higher price. The third strategy is a tie-bid preference. In this case, the local vendor is awarded the contract if a non-local and local vendor s bids are equal in price.
III. Research Design Methodology This study used two methods to obtain qualitative data from North Carolina, South Carolina and Georgia local governments. An electronic survey was administered to North Carolina purchasing agents and city and county managers to determine the extent to which North Carolina local governments practice local preferences in public contracting and the reasons for local preferences. Follow-up phone interviews with select North Carolina local governments supplement survey data. Out-of-state jurisdictions, with more established and formal policies were contacted for a more detailed case study. Participants completed a telephone interview and a document review was conducted to gather policy data. Case studies with out-of-state local governments sought to gain information about the types of policies formally adopted outside of North Carolina and gauge the degree to which outside local governments perceive their policies to be effective. A complete list of electronic survey questions, telephone survey questions and document review criteria can be found in Appendices B and C. Response Rates A total of 51 North Carolina respondents completed the electronic survey and three participated in a follow-up phone interview to provide supplemental information. Thirteen out-of-state jurisdictions were interviewed and submitted policy documents for review. General information about participants can be found in Appendices B and C. IV. Key Findings North Carolina Jurisdictions Prevalence of Informal Policies Nearly half of the survey respondents have a practice or policy for awarding contracts to local vendors. All of the 23 respondents with a practice or policy grant local preference informally. None of the North Carolina respondents have a formal policy (e.g. resolution or ordinance) for granting local preferences. Types of Contracts Awarded Under Informal Local Preference Among the local governments with informal practices, local preferences are awarded equally among various types of contracts including service contracts and small construction and purchasing contracts (under $30,000). Responses were consistent with the contract type and price limitation under the bidding statutes. Goals of Local Preference Policies When asked which best described the goals of the local government s LPP, promotion of local businesses was the most frequently cited answer. Following was job creation, increased tax base, sustainability and wealth creation. Respondents goals and the frequency of responses were consistent with out-of-state policy goals (see Appendix B). Out-of-State Jurisdictions Policy Design and Price-Match Requirements Out-of-state respondents use three different strategies to award local preference. Nine out of the 13 local governments use the price match
method, which gives the local vendor an opportunity to match the lowest non-local price if their original price falls within a certain percentage of the lowest non-local bid. The percentage thresholds for local governments using the price-match requirement range from 1% to 10%. The average percentage threshold was 4.7% and 5% was the most frequently used threshold (Appendix C). Three local governments also award a local preference when the local vendor falls within a certain percentage of the lowest non-local vendor. However, in these cases, the local government awards the contract to the local vendor based on their original bid and the local government pays the higher amount for the contract. Two of these three local governments use a 5% threshold and one uses a 2% threshold (Appendix C). One of the local governments only grants local preference in the event of a tie bid. Definition of Local All of the 13 local governments explicitly define the term local or resident vendor in their policies. With the exception of one local government, all of the respondents required all three or a combination of the following three requirements: 1. The vendor maintains or operates a physical office within the legally defined or physical boundaries of the local government. 2. The vendor holds a business license from the local government (county or city) or one of the municipalities within a county. 3. The vendor must be able to provide proof of payment of all applicable taxes and fees to the local government. All of the local governments required the vendor to operate a physical office within the local government s boundaries for a set period of time. The range of time periods was 90 days to three years. The average operating time was 12 months. One local government defined the local vendor as the business located within the jurisdiction or closest to the boundaries of the jurisdiction. Initiation and Creation of the Policy In 10 out of 13 cases, the governing board was responsible for initiating the creation of an LPP. In all 10 cases, the purchasing agent, purchasing department or finance department was responsible for policy research and design following the request from council. In the remaining three cases, the county administrator, the purchasing agent and the city manager initiated the creation of the LPP. Goals of Policy and Perceptions of Effectiveness The most commonly cited goal of an LPP is to show support to local businesses. Closely following were local job creation, local wealth creation, increased participation in the local contracting process and an increased tax base. Individuals surveyed from all 13 local governments responded that the LPP fulfilled the goal of showing support to local businesses. Responses were mixed in terms of fulfillment of the remaining goals. While eight respondents perceived the policy as effective in meeting other goals, all of the local governments lack tools to formally track goal fulfillment. Two respondents described their policy as ineffective in meeting goals aside from support of local businesses. One stated that the goals were too vague and difficult to measure. One respondent felt as though the
percentage threshold on the policy was too low to be effective. Three respondents said their policy was too new to gauge the effectiveness in meeting goals. Drawbacks, Benefits and Use The most frequently cited drawback associated with LPPs was diminished competition. Only in regards to vehicle purchases did two respondents actually see the policy as diminishing competition by decreasing non-local vendor participation. No other respondents experienced decreases in participation, but many felt as though diminished competition could be a future drawback of the policy. Benefits of the policy are closely aligned with the goals. Supporting local businesses was the most commonly cited benefit of an LPP followed by local job and wealth creation, an increased tax base, keeping business local and increasing the competitiveness of small businesses (Appendix C). At some point in time, each local government has awarded a contract using the policy. Each local government saw an increase in the number of local contracts awarded, but seven respondents described the increase as slight. Local governments citing less frequent use were the local governments with a low percentage threshold (one and two percent) and the local government with a tie-bid policy. V. Implications for North Carolina Local Governments North Carolina local governments are required to follow bidding statutes and presently have limited authority to adopt LPPs. As a Dillon s Rule state, legislative approval is required before North Carolina local governments can increase their authority to grant local preferences. 5 Because South Carolina is a Home Rule state, local governments have broader authority to pass local preference laws, unless state law explicitly prohibits it. Georgia operates under limited Home Rule and many local governments also have the authority to pass local preference regulations. Supplemental data gathered through phone interviews with North Carolina local governments and the lack of formal policies found in the electronic survey indicate that very few, if any, North Carolina local governments formally grant local preference. Supplemental data also indicates North Carolina local governments are interested in expanding their authority to adopt formal policies for a variety of contract types and some are considering approaching the General Assembly to obtain this authority. The following recommendations propose considerations for local governments considering or pursuing a local preference policy or practice. The recommendations also seek to provide guidelines for policy design, based on the experience and perceptions of local governments with longer standing policies and practices. Clearly Define Local or Resident in the Policy Out-of-state respondents cited confusing definitions in the policy as causing debate among citizens, local business owners and local government officials prior to adoption of the policy. Confusion can be reduced by creating a clear definition of local or resident vendor. The following three requirements are useful in categorizing vendors as local or non-local: 1. The vendor maintains or operates a physical office within the legally defined or physical boundaries of the local government for a specified time period. 2. The vendor holds a business license from the local government or one of the municipalities within a county.
3. The vendor must be able to provide proof of payment of all applicable taxes and fees to the local government. Notification of the LPP is included in the vendor application for most out-of-state local governments. Vendors must answer questions regarding the three requirements and provide proof with the application to be registered as a local vendor. No local governments reported confusion surrounding the term local after the adoption of the policy. Consider a Price-Match Requirement Out-of-state respondents preferred policies with a pricematch requirement over policies without the requirement. A price-match requirement allows the local vendor to match the price of the lowest non-local bidder and win the contract. Out of the nine policies with a price-match requirement, three were only recently modified to include the requirement. The price-match requirement was seen as a benefit of the new policy. When asked if they would like to comment further on LPPs, seven respondents noted the importance of a price-match requirement. Without a price-match requirement, local governments pay a higher price for local contracts, raising concerns about fulfilling the obligation to award contracts to the lowest responsible bidder and the responsible use of tax payer dollars. Adopt a Worthwhile and Responsible Percentage Threshold Policies perceived as ineffective by respondents were attributed to low percentage thresholds (one and two percent) and to the tie-bid policy. The policy was rarely used and had little perceived impact on the number of local contracts awarded. The drawback of a low percentage threshold is limited use of the policy. However, a percentage threshold that is too high could create a substantial disparity between local and non-local bid prices. For example, a 10% threshold on a roughly $400,000 contract could create a $40,000 difference between the local and non-local price and if no price-match requirement is in place, the local government must pay the higher price. Policy designers should seek to identify a percentage threshold that promotes use of the policy and balances responsible bidding practices. Consider Benefits, Drawbacks and Difficulty of Goal Tracking The most cited reason for the creation of an LPP was to show support to local businesses, largely perceived by respondents as a symbolic goal that lacks quantitative measures. All thirteen respondents felt support was shown to local businesses through the adoption of the policy and ten respondents felt local participation in the public contracting process had increased. Perceptions of goal fulfillment were mixed on additional quantitative goals including job creation, wealth creation and increased tax base. Hesitation in associating the policy with impact on these goals results from a lack of formal goal tracking and difficulty in attributing impact to the LPP. Similarly, respondents were hesitant to link outcomes of the policy with generally perceived benefits and drawbacks of LPPs. With the exception of showing support to local businesses, demonstrating a link between an LPP and resulting impacts, benefits or drawbacks is difficult. If the primary goal of the local government is to show support to local businesses, LPPs may be perceived as effective in meeting goals. Local governments and elected officials should have realistic expectations regarding the actual impact of LPPs on quantitative goals, often identified as a reason for LPPs such as job and wealth creation, that are more difficult to measure and track.
1 Office of the Governor, the State Of North Carolina Executive Order 50. North Carolina: February 18, 2010. http://www.governor.state.nc.us/newsitems/uploadedfiles/d132dbc6-bca4-4a6f-ae10-3f27e2e53e01.pdf 2 National Association of State Procurement Officials 2009 Survey of State Government and Purchasing Practices. September, 2009: http://www.naspo.org/documents/2009_survey_of_state_government_procurement_exec_summary.pdf 3 North Carolina General Statutes (N.C.G.S.) 143-129. (Procedure for letting of public contracts.); N.C.G.S. 143-131 (When counties, cities, towns and other subdivisions may let contracts on informal bids.) 4 This statement is based on conversations with officials from North Carolina local governments who expressed interest in approaching the NC General Assembly to broaden their authority. 5 For more on Home Rule versus Dillon s Rule, see: Bluestein, Frayda S. Do North Carolina Local Governments Need Home Rule? Popular Government. Fall 2006. p 15 24.
Appendix A: North Carolina Contracting Method Selection $500,000 $90,000 Formal Bidding Informal Bidding Formal Bidding Informal Bidding Qualifications Based Selection No Method Required $30,000 $0 No Method Required No Method Required Purchase Construction Design Services Everything Else Source: Eileen Youens, UNC School of Government, Chapel Hill, North Carolina
Appendix B: Electronic Survey Questions and Results North Carolina Local Governments 1. Does your jurisdiction encourage local vendors to bid on public contracts? Yes No 49/49 0/45 2. Does your jurisdiction have either a practice or policy for awarding service contracts, small construction contracts and small purchasing contracts to local vendors? Yes No 22/51 25/51 3. For which of the following does your jurisdiction have a practice or policy for awarding contracts? Please check all that apply. Service Contracts Small Construction Contracts Purchasing Contracts 20/23 19/23 21/23 4. How does your jurisdiction grant preferences to local vendors? Informally Formally Other 21/23 0/23 2/23 5. How long has your jurisdiction had a local preference policy or practice? Less than 1 year 1 3 years 3 5 years More than 5 years 1/23 5/23 3/23 14/23 6. Which of the following best describe the goals of your local preference policy? Please check all that apply. Job Creation Wealth Creation Support Local Businesses Sustainability Increased Tax Base 14/23 7/23 20/23 9/23 9/23 7. Has your organization or board considered a local preference policy in awarding public contracts? Yes No 6/24 18/24 8. What jurisdiction or organization do you represent? Answers kept confidential 9. Which type of jurisdiction do you represent? City County 31/48 17/48 10. Is your jurisdiction: Small (up to 20,000) Medium (20,000 250,000) Large (250,000 and above) 1/15 10/15 4/15 Notes: Respondents answering No to Question Two, Does your jurisdiction have either a practice or policy for awarding service contracts, small construction contracts and small purchasing contracts to local vendors? were directed to Question Seven, Has your organization or board considered a local preference policy in awarding public contracts? Respondents declining to answer Question 8, What jurisdiction do you represent? were directed to Question 10, Is your jurisdiction: Small, Medium, or Large?
Appendix C: Select Characteristics of Georgia and South Carolina Local Governments and Local Preference Policies Table 1: Population Town/City 1-20,000 20,000-40,000 80,000 120,000 + Population 40,000 80,000 120,000 Total: 5 1 2 1 1 County 20,000 50,000 100,000 150,000 200,000 + Population 50,000 100,000 150,000 200,000 Total: 8 1 2 2 1 2 Table 2: Requirements for Local Vendor Status Respondent 1. Maintains or Operates a Physical Office within Boundaries of Local Government Requirement as Stated In Policy 2. Holds a Business License from the Local Government or One of its Municipalities 1 x x 2 x x 3 x x x 4 x x 5 x x x 6 x x x 7 x x x 8 x x x 9 x x 10 x x x 11 x x 12 x x x 13 Total 12 10 9 3. Able to Provide Proof of Payment of All Applicable Taxes and Fees Table 3: Price Match Requirement Price Match Requirement Number of Respondents Yes No Tie-Bid Only 9 3 1
Table 4: Percentage Thresholds* Percentage Price Match No Price Match Total Number of Requirement Requirement Respondents Respondents Respondents 0% 1 1 1% 0 0 2% 1 1 2 3% 0 0 4% 1 1 5% 5 2 7 6% 0 0 7% 0 0 8% 0 0 9% 0 0 10% 1 1 Tie-Bid Only 1 1 Total 9 4 13 *Local Vendor must fall within given percentage threshold to initiate exercise of the local preference policy Frequency of Percentage Thresholds 10% 8% 6% 4% 2% 0% 0 2 4 6 8 Respondents Table 5: Goals of Local Preference Policy Goal Job Creation Local Wealth Creation Support Local Businesses Increased Tax Base Increase Local Participation Total Respondents 13/13 12/13 13/13 10/13 12/13