BILL ANALYSIS Ó
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|SENATE RULES COMMITTEE | AB 2316|
|Office of Senate Floor Analyses | |
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THIRD READING
Bill No: AB 2316
Author: O'Donnell (D), et al.
Amended: 8/2/16 in Senate
Vote: 21
SENATE EDUCATION COMMITTEE: 9-0, 6/29/16
AYES: Liu, Block, Hancock, Huff, Leyva, Mendoza, Monning, Pan,
Vidak
ASSEMBLY FLOOR: 66-4, 5/12/16 - See last page for vote
SUBJECT: School facilities: leasing property
SOURCE: Author
DIGEST: 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
provides that a contractor may 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. This bill permanently
deletes the authority to enter into a lease-leaseback instrument
without advertising for bids beginning July 1, 2022.
ANALYSIS:
Existing law:
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1)Authorizes the governing board of a school district to enter
into a lease-leaseback contract without advertising for bids.
Existing 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.
2)Requires, until January 1, 2019, 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
or more, and the average daily attendance of the school
district is greater than 2,500. (Education Code § 17406)
3)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)
4)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:
a) The contractor proceeded with the project based upon a
good faith belief that the contract was valid.
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b) The public entity has determined that the work performed
is satisfactory.
c) Contractor fraud did not occur in the obtaining or
performance of the contract.
d) The contract does not otherwise violate statutory or
constitutional limitations. (Public Contract Code § 5110)
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.
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.
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c) Establishes provisions to be applied to lease-leaseback
school construction projects. It:
i) Provides that a contractor may 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 and because the instrument fails to
fall within the competitive bidding exception, as
specified.
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 applicable to
lease-leaseback under existing law from 2019 to 2022.
e) Sunsets all of these provisions on July 1, 2022.
2)Deletes permanently the authority to enter into a
lease-leaseback instrument without advertising for bids,
beginning on July 1, 2022.
Comments
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
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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.
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 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.
Historical concerns with lease-leaseback. In January 2004, the
State Allocation Board (SAB) 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 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
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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.
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) 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 LAUSD 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.
With modifications. As noted in the analysis of this bill, the
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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
DSA approval.
1)Pre-construction Services. According to the author, the
pre-construction services provisions are based upon a similar
authority granted under Public Contract Code Section 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 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 this bill would
apply to all bidders for the construction contract, including
any provider of pre-construction services.
2)DSA Approval. Current law requires architectural plans to be
approved by the 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.
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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.
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 Section 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.
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Disgorgement. The lawsuits discussed previously 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 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.
FISCAL EFFECT: Appropriation: No Fiscal
Com.:NoLocal: No
SUPPORT: (Verified8/2/16)
American Subcontractors Association, Inc.
Associated General Contractors
Association of California School Administrators
California Association of School Business Officials
California Association of Suburban School Districts
California Chapters of the National Electrical Contractors
Association
California Legislative Conference of the Plumbing, Heating, and
Piping Industry
California School Boards Association
California State Association of Electrical Workers
California State Pipe Trades Council
Coalition for Adequate School Housing
Construction Employers Association
School Employers Association of California
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Small School Districts' Association
State Building and Construction Trades Council
United Contractors
Western States Council of Sheet Metal Workers
OPPOSITION: (Verified8/2/16)
California Taxpayers Association
Howard Jarvis Taxpayers Association
KernTax
ASSEMBLY FLOOR: 66-4, 5/12/16
AYES: Achadjian, Alejo, Arambula, Atkins, Baker, Bigelow,
Bloom, Bonilla, Bonta, Brough, Brown, Calderon, Campos, Chau,
Chiu, Chu, Cooley, Cooper, Dababneh, Daly, Dodd, Eggman,
Frazier, Cristina Garcia, Eduardo Garcia, Gatto, Gipson,
Gonzalez, Gordon, Gray, Hadley, Roger Hernández, Holden,
Irwin, Jones, Lackey, Levine, Linder, Lopez, Low, Maienschein,
Mayes, McCarty, Medina, Mullin, Nazarian, Obernolte,
O'Donnell, Olsen, Patterson, Quirk, Ridley-Thomas, Rodriguez,
Salas, Santiago, Steinorth, Mark Stone, Thurmond, Ting,
Wagner, Waldron, Weber, Wilk, Williams, Wood, Rendon
NOES: Travis Allen, Chávez, Grove, Mathis
NO VOTE RECORDED: Burke, Chang, Dahle, Beth Gaines, Gallagher,
Gomez, Harper, Jones-Sawyer, Kim, Melendez
Prepared by:Lenin DelCastillo / ED. / (916) 651-4105
8/4/16 14:23:14
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