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Arkansas isolationism: debate still rages over state's bid preference laws.

Arkansas Isolationism

Debate Still Rages Over State's Bid Preference Laws

When the Texas government opened bids recently for 3 million pounds of chicken quarters, it looked as if OK Foods Inc. of Fort Smith had won a contract worth nearly $1 million.

But OK didn't get the contract.

It went to a Texas firm even though the decision cost Texas taxpayers $22,500 more.

OK had no one to blame but Arkansas for the loss.

The same thing would have happened in Louisiana, Missouri, Oklahoma, Mississippi and Tennessee.

Those and 21 other states penalize eight states, including Arkansas, that insist on keeping laws that give preference to their own businesses on state government contracts for commodities, construction or both.

Bid preference laws are so pervasive in Arkansas that even cities and counties can discriminate against businesses outside their borders if bids from locals are 3 to 5 percent above the low offer.

Ed Erxleben, a retired Air Force major who has been state purchasing director for 10 years, says Arkansas' bid preference laws are "counter-productive."

In other words, they're hurting rather than helping the state's businesses.

Erxleben tried to do something about it during the 1991 legislative session by backing bills to repeal bid preference laws.

Things were going well, he says, until the Legislature raised motor fuel taxes to pay for a $2.4-billion, 13.8-year highway improvement program, and the Associated General Contractors decided to oppose repeal except for construction subcontractors. AGC remains a major force at the Capitol despite the 1990 political demise of its lobbyist, Sen. Knox Nelson of Pine Bluff.

Printers' Relief

Printers were the only vendors, as opposed to construction contractors, who received legislative relief. They won an exemption on the strength of testimony by Jerry Hendrix that the bid preference law was risking $2.5 million in sales and 30 of the 300 jobs at Weldon Williams & Lick Inc. in Fort Smith.

Hendrix is vice president for sales at WW&L, a blue-chip firm that counts 48 state governments among its clients.

"It used to be that almost every state had bid preference laws," Hendrix says. "What we saw happening to us is that, all of a sudden, we were being penalized because we were based in Arkansas. Pennsylvania won't allow us to do business there at all."

About half of his company's 30 "at-risk" jobs were in "immediate jeopardy," Hendrix says.

Jim Martin is ABC's longtime director who is being forced out by "newbroom" reformers on the organization's board. Martin confirms that his group, dominated by highway contractors, opposed repeal of the bid preference laws except for Greenwood Sen. Bill Walters' amendment affecting subcontractors.

Walters' bill, which passed, removes the requirement that all of a prime contractor's subcontractors must be eligible for Arkansas' preference before it can be claimed.

Although some AGC members have lost work in Oklahoma and Missouri because of Arkansas' laws, views were mixed within the organization. It took almost eight months for a position to gel, Martin says.

AGC's eventual stand against outright repeal had nothing to do with passage of the highway program, according to Martin.

"Our position was adopted before final passage of [the highway bill] and was not predicated on its passage," Martin says.

Ironically, Sen. Jay Bradford of Pine Bluff was the man who voiced AGC's position on the Senate floor, blocking passage of Texarkana Rep. Travis Dowd's bill. It was Bradford who defeated Nelson in 1990. Court-ordered redistricting forced the two incumbents into the same district.

Many believe Nelson's close ties to the AGC contributed to his defeat.

All About Attitude

So what drove the organization's opposition to repeal of the bid preference laws?

Attitude, Martin says.

"An attitude of, |Well, it's on the books, so let's keep it. We may need it someday,'" he says.

Arkansas Highway and Transportation Department records show that since 1988, only one road construction contract has been awarded to an Arkansas firm because of the law that gives domestic businesses an advantage if their bids are within 3 percent of low bids from out-of-state companies.

That contract was for road work between Portland and Montrose in Sen. Jack Gibson's Ashley County. Arkansas motorists ended up paying $358,423 for the work, as opposed to $349,222 for the low out-of-state bid.

Were AGC's members aware the law had netted only one contract in three years?

Martin says he expected fewer than five, but he didn't know it was one. Martin says he wishes AGC's stand had been different, but he was required to work for whatever position the organization chose.

"A fence works two ways," he says.

Erxleben, meanwhile, is driven by the conviction that "for Arkansas business and industry to develop, it has to be able to compete in the interstate market, especially in government business. We're not going to get anywhere with this isolationist attitude."

A "military brat" who is an Arkansan by choice, Erxleben was president of the 44-year-old National Association of State Purchasing Officials in 1989. He still sits on its executive committee. The experience gives Erxleben a broad background from which to draw his conclusions.

Arkansas' Laws

Arkansas' original bid preference law dates back to the Orval Faubus era in 1955. The latest law was adopted in 1981 when the New York prison system outbid a Conway firm to make Arkansas vehicle license plates. As a result, another state's prison must underbid an Arkansas firm by 15 percent to get state business.

The margin on construction contracts is 3 percent.

Erxleben works with a different law, one that says any Arkansas firm that has paid state taxes for the previous two years can file a written claim for bid preference on a given commodity. This forces even Arkansas firms that don't claim preference but are eligible for it to be considered whenever a low bid is from an out-of-state vendor.

"If any Arkansas firm's price is within 5 percent of the low bid, the business goes to the Arkansas firm," Erxleben says.

The bid preference law comes into play on about 3 percent of the $200 million in contracts Erxleben's office handles annually.

In the 1970s, he says, it was "fashionable for states to have preference laws similar to ours."

The theory was that a state would subsidize domestic businesses on contracts in return for the tax revenues generated by the work or sales.

However, "there's no statistical evidence in any state that says it's a benefit," Erxleben says.

The federal courts got in on the act, striking down some bid preference laws as unconstitutional restraints of trade.

A movement to repeal preference laws began and gained momentum when both the organization Erxleben eventually headed and the National Governors' Association adopted resolutions backing repeal.

"The majority of states are getting away from these laws as counterproductive to business development," Erxleben says.

Reciprocal Laws

But those states that reacted and repealed their bid preference laws quickly began getting complaints about other states blocking business.

Those complaints led to the adoption of reciprocal laws such as the one in Texas that knocked OK Foods out of the chicken quarters contract. In effect, reciprocal laws say, "You discriminate against our businesses, and we'll discriminate against yours -- by exactly the same percentage."

Some contractors, almost always the large ones, are finding ways to get around bid preference laws by using what Martin calls "brokers" in other states to bid for them.

"There are very few ways to enhance the wealth of the state," Erxleben says.

One is to "export more than we import," he says. Another is to attract outside capital. Erxleben argues bid preference laws hurt in both areas.

"When you exercise the preference law, you're taking money out of Peter's pocket and putting it in Paul's," he says. "The taxpayer pays more than he has to. The businessman pays more for contracts he doesn't have. You're circulating money without it contributing anything to the wealth of the state."

Even at the national level, Erxleben says, "the economic leadership has become aware that reducing trade barriers is to the economic advantage of the country and states in the long run."

The Bush administration is trying to convince states to repeal their laws favoring purchases of made-in-America goods so U.S. firms can qualify for markets that will open when the European Economic Community becomes a reality in 1992.

Does this mean Erxleben will make another stab at getting the General Assembly to repeal bid preference laws?

Erxleben squirms slightly in his office chair as he concedes it's not "prudent nor fashionable" to speak against preference laws in a state historians say has a provincial streak.

But, yes, he says, he plans to try again.

PHOTO : THE PURCHASER: Ed Erxleben, a retired Air Force major, has been state purchasing director for 10 years. He believes Arkansas' bid preference laws are counterproductive.
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Title Annotation:repeal of bid preference laws blocked by Associated General Contractors
Author:Griffee, Carol
Publication:Arkansas Business
Date:Jun 24, 1991
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