Memorandum

City of Lawrence

City Manager’s Office

TO:	David L. Corliss, City Manager
FROM:	Jonathan Douglass, Assistant to the City Manager
CC:	Ed Mullins, Finance Director Alan Landis, Purchasing Specialist
DATE:	March 19, 2009
RE:	Local Purchasing Preferences

Background and Relevant Law

The City of Lawrence does not have a local purchasing preference policy. The city’s purchasing policy and purchasing procedures manual are attached. The only preference policy in place is an environmental procurement policy, which states, “The Finance Department will establish a price preference of up to 5 percent for recycled paper products and other recycled and environmentally preferable products.  This price preference shall be established in advance of any bid and may be modified from time to time at the discretion of the Finance Department with the objective of maximizing the City’s purchase of environmentally preferable products to the extent practicable.”

By State statute (K.S.A. 13-1017) cities of the first class must award contracts for public improvements over $2,000 to the lowest responsible bidder. The City of Lawrence has chartered out of this statute by Charter Ordinance No. 19, which gives the governing body the right to waive certain bidding requirements and estimates. The statute is silent as to whether procurements other than public improvements must go to the lowest responsible bidder. It may be necessary to amend Charter Ordinance No. 19 if the city desired to enact a local preference policy applying to public improvement projects.

In 1985, Kansas Attorney General Opinion 85-121 stated that a governing body may, pursuant to home rule powers granted by the Kansas Constitution, adopt an ordinance providing for local purchasing preferences. The opinion seems to point toward an ordinance (instead of, or in addition to, a policy) as the proper way to establish such a preference. A local preference could apply to services, construction, products and all other procurements paid for with non-federal dollars, including public improvements. The opinion quotes an earlier Kansas Supreme Court case stating that the governing body is “not obliged to let the work to the lowest bidder. They may exercise an unlimited discretion so long as they are not guilty of fraud.”

Particularly at the state level, local preference policies sometimes prompt neighboring jurisdictions to adopt reciprocity laws that penalize bidders from the jurisdiction that has a local preference. For example, if State A has a local preference of 10% which in effect penalizes bidders from State B, State B (while not having its own local preference) may adopt a reciprocity law that adds a 10% penalty to bids from vendors located in State A. The State of Kansas has adopted K.S.A 75-3740a, a reciprocity law which states that for non-Kansas vendors who are located in states having local preference laws to be successful bidders for contracts with the State of Kansas or Kansas municipalities, their responsible bids must be the same percent less than the lowest responsible Kansas bid as the local preference established in their home state.

In summary, it does not appear that Kansas law prevents the City of Lawrence from adopting a local purchasing preference. The preference should be established by ordinance and an accompanying policy. Legal staff advises that if a local preference is going to be used to determine the award of any bid, the ordinance and policy should be in place and should be cited in the bid documents. Legal staff also cautions that local preferences may not be able to apply to federal or state funded projects.    

Policies in other cities

Recent research by city staff and by members of the Kansas Association of City/County Management found that while a number of small jurisdictions in Kansas do have local preference policies, larger cities in Kansas to whom we often compare ourselves (Wichita, Overland Park, Unified Government of Wyandotte County/Kansas City, Topeka, Olathe and Lenexa) do not have such policies. The Unified Government does have a stipulation in their purchasing policy that in the event of a tie where all other things are equal, the preference goes to the local vendor. Their purchasing staff reports that such a scenario has never occurred.  

Local purchasing preference policies generally do at least the following: define a “local vendor” and a process for certifying that they are local, and set a preference level – generally a percentage above the low bidder that the local vendor must fall within in order to be selected. For example, a preference could state that if a responsible local vendor’s bid is within 5% of the lowest responsible bid, the local bid will be preferred. 

To illustrate the effects of such a policy, consider the bids recently received for nine police cars. The low bid (from a non-local vendor) was $196,896. The highest of the three bids came from a local vendor in the amount of $197,634, or $738 higher. Local preferences applied to this scenario could possibly include:

• A 1% local preference would allow the local bid to be preferred up to $198,864;
• A 3% local preference would allow the local bid to be preferred up to $202,802;
• A 5% local preference would allow the local bid to be preferred up to $206,740.

Staff was able to locate a few examples of local purchasing preference policies from jurisdictions around the country:

Alameda, CA: 5% preference

Alameda County Waste Management Authority: 2.5% preference

Leon County, FL: 3% preference

Palm Bay, FL: 5-10% preference

Jefferson County, AL: 3% preference

Nevada County, CA: 5% preference

Madison, WI: 1% price preference for bids, 5% score preference for RFPs

Columbus, OH: 1% preference

Considerations

The principal argument for local purchasing preferences is that by favoring local vendors the city can stimulate local economic activity and health. Local vendors pay local taxes, may be more likely to invest locally, employ local residents, and spur additional local spending by their employees, suppliers, etc. Considering the tough economic conditions nationally and locally, local government support of local businesses may be more important than ever.  

Proponents of local purchasing preferences argue that “Giving preference to local suppliers, even if it means spending a little more, can actually benefit a city's finances. Dollars spent locally generate additional economic activity even beyond the value of the initial contract as the local supplier in turn sources goods and services locally. Each additional dollar that circulates locally boosts local economic activity, employment, and ultimately tax revenue,” (http://www.newrules.org/retail/purchasing.html). 

Opponents to local purchasing preferences would point to the following arguments:

• Additional cost to local taxpayers: The city would virtually be guaranteed to pay more for products/services under a local purchasing preference policy. While it is hard to predict how many bids would come in such a manner that they would be affected by the policy, assuming that we paid an average of 1% more on all vendor payments (excluding large non- and near-non-discretionary payments such as payroll taxes, retirement system contributions, utility bills, etc.) due to a local preference policy, based on 2008 numbers, we would have paid approximately an additional $498,000 to vendors. While money may be injected into the local economy through the local purchases, it would also be removed from the local economy via taxes. Local preference is essentially a tax to support local businesses.
• Difficult to define, and verify, a “local” vendor: While any vendor with a Lawrence address could be considered a local vendor, that definition may not serve the intended purpose of a local purchasing preference policy. Purchases from a vendor located in Douglas County just outside Lawrence city limits may provide nearly the same boost to the local economy. A vendor may have a Lawrence sales address but produce most of their goods outside of Lawrence. A vendor may have a non-Lawrence sales address but manufacture most of their goods in Lawrence. A local vendor may employ mostly non-Lawrence residents. A non-local vendor may employee many Lawrence residents. Can a national or regional chain with a store in Lawrence be considered a local vendor? A non-local vendor may employ one salesperson who works out of there home in Lawrence. There are so many variables that could be meaningful that the prospect of defining a “local” vendor is vexing. If a vendor claimed to be local, the city would have the burden of verifying that claim before awarding a bid. Depending on the definition of “local” and the number of vendors claiming to fit that definition, this could require a significant amount of staff time, and possibly lead to litigation. Purchasing staff currently focuses their efforts on obtaining the best prices for the city; with a local preference they would have to dedicate much of their time to determining if vendors are local.     
• Incentive to bid: If local vendors are in a preferred position, non-local vendors may be less likely to invest resources in preparing bids. This may lead to fewer and less competitive bids received.
• Reciprocity laws: As discussed earlier, local preference policies sometimes prompt neighboring jurisdictions to adopt reciprocity laws that penalize bidders from the jurisdiction that has a local preference. According to research by the City of Topeka Contracts and Procurement Division, 23 states, including Kansas, and some local governments have adopted reciprocity laws. These laws may do more harm to local vendors than the benefit that is conferred by the local preference.
• Use of cooperative purchasing contracts: The city currently makes purchases off at least eight different cooperative purchasing contracts. These contracts allow the city to take advantage of volume pricing and save staff time in obtaining individual bids and quotes. The adoption of a local preference policy would likely mean the end of this purchasing practice, which would in turn mean higher costs for the city to bid and quote individually all of the items purchased off these contracts. An exemption could be written into the policy to allow the use of cooperative purchasing contracts, but that would seem contrary to the intent of a local purchasing preference policy.

The National Institute of Governmental Purchasing, a membership group for government agencies and purchasing professionals, has officially adopted a resolution in opposition to “all types of preference law and practice and views it as an impediment to cost effective procurement of goods, services and construction in a free enterprise system,” (Resolution No. 1016, adopted 11/11/95). 

ACTION:      Direct staff as appropriate.