BILL ANALYSIS Ó
AB 2316
Page 1
Date of Hearing: May 4, 2016
ASSEMBLY COMMITTEE ON EDUCATION
Patrick O'Donnell, Chair
AB 2316
(O'Donnell) - As Amended April 26, 2016
SUBJECT: School facilities: leasing property
SUMMARY: Eliminates the authority for school districts to issue
a lease-leaseback contract without advertising for bid,
establishes a competitive selections process for awarding
lease-leaseback contracts, and allows a contractor to be paid
the reasonable cost of labor, equipment, materials, and services
furnished by the contractor meeting specified conditions if a
lease-leaseback contract entered into prior to July 1, 2015 is
found to be invalid by a court. Specifically, this bill:
1)Establishes the following definitions:
a) "Best value" means a competitive procurement process
whereby the selected proposer is selected on the basis of
objective criteria for evaluating the qualifications of
proposers with the resulting selection representing the
best combination of price and qualifications.
b) "Best value score" means the total score awarded to a
proposer for all scored evaluation factors.
c) "Preconstruction services" means advice during the
design phase including, but not limited to, scheduling,
pricing, and phasing to assist the school district to
design a more constructible project.
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2)Strikes the authority of a governing board of school district
to enter into a lease-leaseback instrument without advertising
for bid.
3)Specifies that a person, firm, or corporation authorized to
enter into a lease-leaseback instrument is one that is
licensed pursuant to the Business and Professions Code.
4)Requires a lease-leaseback instrument to be awarded based on a
competitive solicitation process to the proposer providing the
best value to the school district, taking into consideration
the proposer's demonstrated competence and professional
qualifications necessary for the satisfactory performance of
the services required. Specifies that before awarding an
instrument, the governing board of the school district shall
adopt and publish required procedures and guidelines for
evaluating the qualifications of proposers that ensure the
best value selections by the school district are conducted in
a fair and impartial manner. Specifies that these procedures
and guidelines shall be mandatory for the school district when
awarding an instrument pursuant to this section. Requires the
procedures to include, at a minimum, the following:
a) The school district shall prepare a request for sealed
proposals from qualified proposers. The school district
shall include in the request for sealed proposals an
estimate of price of the project, a clear, precise
description of any preconstruction services that may be
required and the facilities to be constructed, the key
elements of the instrument to be awarded, a description of
the format that proposals shall follow and the elements
they shall contain, the standards the school district will
use in evaluating proposals, the date on which proposals
are due, the timetable the school district will follow in
reviewing and evaluating proposals, and the process to be
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used by the successful proposer for the award of
subcontracts.
b) The school district shall give notice of the request for
sealed proposals in the manner of notice provided in
Section 20112 of the Public Contract Code, with the latest
notice published at least 10 days before the date for
receipt of the proposals.
c) A proposer must be prequalified in accordance with
subdivisions (b) to (m), inclusive, of Section 20111.6 of
the Public Contract Code, in order to submit a proposal. If
used, electrical, mechanical, and plumbing subcontractors
shall be subject to the same prequalification requirements
for prospective bidders described in subdivisions (b) to
(m), inclusive, of Section 20111.6 of the Public Contract
Code, including the requirement for the completion and
submission of a standardized prequalification questionnaire
and financial statement that is verified under oath and is
not a public record. These prequalification requirements
shall be included in a lease-leaseback instrument.
d) The request for sealed proposals shall identify all
criteria that the school district will consider in
evaluating the proposals and qualifications of the
proposers, including relevant experience, safety record,
price proposal, and other factors specified by the school
district. The price proposal shall include, at the school
district's discretion, either a lump-sum price for the
instrument to be awarded or the proposer's proposed fee to
perform the services requested, including the proposer's
proposed fee to perform preconstruction services or any
other work related to the facilities to be constructed, as
requested by the school district. The request for proposals
shall specify whether each criterion will be evaluated
pass-fail or will be scored as part of the best value
score, and whether proposers must achieve any minimum
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qualification score for award of the instrument under this
section.
e) For each scored criterion, the school district shall
identify the methodology and rating or weighting system
that will be used by the school district in evaluating the
criterion, including the weight assigned to the criterion
and any minimum acceptable score.
f) Proposals shall be evaluated and the instrument awarded
in the following manner:
i) All proposals received shall be reviewed to
determine those that meet the format requirements and the
standards specified in the request for sealed proposals.
ii) The school district shall evaluate the
qualifications of the proposers based solely upon the
criteria and evaluation methodology set forth in the
request for sealed proposals, and shall assign a best
value score to each proposal. Once the evaluation is
complete, all responsive proposers shall be ranked from
the most advantageous to the least advantageous to the
school district.
iii) The award of the instrument shall be made by the
governing board of the school district to the responsive
proposer whose proposal is determined, in writing by the
governing board of the school district, to be the best
value to the school district.
iv) If the selected proposer refuses or fails to execute
the tendered instrument, the governing board of the
school district may award the instrument to the proposer
with the second highest best value score if the governing
board of the school district deems it to be for the best
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interest of the school district. If the second selected
proposer refuses or fails to execute the tendered
instrument, the governing board of the school district
may award the instrument to the proposer with the third
highest best value score if the governing board of the
school district deems it to be for the best interest of
the school district.
v) Notwithstanding any other law, upon issuance of a
contract award, the school district shall publicly
announce its award, identifying the entity to which the
award is made, along with a statement regarding the basis
of the award. The statement regarding the school
district's contract award and the contract file shall
provide sufficient information to satisfy an external
audit.
g) The governing board of the school district, at its
discretion, may reject all proposals and request new
proposals.
h) Following the award of an instrument, and if the price
proposal is a not a lump sum for the instrument awarded,
the successful proposer shall provide the school district
with objectively verifiable information of its costs to
perform the services requested under the instrument and
shall select subcontractors using a competitive selection
process that is set forth in the request for sealed
proposals. Once any preconstruction services are completed
and subcontractors are selected, the successful proposer
and the school district shall finalize the price for the
services to be provided under the instrument that is
consistent with the price estimate in the request for
proposal. The contract file shall include documentation
sufficient to support the final price determination.
i) Nothing shall preclude a school district from
segregating the request for proposals into a request for
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qualifications, followed by a request for proposals with
price information from the proposers deemed most qualified
by the school district, provided that the procedures
specified in this bill are otherwise followed.
5)Specifies that notwithstanding Sections 17297 and 17402, a
school district may enter into an instrument before written
approval by the Department of General Services' Division of
the State Architect if the instrument provides that no work
for which a contractor is required to be licensed in
accordance with Article 5 (commencing with Section 7065) of
Chapter 9 of Division 3 of the Business and Professions Code
and for which Division of the State Architect approval is
required shall be performed before receipt of the required
Division of the State Architect (DSA) approval.
6)Specifies that if a project for the construction, alteration,
repair, or improvement of any structure, building, or other
improvement of any kind that was leased through a
lease-leaseback instrument before July 1, 2015 is determined
to be invalid by a court of competent jurisdiction, the
contractor who entered into the instrument with the school
district shall be entitled to be paid the reasonable cost of
the labor, equipment, materials, and services furnished by the
contractor before the date of the determination that the
instrument is invalid if all of the following conditions are
met:
a) The contractor proceeded with construction, alteration,
repair, or improvement based upon a good faith belief that
the instrument was valid.
b) The school district has reasonably determined that the
work performed is satisfactory.
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c) Contractor fraud did not occur in the obtaining or
performance of the instrument.
d) The instrument does not otherwise violate state law
related to the construction or leasing of public works of
improvement.
7)Specifies that in no event shall payment to the contractor
exceed either of the following:
a) The contractor's costs as included in the instrument
plus the cost of any approved change orders.
b) The lease payments made, less profit, at the point in
time the instrument is determined to be invalid by a court
of competent jurisdiction.
8)Specifies this bill shall not affect any protest and legal
proceedings, whether contractual, administrative, or judicial,
to challenge the award of the public works contract, nor
affect any rights under Section 337.1 or 337.15 of the Code of
Civil Procedure.
9)Sunsets on July 1, 2022 and is repealed as of January 1, 2023,
unless a later enacted statute, that is enacted before January
1, 2023, deletes or extends that date.
EXISTING LAW:
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1)Requires the governing board of a school district to
competitively bid and award to the lowest bidder contracts
involving the following:
a) An expenditure of $50,000 or more for the purchase of
equipment, materials, or supplies, services (except for
construction services), and repairs.
b) An expenditure of $15,000 or more for a public contract
project defined as construction, reconstruction, erection,
alteration, renovation, improvement, demolition, repair,
painting or repainting of any publicly owned, leased, or
operated facility. (Public Contract Code (PCC) Sections
20111 and 22002)
2)Authorizes the governing board of a school district, without
advertising for bids, to let, for a minimum rental of $1 a
year, to any person, firm, or corporation any real property
that belongs to the school district if the instrument by which
such property is let requires the lessee therein to construct
on the demised premises, or provide for the construction
thereon of, a building or buildings for the use of the school
district during the term thereof, and provides that the title
to that building shall vest in the school district at the
expiration of that term. (Education Code (EC) Section 17406)
3)Requires, until January 1, 2019, a school district with an
average daily attendance (ADA) of more than 2,500 using state
school facility bond funds for a public project with an
expenditure of $1 million or more to require prospective
bidders, and if utilized, all electrical, mechanical, and
plumbing subcontractors, to complete and submit a standardized
prequalification questionnaire and financial statement. (PCC
Section 20111.6(a)(i)(l))
FISCAL EFFECT: None. This bill is keyed non-fiscal by the
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Legislative Counsel.
COMMENTS: Contracting. Under current law, school districts are
required to competitively bid any public works contract over
$15,000 and award the contract to the lowest responsible bidder.
Alternative methods for awarding contracts have emerged over
time, including design-build, which enables a school district to
issue a request for proposal for both design and construction of
projects; best value, which authorizes school districts to
consider factors other than cost; and job order contracting,
which is based on prices for specific construction tasks. AB
1358 (Dababneh), Chapter 752, Statutes of 2015, standardized the
design build process for school districts with the process
authorized for state and local governmental agencies. AB 1185
(Ridley-Thomas) authorized the Los Angeles Unified School
District (LAUSD) to use a best value procurement method. SB 835
(Wolk), Chapter 636, Statutes of 2011, extended the sunset of
the best value pilot program for the University of California
(UC) to January 1, 2017 and expanded the program to all UC
campuses. SB 1214 (Allen), pending on the Senate floor, will
remove the sunset. AB 1431 (Gomez), Chapter 786, Statutes of
2015, extends the authority to utilize job order contracting to
all school districts.
Lease-leaseback. Unlike the other contracting methods that
require a competitive process, lease-leaseback is a process
whereby a governing board of a school district may, without
advertising for bid, rent district property for a minimum of $1
a year, to any person, firm or corporation. The person, firm or
corporation constructs the school building and rents the
facility back to the school district. At the end of the lease,
the district resumes title to the building and site.
The non-competitive nature of lease-leaseback has been a subject
of contention for a long time, even though it is authorized in
Education Code Section 17406. In 2004, the Office of Public
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School Construction, the agency that administers the School
Facility Program submitted a report to the State Allocation
Board (SAB), the body that allocates state bond funds, raising
concerns that "a significant numbers of projects and significant
sums of public funding are not being subjected to the checks and
balances of the competitive bid process." The report suggested
that the Legislature may wish to consider the option of
requiring a competitive selection process rather than a
competitive bid process. Subsequently, Assemblymember John
Dutra, who was a member of the SAB, amended AB 1486 in 2004 to
develop a competitive procurement process that is similar to the
process proposed by this bill. Governor Arnold Schwarzenegger
vetoed the bill, stating that he was "supportive of using a
competitive process for public works projects and understand
that this bill is needed to clarify that process. However, this
bill imposes restrictions on lease-leaseback contracts that
could limit competition, inadvertently limit schools'
flexibility, and drive higher administrative costs; thereby
potentially increasing the overall cost of school facility
construction."
More recently, over a dozen lawsuits against school districts
and contractors have been filed throughout the state,
challenging that lease-leaseback contracts should have been
competitively bid. Most of the plaintiffs in the lawsuits were
represented by the same attorney and most were found to be
unsuccessful, except for three that have been appealed to the
Appellate Court level. The most notable case is Davis v. Fresno
Unified School District. In 2015, an Appellate Court determined
that the contract of the construction of a middle school,
completed in 2014 and costing $37 million, while awarded as a
lease-leaseback contract, was not a true leaseback. The
plaintiff, a taxpayer, and according to media reports, a Fresno
contractor, argued that the contract was treated like a
traditional construction contract and should have been
competitively bid. The case is currently back before the trial
court for deliberation.
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Purpose of the bill. The author states that this bill will halt
sole source contracting by striking the authority to award a
lease-leaseback contract without advertising for bid and
establishing a competitive process. Existing law requires
competitive bidding to ensure that a governmental entity is
getting a good price while ensuring that there is no favoritism
towards a business entity for services or goods. Under the
traditional design-bid-build method, a school district would
first hire an architect to design a school facility and then
issue a bid for the construction phase using the plans already
developed, awarding the contract to the lowest responsible
bidder. The author states that the traditional bidding method
doesn't work well in a lease model because the lease structure
will vary depending on the length, interest, and monthly
payments. Instead, this bill stablishes a competitive selections
process that is modeled after design build and best value, both
of which are alternatives to traditional design-bid-build
already approved by the Legislature. Under a design-build
process, a K-12, community college district, or other public or
private agency issues a request for proposal for both design and
construction of a facility. Best value is a procurement process
whereby the selected bidder may be selected on the basis of
objective criteria for evaluating the qualifications of bidders
with the resulting selection representing the best combination
of price and qualifications. The author states that similar to
design build, this bill allows a contractor to work with an
architect early to avoid costly change orders later, and similar
to best value, this bill allows evaluation of proposals based on
price and other factors, including the proposed lease structure.
Under this bill, a school district must develop and publish
guidelines for the request for sealed proposals that includes
information about the estimated price of the project, a
description of the facilities to be constructed, including a
description of any preconstruction services, if sought by the
school district, the key elements and the standards by which the
proposals will be evaluated, a timetable for submission and
review of proposals, the process to be used by the successful
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proposer for the award of subcontracts, and the key elements of
the instrument (lease structure). The bill also requires the
request for sealed proposals to identify all the criteria that
the school district will consider in evaluating the proposals
and qualifications of the proposers, including relevant
experience, safety record, price proposal and other factors
identified by a school district. The school district may
request a lump-sum price or a proposer's proposed fee for work
related to the construction of facilities, including
preconstruction services.
Once proposals are reviewed and rated, the bill requires the
district to select the proposal with the highest score.
Consistent with existing law, the bill requires a proposer and
major subcontractors (electrical, mechanical and plumbing) to be
prequalified, comprised of a questionnaire and a rating system,
for any request for proposal issued by a district with more than
2,500 ADA, regardless of funding source.
Preconstruction services. This bill authorizes the request for
proposal to include preconstruction services. According to the
author, this provision is similar to design build allowing
contractors to be involved with the project from the onset of
the project. This provision is also similar to the Construction
Manager/General Contractor (CM/GC) method of awarding a highway,
bridge, or tunnel project used by the California Department of
Transportation (Caltrans). The definition of preconstruction
services in this bill is identical to the definition in Public
Contract Code Section 6702 and states that preconstruction
services means "advice during the design during the design phase
including, but not limited to, scheduling, pricing, and phasing
to assist the school district to design a more constructible
project."
The Assembly Transportation Committee analysis of AB 2498
(Gordon), Chapter 752, Statutes of 2012, which authorized the
CM/GC method, described the benefits of this process as the
following: "CM/CG process is meant to provide continuity and
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collaboration between the design and construction phases of the
project. Construction managers have an incentive to provide
input during the design phase that will enhance constructability
of the project later because they know that they will have the
opportunity to become the general contractor for the project.
Furthermore, CM/CG promises to save project delivery time,
provide earlier cost certainty, transfer risks from Caltrans to
the contractor, and ensure project constructability.
Additionally, CM/CG allows Caltrans to have greater control of
design decisions."
DSA approval. Current law requires architectural plans to be
approved by the DSA before a construction contract can be
signed. School districts state that this requirement prevents
them from entering into contracts when prices can be guaranteed
or being able to sign contracts to secure work to be completed
during summer months when facilities are not full of students.
In 2012, the Chief Architect, Chet Widom, put together a task
force to review the DSA approval process using alternative
delivery methods such as best value and lease-leaseback. The
task force submitted recommendations to the State Architect on
legislative, regulatory and administrative policy changes to
clarify and better guide approvals using these alternative
delivery methods. One of the recommendations from the task
force is to allow districts to sign contracts prior to receiving
DSA approval as long as construction does not begin prior to DSA
approval. This bill incorporates that recommendation.
Disgorgement. The Davis lawsuit seeks to invalidate the
lease-leaseback contract and disgorge or require repayment of
the funds received by the contractor. Current law, specified in
Public Contract Code Section 5110, entitles a contractor to be
paid reasonable cost, including labor, equipment, materials and
services, but excluding profit, if a contract for the
construction, alteration, repair, or improvement of any
structure, building, or road, is found to be invalid by a court
due to a defect or defects in the competitive bidding process.
This provision does not apply in lease-leaseback cases because
lease-leaseback contracting is not a competitive process. This
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bill models the language in Public Contract Code Section 5110
and provides contractors who entered into a lease-leaseback
contract prior to July 1, 2015 (the date the Davis v. Fresno
Unified School District appellate court decision was published)
that is found to be invalid by a court to be entitled to
reasonable cost of labor, equipment, materials and services
furnished by the contractor if specified conditions are met,
including that the contractor proceeded with good faith belief
that the contract was valid, the school district reasonably
determines that the work is satisfactory, contractor fraud did
not occur in obtaining or performance of the contract, and the
contract does not violate any other state construction or
leasing laws. The bill excludes any profit.
The Davis lawsuit also seeks to invalidate the contract based on
allegations that the contractor had violated conflict of
interest laws when it received a pre-construction contract and
was later awarded the construction contract. Government Code
Section 1090 states, in part, "Members of the Legislature,
state, county, district, judicial district, and city officers or
employees shall not be financially interested in any contract
made by them in their official capacity, or by any body or board
of which they are members." At issue is whether the contractor
had acted as a public official when it provided pre-consulting
services under one contract and then received another contract
for construction services. The Appellate Court determined that
a "corporate consultant" could be considered a public employee.
The trail court will now determine whether there is sufficient
evidence to prove that a conflict of interest had occurred.
This bill does not automatically protect all contractors from
disgorgement. If a contract is found to be invalid by a court,
the contractor must show that it meets all the conditions
specified in the bill, including that the contractor had acted
in good faith and fraud did not occur in obtaining the contract.
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Arguments in support. The author states, "Since 1957, the law
has allowed school districts to bypass the competitive bidding
process through the lease-leaseback method. It is time to
eliminate this authority and ensure that public funds are
awarded in a transparent manner. If enacted, sole source
contracting will no longer be allowed. This bill also extends
current law to lease-leaseback situations so that a contractor
would not be required to pay back the costs it incurred to build
a facility, excluding profit, if the contract is found to be
invalid. The facilities were built; contractors who acted in
good faith should not be required to donate facilities to school
districts, who awarded the contracts."
Arguments in opposition. Kevin Carlin, the attorney
representing the plaintiff in the Davis v. Fresno Unified School
District lawsuit, states, "AB 2316's 'competitive selection
process' based on 'best value' factors other than price is a
sham and a subterfuge to allow a handful of large and powerful
crony contractors continue to receive fat contracts from the
school district staff and board members they influence and
control." Mr. Carlin also opposes the disgorgement provision of
the bill, stating that contractors have violated conflict of
interest laws and should not be given a free pass.
Related and prior related legislation. AB 975 (Mullin), pending
in the Senate, is substantially similar to the provision in this
bill allowing contractors to retain specified reasonable costs
if a lease-leaseback instrument awarded prior to July 1, 2015 is
found to be invalid by a court of competent jurisdiction.
SB 1214 (Allen), pending on the Senate floor, removes the sunset
giving the UC authority to use design build.
AB 1185 (Ridley-Thomas), Chapter 786, Statutes of 2015,
authorizes the LAUSD to utilize a best value procurement process
as a pilot project until January 1, 2021.
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AB 1358 (Dababneh), Chapter 752, Statutes of 2015, aligns the
process for school districts awarding contracts through the
design-build method with the design-build process established
for state and local agencies.
AB 1431 (Gomez), Chapter 753, Statutes of 2015, extends the
authority to utilize job order contracting to all school
districts.
AB 1486 (Dutra), introduced in 2004, would have established a
competitive procurement process for lease-leaseback that is
similar to this bill. The bill was vetoed by Governor
Schwarzenegger.
REGISTERED SUPPORT / OPPOSITION:
Support
Associated General Contractors
Construction Employers Association
Opposition
An individual
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Analysis Prepared by:Sophia Kwong Kim / ED. / (916) 319-2087