BILL ANALYSIS                                                                                                                                                                                                    



          SENATE COMMITTEE ON GOVERNANCE AND FINANCE
                         Senator Robert M. Hertzberg, Chair
                                2015 - 2016  Regular 

                              
          
           ------------------------------------------------------------------ 
          |Bill No:  |AB 2551                          |Hearing    |6/29/16  |
          |          |                                 |Date:      |         |
          |----------+---------------------------------+-----------+---------|
          |Author:   |Gallagher                        |Tax Levy:  |No       |
          |----------+---------------------------------+-----------+---------|
          |Version:  |4/27/16                          |Fiscal:    |Yes      |
           ------------------------------------------------------------------ 
           ----------------------------------------------------------------- 
          |Consultant|Favorini-Csorba                                       |
          |:         |                                                      |
           ----------------------------------------------------------------- 

                    Contract procurement:  surface storage projects



          Authorizes local agencies to use alternative procurement methods  
          for reservoirs funded by Proposition 1 bond funds.


           Background 

           Alternative Procurement Methods.  The Local Agency Public  
          Construction Act requires local officials to invite bids for  
          construction projects and then award contracts to the lowest  
          responsible bidder.  This design-bid-build method is the  
          traditional, and most widely-used, approach to public works  
          construction.  This approach splits construction projects into  
          two distinct phases: design and construction.  During the design  
          phase, the local agency prepares detailed project plans and  
          specifications using its own employees or by hiring outside  
          architects and engineers.  Once project designs are complete,  
          local officials invite bids from the construction community and  
          award the contract to the lowest responsible bidder. 

          By contrast, state law allows state and local officials, until  
          January 1, 2025, to use the design-build method for contracts in  
          excess of $1 million to procure both design and construction  
          services from a single company before the development of  
          complete plans and specifications.  Under design-build, the  
          owner contracts with a single entity-which can be a single firm,  
          a consortium, or a joint venture-to design and construct a  







          AB 2551 (Gallagher) 4/27/16                             Page 2  
          of ?
          
          
          project.  Before inviting bids, the owner prepares documents  
          that describe the basic concept of the project, as opposed to a  
          complete set of drawings and specifications of the final  
          product.  In the bidding phase, the owner typically evaluates  
          bids on a best-value basis, incorporating technical factors,  
          such as qualifications and design quality, in addition to price.  
           The Department of General Services, the California Department  
          of Corrections and Rehabilitation, cities, counties, transit  
          districts, special districts operating wastewater, water  
          recycling, or solid waste management facilities, and certain  
          health care districts may use design-build.  

          Originally the authorizations for state agencies and local  
          governments to use design-build were dispersed throughout state  
          law in separate code sections.  In 2014, the Legislature  
          consolidated these provisions into consistent,  
          generally-applicable statutes (SB 785, Wolk, 2014).  SB 785  
          outlines a standardized design-build procurement process in  
          which the awarding authority may prepare a list of qualified or  
          short-listed entities, based on specified criteria.  Once a list  
          of qualified or short-listed entities is complete, the awarding  
          authority may prepare a request for proposals (RFP) that invites  
          prequalified or short-listed entities to submit competitive  
          sealed proposals in the manner prescribed by the awarding  
          authority. 

          For projects utilizing low bid as the selection method, the  
          competitive bidding process must involve lump-sum bids by the  
          prequalified or short-listed design-build entities. Awards must  
          be made to the design-build entity that is the lowest  
          responsible bidder.

          For those projects utilizing best value as a selection method,  
          proposals must be evaluated using only the criteria and  
          selection procedures specifically identified in the RFP.  The  
          awarding authority may reserve the right to request revisions  
          and conduct negotiations with responsive proposers, if the  
          authority specifies in the RFP how it will ensure that  
          negotiations are conducted in good faith.  The authority may  
          hold discussions or negotiations with responsive proposers using  
          the process specified in the RFP.  Responsive proposers are  
          ranked based on value provided.  The contract must be awarded to  
          the responsible design-build entity whose proposal is determined  
          by the authority to have offered the best value to the public.   








          AB 2551 (Gallagher) 4/27/16                             Page 3  
          of ?
          
          
          Upon issuance of a contract award, the awarding authority shall  
          publicly announce its award, identifying the design-build entity  
          to which the award is made, along with a written decision  
          supporting its contract award and stating the basis of the  
          award. 

          The state's design-build statutes also impose requirements for  
          the use of skilled labor, the issuance of performance bonds,  
          insurance coverage, and identification of subcontractors that  
          will complete at least one-half of 1% of the value of a  
          contract.

          Local agencies may also use "construction manager at risk"  
          contracting, which allows local officials to retain a  
          construction manager, who provides pre-construction services  
          during the design period, later becomes the general contractor  
          during the construction process, and is responsible for  
          delivering the project within an agreed upon price, potentially  
          assuming the risk for cost-overruns (SB 328, Knight, 2013). 

          CALFED Surface Storage Projects.  In response to increasing  
          environmental concerns and water supply restrictions in the  
          Sacramento-San Joaquin Delta (the Delta), state and federal  
          agencies created CALFED in 1994.  In 2000, the parties to CALFED  
          signed the CALFED Record of Decision, which laid out the  
          agencies' commitment to water supply reliability, ecosystem  
          restoration, water quality improvements, and levee system  
          integrity.  Constructing new dams upstream of the Delta was a  
          cornerstone of CALFED.  The Record of Decision identified  
          numerous surface storage projects, including three that could  
          potentially be built by local agencies, specifically:

                 Sites Reservoir, off of the Sacramento River in Glenn  
               and Colusa Counties.  Sites Reservoir would be constructed  
               by the Sites Joint Powers Authority, comprising the County  
               of Colusa, County of Glenn, Glenn-Colusa Irrigation  
               District, Maxwell Irrigation District, Reclamation District  
               108, Tehama-Colusa Canal Authority, and Yolo County Flood  
               Control and Water Conservation District;

                 Temperance Flat Reservoir, along the Upper San Joaquin  
               River.  Temperance Flat would be constructed by the San  
               Joaquin Valley Water Infrastructure Authority, comprising  
               the Counties of Fresno, Kern, Kings, Madera, Merced, and  








          AB 2551 (Gallagher) 4/27/16                             Page 4  
          of ?
          
          
               Tulare;

                 Los Vaqueros Expansion Project, which would expand an  
               existing reservoir in Contra Costa County that diverts  
               water from the Delta.  Contra Costa Water District  
               currently operates Los Vaqueros.














































          AB 2551 (Gallagher) 4/27/16                             Page 5  
          of ?
          
          
          
          Proposition 1.  Proposition 1, approved by voters in November  
          2014, authorized the sale of $7.5 billion in general obligation  
          bonds for various types of water and environmental restoration  
          projects.  Of that amount, Proposition 1 allocates $2.7 billion  
          to the Water Commission for competitive grants for water storage  
          projects, including any of the following:

                 Surface storage projects identified in the CALFED Record  
               of Decision, except projects prohibited by the California  
               Wild and Scenic Rivers Act.

                 Groundwater storage projects and groundwater  
               contamination prevention or remediation projects that  
               provide water storage benefits.

                 Conjunctive use and reservoir reoperation projects.

                 Local and regional surface storage projects that improve  
               the operation of water systems in the state and provide  
               public benefits.

          Projects will be selected based on the magnitude of public  
          benefits the projects provide, as defined by Proposition 1.   
          Some local agencies want to be able to use alternative  
          procurement methods to construct and operate projects funded by  
          Proposition 1.


           Proposed Law

           Assembly Bill 2551 allows any surface storage project that is  
          identified in the CALFED Record of Decision and receives funding  
          from the water storage funding allocation in Proposition 1 to  
          use design-build, design-bid-build, and construction manager  
          at-risk alternative procurement methods.  Specifically, AB 2551  
          reenacts, in a separate code section, the provisions of current  
          law governing local agency authority to use design-build  
          procurement, except that AB 2551:

                 Authorizes design-build-operate agreements where  
               existing law expressly prohibits this type of procurement.

                 Requires at least 50 percent of the skilled workforce at  








          AB 2551 (Gallagher) 4/27/16                             Page 6  
          of ?
          
          
               every tier of the contract or project to be graduates of an  
               apprenticeship program by the fourth year of project  
               construction, where existing statute requires at least 60  
               percent by January 1, 2020.

                 Omits a provision in existing law that prevents  
               materials not subject to the California Public Records Act  
               from being inspected by the public and further provides  
               that a local agency must make the list of prequalified  
               entities available to the public.

                 Requires a local agency that evaluates bids to consider  
               numerous additional factors as compared to existing law,  
               such as financial and bonding capacity requirements,  
               proposed construction approach and methods, ability to meet  
               a schedule, proposed risk allocation and sharing, and  
               safety record.

                 Omits a requirement in existing law that any  
               design-build project list and exclusively use  
               subcontractors that will perform special services for more  
               than one-half of one percent of the value of the prime  
               contractor's bid.

                 Omits a requirement in existing law that limits the  
               retention proceeds withheld by the agency from the  
               design-build entity to no more than 5 percent if a  
               performance and payment bond, issued by an admitted surety  
               insurer, is required in the solicitation of bids.

                 Makes other technical and conforming changes to  
               encompass construction manager at-risk and  
               design-build-operate procurement methods.


           State Revenue Impact

           No estimate.


           Comments

           1.  Purpose of the bill  .  Historically, water projects built by  
          local agencies have been limited to the design-bid-build  








          AB 2551 (Gallagher) 4/27/16                             Page 7  
          of ?
          
          
          delivery method.  While there are benefits to this process, such  
          as an impartial design team and builders bidding on the same  
          design, there are also several drawbacks. Unexpected costs may  
          arise during construction due to change orders or other  
          unanticipated complications.  Alternative delivery methods, on  
          the other hand, can be more cost effective when used to procure  
          large, complex projects because these methods give contractors  
          the freedom to develop clever solutions to problems and transfer  
          the risk of overruns from the public agency to the contractor.  
          Proposition 1 is expected to provide funding to several large  
          surface storage projects identified by CALFED in 2000.  These  
          projects are expected to cost billions of dollars and often  
          include complex geological studies, making them prime candidates  
          for design-build or other procurement methods.  AB 2551 provides  
          local agencies the necessary authorization to use these methods,  
          thereby ensuring timely construction of much-needed new dams and  
          helping stretch taxpayer dollars to fund more projects.

          2.  Design-build, by design  .  SB 785 was enacted precisely to  
          harmonize the state's design-build authorizations that had been  
          scattered across sections of code.  The particulars of SB 785  
          were carefully negotiated to balance the interests of project  
          proponents, labor unions, contractors, and subcontractors.  AB  
          2551 upsets this balance by enacting similar-but not  
          identical-design-build authority for certain surface storage  
          projects.  Although proponents may argue that these projects are  
          unique and therefore warrant unique authority, AB 2551 sets a  
          precedent for carving out exceptions to the generally applicable  
          design-build statutes.  Furthermore, by enacting a separate code  
          section, AB 2551 makes it difficult to identify which entities  
          may procure projects using design-build and to ensure that  
          future changes to design-build authorization are enacted  
          consistently for all entities.  The Committee may wish to  
          consider amending AB 2551 to add CALFED storage projects (or all  
          projects that receive storage funding from Proposition 1) to the  
          existing design-build statutes, instead of creating a parallel  
          process.

          3.  Local agency, multinational corporation  .  Critics of the use  
          of design-build by public agencies note that the entities that  
          typically design and construct these projects are large,  
          sophisticated engineering companies that possess specialized  
          expertise in this area.  These companies may be in a better  
          position than a local agency project proponent to understand the  








          AB 2551 (Gallagher) 4/27/16                             Page 8  
          of ?
          
          
          conditions of the contracts governing the agreement-and how  
          those contracts allocate risks between the design-build entity  
          and the local government.  It is unclear whether the local  
          agencies that might make use of the authority granted by AB 2551  
          have the competencies necessary to effectively structure a  
          contract and oversee the project delivery.

          4.  Level playing field  .  Several types of water storage projects  
          are eligible for funding under Proposition 1, including  
          groundwater storage projects that may be cheaper on a  
          per-acre-foot basis than surface storage.  But AB 2551 only  
          allows CALFED projects procured by local agencies to use  
          alternative procurement methods.  To the extent that this  
          authority reduces costs or increases the certainty and  
          timeliness of project benefits for surface storage projects, AB  
          2551 may provide an advantage to CALFED surface projects  
          constructed by local agencies over other projects that are also  
          competing for Proposition 1 dollars.  In order to ensure a level  
          playing field for all potential projects, the Committee may wish  
          to amend AB 2551 to apply to any projects that receive funding  
          under the storage funding allocation in Proposition 1.































          AB 2551 (Gallagher) 4/27/16                             Page 9  
          of ?
          
          

          5.  Technical amendments  .  The Committee may wish to consider the  
          following technical amendments:

                 On page 2, line 18, the bill authorizes the use of  
               construction management at risk.  Elsewhere in the Public  
               Contract Code, this method of procurement is called  
               construction manager at-risk.  The Committee may wish to  
               consider amending AB 2551 to correct "management" to  
               "manager."

                 On page 7, line 30, the bill provides that "pursuant to  
               subdivision (d), the local agency may hold discussions or  
               negotiations with responsive bidders..."  But in the bill  
               subdivision (e) lays out the process for negotiations with  
               bidders.  The Committee may wish to consider amending AB  
               2551 to correct this cross-reference.

          6.  Related legislation  .  SB 693 (Hueso), currently pending in  
          the Assembly Appropriations Committee, deletes "skilled and  
          trained workforce" requirements in various sections of existing  
          law related to alternative procurement methods and enacts a new  
          comprehensive section of the Public Contract Code applicable  
          whenever a public entity is required to ensure that contractors  
          use a "skilled and trained workforce."

          7.  Mandate  .  The California Constitution generally requires the  
          state to reimburse local agencies for their costs when the state  
          imposes new programs or additional duties on them.  AB 2551  
          requires bidders to certify specified information under penalty  
          of perjury.  By expanding the crime of perjury, AB 2551 creates  
          a new state-mandated program.  But the bill disclaims the  
          state's responsibility for reimbursing local governments for  
          enforcing these new crimes.  That's consistent with the  
          California Constitution, which says that the state does not have  
          to reimburse local governments for the costs of new crimes  
          (Article XIIIB, 6[a][2]).


          Assembly Actions

           Assembly Water, Parks, and Wildlife Committee:13-1
          Assembly Appropriations Committee:           20-0
          Assembly Floor:                              73-1








          AB 2551 (Gallagher) 4/27/16                             Page 10  
          of ?
          
          

           Support and  
          Opposition   (6/23/16)


           Support  :  American Council of Engineering Companies, California;  
          Association of California Water Agencies; California Chapters of  
          the National Electrical Contractors Association; California  
          Cotton Ginners and Growers Associations; California Fresh Fruit  
          Association; California Legislative Conference of Plumbing,  
          Heating and Piping Industry; California Rice Commission;   
          California-Nevada Conference of Operating Engineers; Far West  
          Equipment Dealers Association; Five Counties Central Labor  
          Council; General Teamsters Professional, Heath Care and Public  
          Employees Local 137; International Brotherhood of Electrical  
          Workers, Local 659; Marysville Central Labor Council, AFL-CIO;  
          Northern California Water Association; Northeastern California  
          Building & Construction Trades Council; Sheet Metal Workers'  
          Local Union No. 104; Sites Project Joint Powers Authority; State  
          Building and Construction Trades Council; United Association of  
          Journeymen and Apprentices of the Plumbing and Pipe Fitting  
          Industry, Local 228; Valley Ag Water Coalition; Western  
          Agricultural Processors Association.

           Opposition  :  Air Conditioning Trade Association; Associated  
          Builders and Contractors; Plumbing-Heating-Cooling Contractors  
          Association; Professional Engineers in California Government;  
          Sierra Club California; Western Electrical Contractors  
          Association.


                                      -- END --