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:	April 2, 2009
RE:	Local Purchasing Preference Ordinance

At the 03/24/09 City Commission meeting, staff was directed to prepare a local purchasing preference ordinance for consideration at the 04/07/09 meeting. The attached Ordinance No. 8386 has been prepared in response. An analysis and explanation of the ordinance follows.

Additionally, staff has been provided with the attached analysis of the San Jose local preference policy and the Grand Traverse County, Michigan procurement policy, by Vice-Mayor Chestnut and Lawrence Chamber of Commerce President and CEO Tom Kern, respectively. Aspects of these and other policies have influenced the drafting of the ordinance presented here. 

City Commission discretion

The ordinance establishes that the City Commission may apply the local preference when awarding bids, but is not required to do so. The City Commission has the discretion to award bids in a manner consistent with this policy and which the Commission judges to best serve the public interest.

Definition of “local”

The ordinance defines a local business entity as a person, firm, corporation or other business entity having all of the following characteristics:

• The business entity has established a permanent place of business within the city limits of Lawrence at least six (6) months prior to the submittal of the bid;
• The place of business must be a location whose principal use is for business purposes, must not be a post office box, and must not be within or part of a residential location including, but not limited to, a home, residence, hotel or motel.
• A business entity with outstanding liens, fines or violations with the City of Lawrence shall not be eligible for the local preference.

The definition of local included in the ordinance does not necessarily exclude national or regional chains from being considered local. If the purchase is made from the local franchise or location, that business is likely paying property taxes, employing local residents, etc., thus accomplishing the goals of the local preference.

The definition of local excludes home based businesses from eligibility for the preference, but this is to close a potential loophole whereby a non-local company might claim the “home office” of a sales person living in Lawrence as a business address.

A bidder may self-certify that they are local by checking a box on the required bid documents. If a bid from a vendor claiming to be local falls within all of the criteria of the local purchasing preference ordinance, city staff will verify the claim before presenting the bid to the City Commission for award. 

The definition of local could also include one or more of the following requirements, but these requirements would require much more in depth investigation by city staff to verify, and could substantially change the types of businesses that are eligible for the preference:

• A percentage of full-time employees of the business that must work in Lawrence;
• A percentage of the full-time employees working in Lawrence that must be Lawrence residents;
• A percentage of the ownership of the business which must be vested in Lawrence residents;
• The principal place of business must be within the city limits of Lawrence (this may exclude chains with local franchises or locations).

Magnitude of the preference

The ordinance establishes a 1% local preference on bids, meaning that subject to other limitations in the ordinance, the lowest responsible local bid within 1% of the lowest responsible bid (if it is not local) may be selected. In case of a tie in which all other aspects of the bid are also equal, the local would be preferred.

Another option would be to write the preference such that a responsible local bidder within 1% of the lowest responsible bid has the opportunity to submit a second bid matching the low bid. If the local then matches the low bid, the local would be preferred. If the local declined to match the low bid, the low bid would be selected.

Applicability and exemptions to the preference

The ordinance establishes that only certain purchases are subject to the local preference:

• Only procurements $15,000 or over are eligible. Staff recommends not applying the preference to smaller purchases (which are not centrally managed and do not require City Commission approval) in order to ensure a transparent process to the public and bidders. The sheer volume of these smaller purchases would also make evaluation of quotes and bids against this policy unreasonably cumbersome, with only limited benefit to local vendors.  
• Procurements where legal restraints on the expenditures of funds prohibit application of the local preference as exempted from the ordinance. Some federal and state funds granted for city projects may not allow for the application of a local preference.
• Construction projects, or public improvements as defined in Charter Ordinance 19, are exempt from the provision of this ordinance. Staff was directed to the attached purchasing policy from Shawnee County, which includes a reciprocity clause (see Section G on page 3) that would likely affect the ability of Lawrence based construction companies to compete for bids in Shawnee County unless construction/public improvements are exempt from Lawrence’s preference. The Purchasing Division of Shawnee County reports that dating back to at least 1997 they have never had occasion to apply that provision of the policy, because no major Kansas communities have had local preference policies.
• City participation in cooperative purchasing agreements or contracts, subject to review by the City Commission, is exempted from the provisions of this ordinance.

Limits to the preference

The ordinance establishes a maximum limit to the local preference. The 1% preference is limited to a dollar amount no greater than $10,000. For example, see the following calculations:

• 1% preference applied to a $1,000,000 low bid = $10,000 preference could be awarded. A local bid up to $1,010,000 could be selected.  
• 1% preference applied to a $2,000,000 low bid = $20,000 preference, however only a preference up to $10,000 could be awarded. A local bid up to $2,010,000 could be selected, which is effectively a 0.5% local preference. 

With construction projects exempted from the local purchasing preference ordinance, it is unlikely that the dollar amount limit would be reached very often.  

Financial analysis

Staff has analyzed bids received in 2008 that would have been affected by the ordinance as currently written. Had this ordinance been in effect in 2008, it appears that zero bids would have been awarded differently. In all cases where other bids came within 1% of the low bid, either the low bid was already from a local vendor or the higher bids were not from a local vendor. The preference would have been applicable to at least one bid already received in 2009 – the police vehicle bid considered on the 04/07/09 regular agenda. In this instance the local bidder is $738, or 0.37%, above the low bid.

Constitutionality concerns

The Legal Department has been analyzing the draft ordinance as well as the state and federal law pertaining to local purchasing, and does have some concerns. The 1985 Kansas Attorney General Opinion (85-121) on local purchasing preferences indicates that cities do have the authority under Kansas law to enact local preferences by ordinance, but also indicates that there is risk of running afoul of federal law, particularly the Privileges and Immunities Clause of the U.S. Constitution. The opinion notes that “courts have held that, in order to justify a law which discriminates against nonresidents, data must be presented which compares the savings resulting from such a law (i.e. lower unemployment, secondary economic activity, etc.) with the costs which are associated therewith (i.e. higher bids on public works projects).”

The City does not currently have data demonstrating this comparison of costs and benefits. It is possible that an aggrieved non-local vendor could claim that Lawrence residents on their payroll or other link(s) to the Lawrence economy are evidence that the local preference unfairly discriminates against them.

It is apparent that other communities across the country have local preference policies. Legal staff would prefer delaying consideration of this ordinance until a comprehensive legal review has been conducted. This review would include investigating whether cities with local preferences have experienced legal challenges to their policies, and whether those cities have performed a quantitative analysis of the savings vs. the costs of their local preference policy. The City of Kansas City, Kansas (precursor to today’s Unified Government of Wyandotte County/Kansas City, Kansas), solicitor of the 1985 Kansas Attorney General Opinion, does not have a local purchasing preference policy such as the one which they proposed to the Attorney General. The Unified Government now has only a “tie breaker” provision preferring local businesses.

ACTION:     Adopt on first reading, Ordinance No. 8386, establishing a local purchasing preference policy, if appropriate.