BILL ANALYSIS Ó SENATE COMMITTEE ON APPROPRIATIONS Senator Ricardo Lara, Chair 2015 - 2016 Regular Session AB 566 (O'Donnell) - School facilities: leasing property: construction contracts. ----------------------------------------------------------------- | | | | | | ----------------------------------------------------------------- |--------------------------------+--------------------------------| | | | |Version: June 17, 2015 |Policy Vote: ED. 6 - 2 | | | | |--------------------------------+--------------------------------| | | | |Urgency: No |Mandate: No | | | | |--------------------------------+--------------------------------| | | | |Hearing Date: July 6, 2015 |Consultant: Jillian Kissee | | | | ----------------------------------------------------------------- This bill meets the criteria for referral to the Suspense File. Bill Summary: This bill expands prequalification requirements for lease/leaseback and lease-to-own contracts currently applicable to public projects funded with state school facility bond funds to also apply to projects regardless of the funding source and contract amount. This bill also requires school districts that enter into these types of contracts to use a skilled workforce, as specified. Fiscal Impact: Ultimately, the costs of this bill are unknown but increases in costs of facility construction projects at the local level could potentially lead to state-level cost pressures. See staff comments. Skilled and trained workforce: Potentially significant increases in state-funded and locally-funded contracts to comply with labor requirements which could lead to AB 566 (O'Donnell) Page 1 of ? increases in the cost of labor. Prequalification: Since school districts are already required to use a prequalification process to determine qualified prospective bidders for public projects funded by state bond funds that exceed $1 million, potential local costs to modify the process to apply to public projects funded by local resources could be minor. The expansion of prequalification requirements could lead to increased costs in contracts, but could also result in savings to the extent project outcomes improve. According to the Department of General Services, the costs associated with implementing this bill at the state level are minor and absorbable. The Department of Industrial Relations cites unknown, likely minor costs for potential increases in workload to investigate apprentice complaints and evaluate applications for new apprenticeship programs in the building and construction trades. Background: Prequalification Existing law authorizes the governing board of a school district to require prequalification of prospective bidders for a public project contract. A prospective bidder may be required to complete and submit to the district a standardized questionnaire and financial statement in a form specified by the district, including a complete statement of the prospective bidder's financial ability and experience in performing public works. A school district that establishes a prequalification process is required to adopt and apply a uniform system of rating bidders on the basis of the completed questionnaires and financial statements. School districts are authorized to establish a process for prequalifying prospective bidders on a quarterly basis and to consider a prequalification to be valid for up to one year. (Public Contract Code § 20111.5) Existing law requires, until January 1, 2019, school districts with an average daily attendance of more than 2,500 using state AB 566 (O'Donnell) Page 2 of ? school facilities bond funds for school construction projects to establish a prequalification process whereby a prospective bidder, and any electrical, mechanical, and plumbing subcontractors, of a public works contract with a projected expenditure of $1 million or more, is required to complete and submit a standardized prequalification questionnaire and a financial statement subject to the same requirements above. Existing law requires the Director of Industrial Relations to submit a report to the Legislature, on or before January 1, 2018, evaluating whether, during the years prequalification applied to contracts, violations of the Labor Code on school district projects have decreased as compared to the same number of years immediately preceding required prequalification, and any recommended improvements on the prequalification system. (Public Contract Code § 20111.6) Leasing Existing law authorizes the governing board of a school district to enter into a lease/leaseback contract with a person, firm, or corporation without advertising for bids. Current law prescribes that real property owned by the school district may be leased for a minimum rental of $1 per year if the lessee is required to construct, or provide for the construction of a building or buildings for the use of the school district during the term of the lease, and requires that the school district owns the building at the expiration of the lease. (Education Code § 17406) Existing law authorizes the governing board of a school district to enter into a lease-to-own agreement in which a person, firm, or corporation is required to construct or provide for the construction of a building, upon a designated site, in which both the site and the building are to be used and leased by the school district. Current law requires that the school district owns the building at the expiration of the term and authorizes ownership prior to expiration of the lease. Current law requires that the agreement for such a lease be entered into with the responsible bidder, as specified. (Education Code § 17407) AB 566 (O'Donnell) Page 3 of ? Current law, until January 1, 2019, requires that school districts entering into lease/leaseback or lease-to-own contracts comply with specified prequalification requirements, if the project is funded with state bond funds, the expenditure of the project is $1 million or more, and the average daily attendance of the school district is greater than 2,500. (Education Code § 17406 and § 17407) Proposed Law: This bill: 1) Expands prequalification requirements for lease/leaseback and lease-to-own contracts currently applicable to public projects funded with state school facility bond funds to also apply to projects regardless of the funding source and contract size. 2) Prohibits the governing board of a school district to enter into a lease/leaseback or lease-to-own agreement with an entity unless the entity provides an enforceable commitment that the entity and its subcontractors will use a skilled and trained workforce to perform all work on the project or contract, as specified. 3) Finally, this bill clarifies existing law that school districts seeking reimbursement from a future state bond are also subject to prequalification requirements. This bill defines "skilled and trained workforce" as workers that are either skilled journeypersons or apprentices registered in an apprenticeship program approved by the Chief of the Division of Apprenticeship Standards of the Department of Industrial Relations. This bill provides that a "skilled journeyperson" is a worker who either graduated from an apprenticeship program for the applicable occupation, or has comparable hours of on-the-job experience in the applicable occupation as would be required to graduate from the respective apprenticeship program. AB 566 (O'Donnell) Page 4 of ? This bill further provides that a "skilled and trained workforce" adheres to the following phase-in of the proportion of skilled journeypersons and subcontractors that are graduates of an applicable apprenticeship program, as follows: 1) By January 1, 2016, at least 30 percent. 2) By January 1, 2017, at least 40 percent. 3) By January 1, 2018, at least 50 percent. 4) By January 1, 2019, at least 60 percent. Finally, this bill provides the methods by which an entity's commitment to a skilled and trained workforce may be established: 1) The entity's agreement with the governing board of the school district that the entity as well as its subcontractors will comply with these requirements and will provide monthly reports to the school district demonstrating its compliance. 2) An existing project labor agreement, entered into by the school district governing board, which includes these requirements and binds all contractors and subcontractors working on the contract, if the entity agrees to become a party to that agreement. 3) Evidence that the entity has entered into a project labor agreement that includes these requirements that will bind the entity and its subcontractors. Related Legislation: AB 1581, Buchanan (Chapter 408, Statutes AB 566 (O'Donnell) Page 5 of ? of 2014) requires, until January 1, 2019, that school districts entering into lease/leaseback or lease-to-own contracts comply with specified prequalification requirements, if the project is funded with state bond funds, the expenditure of the project is $1 million or more, and the average daily attendance of the school district is more than 2,500. Staff Comments: Ultimately the costs of this bill are unknown. However, it is likely that the bill's additional requirements related to prequalification and a skilled and trained workforce will increase the cost of entering into lease/leaseback and lease-to-own contracts at the local level, which could result in significant state level cost pressures. Current law requires school districts entering into lease/leaseback or lease-to-own contracts to comply with specified prequalification requirements if the project is funded with state bond funds, the expenditure of the project is $1 million or more, and the average daily attendance of the school district is greater than 2,500. This bill expands prequalification requirements for lease/leaseback and lease-to-own contracts to also apply to projects regardless of the funding source and contract size. Creating additional barriers for prospective bidders to bid on a project could result in fewer bids from which a school district can choose a responsible bidder, which could drive increases in contract costs. However, to the extent this process eliminates unqualified bidders upfront, potential higher quality projects and efficiencies could be achieved. This bill also prohibits a school district from entering into a lease/leaseback or lease-to-own agreement unless the entity and its subcontractors agree to use a specified minimum amount of a skilled and trained workforce at every tier. In addition, part of that skilled and trained workforce are skilled journeypersons who must have graduated from an apprenticeship program or have as many hours of on-the-job experience as a graduate from an applicable apprenticeship program. The prescribed percentage of skilled and trained workforce required to carry out the work of the project will likely drive increases to contract costs as the percentage increases over the years. AB 566 (O'Donnell) Page 6 of ? It is presumed that school districts currently opting to use lease/leaseback and lease-to-own agreements do it because it is in their best interest financially, compared to the traditional design-build method. To the extent that a higher percentage of skilled and trained workforce as prescribed by this bill increases contract costs, school districts could experience a decrease in savings as compared to other procurement methods, which could lead to districts no longer choosing this option. These cost pressures on local budgets could translate to a state level cost pressure for future K-12 facilities state bond funding, though it is unknown as to whether one will materialize. For illustrative purposes, a one percent increase in the average cost of a new school construction project completed between 2002 and 2012 would result in a cost of about $600,000. -- END --