BILL ANALYSIS Ó
SENATE COMMITTEE ON EDUCATION
Senator Carol Liu, Chair
2015 - 2016 Regular
Bill No: AB 2316
-----------------------------------------------------------------
|Author: |O'Donnell |
|-----------+-----------------------------------------------------|
|Version: |Jun 14, 2016 Hearing |
| |Date: June 29, 2016 |
-----------------------------------------------------------------
----------------------------------------------------------------
|Urgency: |No |Fiscal: |No |
----------------------------------------------------------------
-----------------------------------------------------------------
|Consultant:|Kathleen Chavira |
| | |
-----------------------------------------------------------------
Subject: School facilities: leasing property
SUMMARY
This bill, until July 1, 2022, modifies lease-leaseback
provisions to remove the authority to let such a contract
without advertising for bids, requires that such a contract be
awarded through a competitive process, as specified, and
entitles a contractor to be paid reasonable costs, as specified,
if a court invalidates a lease-leaseback instrument entered into
prior to July 1, 2015 for a school construction project, if
specified conditions are met. The bill permanently deletes the
authority to enter into a lease-leaseback instrument without
advertising for bids beginning July 1, 2022.
BACKGROUND
Existing law authorizes the governing board of a school district
to enter into a lease-leaseback contract without advertising for
bids. Current law prescribes that real property may be let by
the district for a minimum rental of $1 per year if the lessee
is required to construct, or provide for the construction of a
building/buildings for the use of the school district during the
term of the lease, and requires that title of the building vests
in the school district at the expiration of that term. Existing
law, until January 1, 2019, also requires that school districts
entering into lease-leaseback comply with specified
pre-qualification requirements, if the project is funded with
state bond funds, the expenditure of the project is $1 million
AB 2316 (O'Donnell) Page 2
of ?
or more, and the average daily attendance (ADA) of the school
district is greater than 2,500. (Education Code § 17406)
Existing law establishes a pilot program to authorize the Los
Angeles Unified School District (LAUSD) to utilize a best value
procurement process, as specified, for construction projects
over $1 million until January 1, 2021.
(Public Contract Code § 20119-20119.7)
Existing law provides that when a construction project is
competitively bid and any intended or actual award of the
contract is challenged, the contract may be entered into pending
final decision of the challenge. Existing law provides that if
the contract is determined to be invalid due to a defect or
defects in the competitive bidding process caused solely by the
public entity, the contractor who entered into the contract with
the public entity is entitled to be paid the reasonable cost,
(excluding profit) of the labor, equipment, materials, and
services furnished by the contractor prior to the date of the
determination that the contract is invalid if specified
conditions are met including that:
1) The contractor proceeded with the project based upon a
good faith belief that the contract was valid.
2) The public entity has determined that the work performed
is satisfactory.
3) Contractor fraud did not occur in the obtaining or
performance of the contract.
4) The contract does not otherwise violate statutory or
constitutional limitations. (Public Contract Code § 5110)
ANALYSIS
This bill:
1) Modifies lease-leaseback provisions applicable to school
construction projects. It:
a) Deletes the authority to let such a
contract without advertising for bids.
AB 2316 (O'Donnell) Page 3
of ?
b) Requires that such a contract be
awarded through a competitive process generally based
upon existing design build and best value processes
with certain exceptions. It:
i) Authorizes a school
district request for proposal to include
"pre-construction services" defined as 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.
ii) Authorizes a school district to enter
into a lease-leaseback agreement prior to written
approval by the Division of the State Architect
(DSA) if the instrument provides that no work
that requires that a contractor be licensed will
be initiated before receipt of statutorily
required DSA approvals.
c) Establishes provisions to be
retroactively applied to lease-leaseback school
construction projects. It:
i) Entitles a contractor to be
paid reasonable costs, as specified, if a court
invalidates a lease-leaseback instrument entered
into prior to July 1, 2015 for a school
construction project, if specified conditions
(mirroring those outlined in Public Contract Code
§ 5110) are met.
ii) Prohibits these provisions from
affecting any protesting and legal proceedings,
whether contractual, administrative, or judicial,
to challenge the award of the public works
contract, nor affecting any rights to bring a
civil action regarding a deficiency or injury
related to deficiency in the development or
improvement of real property, per specified
provisions of the Code of Civil Procedure.
d) Extends prequalification requirements
AB 2316 (O'Donnell) Page 4
of ?
applicable to lease-leaseback under current law from
2019 to 2022.
e) Sunsets all of these provisions on July
1, 2022.
2) Permanently deletes the authority to enter into a
lease-leaseback instrument without advertising for bids,
beginning on July 1, 2022.
STAFF COMMENTS
1) Need for the bill. According to the author this bill
responds to lawsuits which have been filed charging that
lease-leaseback provisions have been used to bypass the
competitive bid process. Courts have had varied
interpretations of the appropriate use of lease-leaseback
contracts. In a lawsuit against the Fresno Unified School
District, an appellate court found that a 2014 contract for
construction of a middle school awarded under these
provisions was not a true leaseback, while the plaintiff
argued that the contract should have been competitively
bid. In a lawsuit against the Torrance Unified School
District a different appellate court found that the law
does not require competitive bidding nor did it specify
that there had to be a true leaseback in order to use this
contracting method.
This bill deletes the authority to issue a lease-leaseback
contract without advertising for bids and establishes a
competitive selection process for these contracts modeled
after design-build and best value provisions. The bill
also entitles a contractor who entered into a
lease-leaseback school construction contract prior to July
1, 2015 to compensation for any reasonable costs (excluding
any profit) if the contract is subsequently found to be
invalid by a court.
2) Lease-leaseback. Current law requires the governing board
of a school district to competitively bid, and award to the
lowest responsible bidder, any contract for a public
project involving an expenditure of $15,000 or more.
Lease-leaseback is a process whereby a governing board of a
school district may, without advertising for a bid, rent
AB 2316 (O'Donnell) Page 5
of ?
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 lease is terminated when the building is constructed.
3) Historical concerns with lease-leaseback. In January 2004,
the State Allocation Board was presented with a report to
discuss the use of lease-leaseback agreements for project
delivery of facilities funded through the School Facility
Program. According to that report, the use of this project
delivery method was growing. Increasingly, districts were
interpreting existing law to allow the use of these
provisions to award a public works project without a
competitive bid. The report noted that some districts do
institute a competitive selection process voluntarily, but
many do not, and expressed concern that an interpretation
that would potentially allow billions of state bond dollars
to be contracted through a "sole-source" mechanism should
be closely examined.
The report concluded that the State Allocation Board (SAB)
might wish to consider whether new construction and
modernization projects interpreting the authority as an
exemption from competitive bidding requirements should
continue to be presented for state funding, and whether
legislation clarifying the appropriate use of this
authority was necessary. The SAB did not accept the report,
some members expressed interest in pursuing proposed
legislation to address this issue, and staff were directed
to provide written notification to school districts to
proceed with caution when using lease-leaseback and
interpreting the law.
4) New competitive process. Over time, alternative methods to
traditional design-bid-build for awarding construction
contracts have emerged and been approved by the
Legislature. These include design-build (which enables a
school district to issue a request for proposal for both
design and construction of projects) and best value (which
authorizes school districts to consider the best
combination of factors, and not just cost, in selecting a
bidder). AB 1358 (Dababneh, Chapter 752, Statutes of 2015)
AB 2316 (O'Donnell) Page 6
of ?
generally aligned the design build process for school
districts with the process authorized for state and local
governmental agencies and sunsets this authority in January
2025. AB 1185 (Ridley-Thomas, Chapter 786, Statutes of
2015) authorized the Los Angeles Unified School District to
use a best value procurement method until January 2021.
According to the author, the traditional "lowest responsible
bidder" method doesn't work well in a lease model because the
lease structure can vary depending on the length, interest, and
monthly payments, making it difficult to compare costs. This
bill establishes a competitive selection process that is modeled
after a combination of design build and best value. 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.
According to the author, these provisions will ensure that
districts will no longer be able to issue these contracts
without soliciting bids. Establishing a process that utilizes
existing contracting models will ensure that there is a
competitive process while allowing districts to determine the
elements that are important for the project.
5) With modifications. As noted in the analysis of this bill,
the competitive process created by this bill goes beyond
current design build and best value provisions by
authorizing the inclusion of preconstruction services in a
request for proposal and authorizing districts to sign
contracts prior to receiving Division of the State
Architect approval.
a) Pre-construction Services. According to the
author, the pre-construction services provisions are
based upon a similar authority granted under Public
Contract Code § 6702 applicable to California
Department of Transportation projects in which a
construction manager is procured to provide
preconstruction services during the design phase of
the project and construction services during the
construction phase of the project. It is the intent to
authorize a process that can provide continuity and
AB 2316 (O'Donnell) Page 7
of ?
collaboration between the design and construction
phases of the project as part of the competitive
bidding process.
This bill authorizes pre-construction services to be
included in a request for proposal under the
competitive process it establishes. While a district
could continue to contract for pre-construction
services separate from the construction contract, the
competitive process required by the bill would apply
to all bidders for the construction contract,
including any provider of pre-construction services.
b) DSA Approval. Current law requires
architectural plans to be approved by the Division of
the State Architect (DSA) before a construction
contract can be signed. In 2012, the State Architect
convened a task force to review the DSA approval
process applicable to alternative delivery methods
such as best value and lease-leaseback in response to
concerns that the process hampered districts' ability
to guarantee contract prices or plan for summer
construction activity. 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. Among other things, the
task force recommended authorizing 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.
1) Sunset of authority. This bill sunsets the authority to
use the alternative competitive process in 2022, at which
point statutes authorizing lease-leaseback will require the
traditional design-bid-build process. According to the
author, requiring a competitive process for lease-leaseback
contracts is intended to be permanent. The sunset is added
to conform with sunsets incorporated in design build and
best value legislation, and will allow the Legislature to
determine whether the competitive process established by
this bill needs to be modified when considering whether to
extend or remove the sunset.
AB 2316 (O'Donnell) Page 8
of ?
2) Related court cases. As previously noted, two recent court
cases came to different conclusions as to whether
competitive bidding was required under the specific
lease-leaseback contracts in question. In Davis v. Fresno
Unified School District, the Fifth Appellate Court ruled
(June, 2015), based upon a complex analysis of the
Legislature's intent and the structure of the specific
contract in question, that competitive bidding was
required. In McGee v. Balfour Beatty Construction, the
Second Appellate Court specifically rejected the Fifth
Appellate Court finding and ruled (April 2016) that the
contract in question was legally entered into by the school
district and that competitive bidding was not required.
This bill deletes the authority to enter into a
lease-leaseback contract without advertising for bids and
establishes an alternate competitive procurement process
for this purpose.
In addition, both lawsuits alleged conflict of interest on
the part of contractors based upon Government Code § 1090
which prohibits public officials from having personal
financial interest in contracts formed in their official
capacities. 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 Fifth Appellate
Court determined that a "corporate consultant" could be
considered a public employee, the Second Appellate Court
agreed, and the respective trial courts will now determine
whether there is sufficient evidence to prove that a
conflict of interest had occurred.
3) Disgorgement. The lawsuits discussed in staff comment #7
seek to invalidate the lease-leaseback contracts in
question and "disgorge" or require repayment of the funds
received by the contractor. Current law (Public Contract
Code Section 5110) entitles a contractor to be paid
reasonable costs, 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. Current law does not apply in lease-leaseback
cases because lease-leaseback contracting does not involve
AB 2316 (O'Donnell) Page 9
of ?
a competitive bid process.
This bill contains provisions modeled after Public Contract
Code provisions that protect against disgorgement if the
contract is invalidated because of a defect in the bidding
process. However, as drafted, this bill appears to extend
these protections to lease-leaseback contracts that are
invalidated for any reason.
The Committee may wish to consider the following:
a) How broad an insulation from action against
improper activity should be allowed?
b) How would these provisions affect current
litigation regarding the violation of
conflict-of-interest provisions? Is it the desire of
this Committee to insulate contractors from
disgorgement if the courts find that there was a
conflict-of-interest?
c) How many lease leaseback contracts were
entered into prior to 2015 that are affected by the
disgorgement provisions?
d) Should statute eliminate the discretion of a
court to determine the appropriate remedy if a
contract emerges that is particularly egregious?
Staff recommends the disgorgement provisions be amended to:
Delete "retroactively" as it appears to be
unnecessarily duplicative
Clarify that the specific reason for being
determined "invalid" is in relation to the competitive
bidding provisions of the lease-leaseback statute.
Preserve the discretion of the court to
determine the appropriate remedy based upon the
specific circumstances surrounding the contract that
is being challenged by "authorizing" rather than
entitling payment of reasonable costs.
AB 2316 (O'Donnell) Page 10
of ?
Clarify that it is the court that determines
whether the specified conditions have been met.
These changes should be reflected as follows:
(d) (1) This subdivision shall apply retroactively to a
project for the construction, alteration, repair, or
improvement of any structure, building, or other
improvement of any kind that was leased through an
instrument pursuant to this section before July 1, 2015. If
at any time the instrument is determined to be invalid by a
court of competent jurisdiction , because it fails to fall
within the competitive bidding exception pursuant to
paragraph (1) subdivision (a) of this section, as it read
on December 31, 2016 , the contractor who entered into the
instrument with the school district shall may 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, as determined
by the court , 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.
(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.
SUPPORT
Associated General Contractors
Association of California School Administrators
California Association of Suburban School Districts
California Chapters of the National Electrical Contractors
Association
California Legislative Conference of the Plumbing, Heating, and
AB 2316 (O'Donnell) Page 11
of ?
Piping Industry
California School Boards Association
Coalition for Adequate School Housing
Construction Employers Association
School Employers Association of California
Small School Districts' Association
United Contractors
OPPOSITION
California Taxpayers Association
Howard Jarvis Taxpayers Association
KernTax
-- END --