BILL ANALYSIS                                                                                                                                                                                                    



          SENATE COMMITTEE ON APPROPRIATIONS
                             Senator Ricardo Lara, Chair
                            2015 - 2016  Regular  Session

          AB 566 (O'Donnell) - School facilities: leasing property:  
          construction contracts.
          
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          |Version: June 17, 2015          |Policy Vote: ED. 6 - 2          |
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          |Urgency: No                     |Mandate: No                     |
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          |Hearing Date: July 6, 2015      |Consultant: Jillian Kissee      |
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          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  







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               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  








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          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)










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          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.









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          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  








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          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.  








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          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.




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