Existing law requires the governing board of a school district to adopt a resolution that, among other things: (1) declares its intention to enter into a lease or agreement relating to school property, (2) includes specified information about the property, and (3) fixes a time for a public meeting of the governing board of the school district at which sealed proposals to enter a lease or agreement with the school district will be received from any person, firm, or corporation, and considered by the governing board of the school district, as specified.

Existing law, notwithstanding the provision described above, also authorizes the governing board of a school district, without advertising for bids, to lease real property for a minimum rental of $1 per year if the instrument by which this property is leased requires the lessee to construct, or provide for the construction of, a building to be used by the school district and provides that the title to the building shall vest in the school district at the end of the lease.

This bill would delete the language that provides that the governing board of a school district is not required to advertise for bids pursuant to this provision. The bill would require an instrument created pursuant to these provisions to be awarded based on a competitive solicitation process to the proposer providing the best value, as defined, to the school district. The bill would require the governing board of the school district to adopt and publish required procedures and guidelines for evaluating the qualifications of proposers, as provided. The bill would authorize a school district, for purposes of utilizing preconstruction services, to enter into an instrument before written approval is obtained from the Department of General Services Division of the State Architect (DSA) only if the instrument provides that no work for which a contractor is required to be licensed and for which DSA approval is required can be performed before receipt of the required DSA approval.

The bill would provide, for certain projects leased through an instrument 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 former competitive bidding exception, that the contractor who entered into the contract with the school district may be paid the reasonable cost, specifically excluding profit, of the labor, equipment, materials, and services furnished by the contractor before the date of the determination, if certain conditions, as determined by the court, are met. The bill would authorize a school district to identify specific types of subcontractors required to be included in a proposal, and would impose specified other procedural requirements on awarding construction subcontracts of a certain value. The bill would provide that the changes made by its provisions, except the deletion of the governing board of a school districts authority to not advertise for bids, shall become inoperative on July 1, 2022.

Existing law requires the governing board of a school district to adopt a resolution that, among other things: (1) declares its intention to enter into a lease or agreement relating to school property, (2) includes specified information about the property, and (3) fixes a time for a public meeting of the governing board of the school district at which sealed proposals to enter a lease or agreement with the school district will be received from any person, firm, or corporation, and considered by the governing board of the school district, as specified.

Existing law, notwithstanding the provision described above, also authorizes the governing board of a school district, without advertising for bids, to lease real property for a minimum rental of $1 per year if the instrument by which this property is leased requires the lessee to construct, or provide for the construction of, a building to be used by the school district and provides that the title to the building shall vest in the school district at the end of the lease.

This bill would delete the language that provides that the governing board of a school district is not required to advertise for bids pursuant to this provision. The bill would require an instrument created pursuant to these provisions to be awarded based on a competitive solicitation process to the proposer providing the best value, as defined, to the school district. The bill would require the governing board of the school district to adopt and publish required procedures and guidelines for evaluating the qualifications of proposers, as provided. The bill would authorize a school district, for purposes of utilizing preconstruction services, to enter into an instrument before written approval is obtained from the Department of General Services Division of the State Architect (DSA) only if the instrument provides that no work for which a contractor is required to be licensed and for which DSA approval is required can be performed before receipt of the required DSA approval.

The bill would provide, for certain projects leased through an instrument 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 former competitive bidding exception, that the contractor who entered into the contract with the school district may be paid the reasonable cost, specifically excluding profit, of the labor, equipment, materials, and services furnished by the contractor before the date of the determination, if certain conditions, as determined by the court, are met. The bill would authorize a school district to identify specific types of subcontractors required to be included in a proposal, and would impose specified other procedural requirements on awarding construction subcontracts of a certain value. The bill would provide that the changes made by its provisions, except the deletion of the governing board of a school districts authority to not advertise for bids, shall become inoperative on July 1, 2022.

Existing law requires the governing board of a school district to adopt a resolution that, among other things: (1) declares its intention to enter into a lease or agreement relating to school property, (2) includes specified information about the property, and (3) fixes a time for a public meeting of the governing board of the school district at which sealed proposals to enter a lease or agreement with the school district will be received from any person, firm, or corporation, and considered by the governing board of the school district, as specified.

Existing law, notwithstanding the provision described above, also authorizes the governing board of a school district, without advertising for bids, to lease real property for a minimum rental of $1 per year if the instrument by which this property is leased requires the lessee to construct, or provide for the construction of, a building to be used by the school district and provides that the title to the building shall vest in the school district at the end of the lease.

This bill would delete the language that provides that the governing board of a school district is not required to advertise for bids pursuant to this provision. The bill would require an instrument created pursuant to these provisions to be awarded based on a competitive solicitation process to the proposer providing the best value, as defined, to the school district. The bill would require the governing board of the school district to adopt and publish required procedures and guidelines for evaluating the qualifications of proposers, as provided. The bill would authorize a school district district, for purposes of utilizing preconstruction services, to enter into an instrument before written approval is obtained from the Department of General Services Division of the State Architect (DSA) only if the instrument provides that no work for which a contractor is required to be licensed and for which DSA approval is required shall can be performed before receipt of the required DSA approval. The

The bill would provide, for certain projects leased through an instrument 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 former competitive bidding exception, that the contractor who entered into the contract with the school district may be paid the reasonable cost cost, specifically excluding profit, of the labor, equipment, materials, and services furnished by the contractor before the date of the determination, if certain conditions, as determined by the court, are met. The bill would authorize a school district to identify specific types of subcontractors required to be included in a proposal, and would impose specified other procedural requirements on awarding construction subcontracts of a certain value. The bill would provide that the changes made by its provisions, except the deletion of the governing board of a school districts authority to not advertise for bids, shall become inoperative on July 1, 2022.

Existing law requires the governing board of a school district to adopt a resolution that, among other things: (1) declares its intention to enter into a lease or agreement relating to school property, (2) includes specified information about the property, and (3) fixes a time for a public meeting of the governing board of the school district at which sealed proposals to enter a lease or agreement with the school district will be received from any person, firm, or corporation, and considered by the governing board of the school district, as specified.

Existing law, notwithstanding the provision described above, also authorizes the governing board of a school district, without advertising for bids, to lease real property for a minimum rental of $1 per year if the instrument by which this property is leased requires the lessee to construct, or provide for the construction of, a building to be used by the school district and provides that the title to the building shall vest in the school district at the end of the lease.

This bill would delete the language that provides that the governing board of a school district is not required to advertise for bids pursuant to this provision. The bill would require an instrument created pursuant to these provisions to be awarded based on a competitive solicitation process to the proposer providing the best value, as defined, to the school district. The bill would require the governing board of the school district to adopt and publish required procedures and guidelines for evaluating the qualifications of proposers, as provided. The bill would authorize a school district to enter into an instrument before written approval is obtained from the Department of General Services Division of the State Architect (DSA) if the instrument provides that no work for which a contractor is required to be licensed and for which DSA approval is required shall be performed before receipt of the required DSA approval. The bill would also make the bills provisions retroactively applicable to provide, for certain projects leased through an instrument before July 1, 2015, and would specify that if at any time the instrument is later determined to be invalid, invalid by a court of competent jurisdiction because it fails to fall within the former competitive bidding exception, that the contractor who entered into the contract with the school district shall be entitled to may be paid the reasonable cost of the labor, equipment, materials, and services furnished by the contractor before the date of the determination, subject to specified conditions. if certain conditions, as determined by the court, are met. The bill would authorize a school district to identify specific types of subcontractors required to be included in a proposal, and would impose specified other procedural requirements on awarding construction subcontracts of a certain value. The bill would provide that the changes made by its provisions, except the deletion of the governing board of a school districts authority to not advertise for bids, shall become inoperative on July 1, 2022.

Existing law requires the governing board of a school district to adopt a resolution that, among other things: (1) declares its intention to enter into a lease or agreement relating to school property, (2) includes specified information about the property, and (3) fixes a time for a public meeting of the governing board of the school district at which sealed proposals to enter a lease or agreement with the school district will be received from any person, firm, or corporation, and considered by the governing board, board of the school district, as specified.

Existing law, notwithstanding the provision described above, also authorizes the governing board of a school district, without advertising for bids, to lease real property for a minimum rental of $1 per year if the instrument by which this property is leased requires the lessee to construct, or provide for the construction of, a building to be used by the school district and provides that the title to the building shall vest in the school district at the end of the lease.

This bill would, among other things, would delete the language that provides that a school district the governing board of a school district is not required to advertise for bids pursuant to this provision and would specify that only a person, firm, or corporation that is a licensed contractor, as specified, is eligible to be the lessee. provision. The bill would require an instrument created pursuant to these provisions to be awarded based on a competitive solicitation process to the proposer providing the best value value, as defined, to the school district, taking into consideration the proposers demonstrated competence and professional qualifications necessary for the satisfactory performance of the services required. Before awarding such an instrument, the district. The bill would require the governing board of the school district to adopt and publish required procedures and guidelines for evaluating the qualifications of proposers to ensure that the best value selections by the school district are conducted in a fair and impartial manner, proposers, as provided. Notwithstanding certain laws, the The bill would authorize a school district to enter into such an instrument before written approval by is obtained from the Department of General Services Division of the State Architect (DSA) if the instrument provides that no work for which a contractor is required to be licensed and for which DSA approval is required shall be performed before receipt of the required DSA approval. The bill would also provide that when a project for the construction, alteration, repair, or improvement of any structure, building, or other improvement of any kind that was make the bills provisions retroactively applicable to certain projects leased through such an an instrument before July 1, 2015, and would specify that if the instrument is later determined to be invalid, the contractor who entered into the contract 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, subject to specified conditions. The bill would authorize a school district to identify specific types of subcontractors required to be included in a proposal, and would impose specified other procedural requirements on awarding construction subcontracts of a certain value. The bill would provide that the changes made by its provisions, except the deletion of the school district governing boards board of a school districts authority to not advertise for bids, shall remain in effect only until become inoperative on July 1, 2022.

Existing law requires the governing board of a school district to adopt a resolution that, among other things: (1) declares its intention to enter into a lease or agreement relating to school property, (2) includes specified information about the property, and (3) fixes a time for a public meeting of the governing board at which sealed proposals to enter a lease or agreement with the school district will be received from any person, firm, or corporation, and considered by the governing board, as specified.

Existing law, notwithstanding the provision described above, also authorizes the governing board of a school district, without advertising for bids, to lease real property for a minimum rental of $1 per year if the instrument by which this property is leased requires the lessee to construct, or provide for the construction of, a building to be used by the school district and provides that the title to the building shall vest in the school district at the end of the lease.

This bill would would, among other things, delete the language that provides that a school district governing board is not required to advertise for bids pursuant to this provision. provision and would specify that only a person, firm, or corporation that is a licensed contractor, as specified, is eligible to be the lessee. The bill would require an instrument created pursuant to these provisions to be awarded based on a competitive solicitation process to the proposer providing the best value to the school district, taking into consideration the proposers demonstrated competence and professional qualifications necessary for the satisfactory performance of the services required. Before awarding such an instrument, the bill would require the governing board of the school district to adopt and publish required procedures and guidelines for evaluating the qualifications of proposers to ensure that the best value selections by the school district are conducted in a fair and impartial manner, as provided. Notwithstanding certain laws, the bill would authorize a school district to enter into such an instrument before written approval by the Department of General Services Division of the State Architect (DSA) if the instrument provides that no work for which a contractor is required to be licensed and for which DSA approval is required shall be performed before receipt of the required DSA approval. The bill would also provide that when a project for the construction, alteration, repair, or improvement of any structure, building, or other improvement of any kind that was leased through such an instrument before July 1, 2015, and that instrument is later determined to be invalid, the contractor who entered into the contract 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, subject to specified conditions. The bill would provide that the changes made by its provisions, except the deletion of the school district governing boards authority to not advertise for bids, shall remain in effect only until July 1, 2022.

Existing law requires the governing board of a school district to adopt a resolution that, among other things: (1) declares its intention to enter into a lease or agreement relating to school property, (2) includes specified information about the property, and (3) fixes a time for a public meeting of the governing board at which sealed proposals to enter a lease or agreement with the school district will be received from any person, firm, or corporation, and considered by the governing board, as specified.

Existing law, notwithstanding the provision described above, also authorizes the governing board of a school district, without advertising for bids, to lease real property for a minimum rental of $1 per year if the instrument by which this property is leased requires the lessee to construct, or provide for the construction of, a building to be used by the school district and provides that the title to the building shall vest in the school district at the end of the lease.

This bill would delete the language that provides that a school district governing board is not required to advertise for bids pursuant to this provision.

CONCURRENCE IN SENATE AMENDMENTS

CSA1 Bill Id:AB 2316

Author:(O'Donnell)

As Amended Ver:August 19, 2016

Majority vote

Original Committee Reference: ED.

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:
   1. "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.
   2. "Best value score" means the total score awarded to a proposer for all scored evaluation factors.
   3. "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.
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:
   1. 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.
   2. The school district shall give notice of the request for sealed proposals in the manner of notice provided in Public Contract Code Section 20112, with the latest notice published at least 10 days before the date for receipt of the proposals.
   3. A proposer must be prequalified in accordance with Public Contract Code Section 20111.6 (b) to (m), inclusive, of, 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 Public Contract Code Section 20111.6 (b) to (m), inclusive, 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.
   4. 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 qualification score for award of the instrument under this section.
   5. 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.
   6. Proposals shall be evaluated and the instrument awarded in the following manner:
      1. All proposals received shall be reviewed to determine those that meet the format requirements and the standards specified in the request for sealed proposals.
      2. 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 highest best value to the lowest best value to the school district.
      3. 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.
      4. 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 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.
      5. 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.
   7. The governing board of the school district, at its discretion, may reject all proposals and request new proposals.
   8. 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 as specified. Once any preconstruction services are completed and upon approval of the plans and specifications for work on the site by the Department of General Services' Division of State Architect (DSA), and subcontractors are selected, the successful proposer and the school district shall finalize the price for the services to be provided under the instrument. The contract file shall include documentation sufficient to support the final price determination.
   9. The school district, in the request for sealed proposals, may identify specific types of subcontractors that must be included in the proposal. All subcontractors that are identified in the proposal shall be afforded the protections of the Subletting and Subcontracting Fair Practices Act.
   10. Following the award of an instrument and for subcontractors not identified in the proposal, the successful proposer shall proceed as follows in awarding construction subcontracts with a value exceeding 1.5% of the price allocable to construction work:
       1. Provide public notice of availability of work to be subcontracted in accordance with the publication requirements applicable to the competitive bidding process of the school district, including a fixed date and time on which qualifications statements, bids, or proposals will be due.
       2. Establish reasonable qualification criteria and standards.
       3. Award the subcontract either on a best value basis or to the lowest responsible bidder. The process may include prequalification or short-listing. The process shall not apply to subcontractors listed in the original proposal. Subcontractors awarded construction subcontracts under this subdivision shall be afforded all the protections of the Subletting and Subcontracting Fair Practices Act.
   11. Nothing shall preclude a school district from segregating the request for proposals into a request for 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 Education Code Sections 17297 and 17402, for purposes of utilizing preconstruction services, a school district may enter into an instrument before written approval by the DSA 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 DSA approval is required shall be performed before receipt of the required DSA approval. Specifies that this provision does not waive the requirements in the School Facility Program (SFP).
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 because it fails to fall within the competitive bidding exception in the lease-leaseback provision in effect prior to December 31, 2016, the contractor who entered into the instrument with the school district may be paid the reasonable cost, specifically excluding profit, 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:
   1. The contractor proceeded with construction, alteration, repair, or improvement based upon a good faith belief that the instrument was valid.
   2. The school district has reasonably determined that the work performed is satisfactory.
   3. Contractor fraud did not occur in the obtaining or performance of the instrument.
   4. 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:
   1. The contractor's costs as included in the instrument plus the cost of any approved change orders.
   2. 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 the Code of Civil Procedure Section 337.1 or 337.15.
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.

The Senate amendments:

1. Add the provisions authorizing the school district to identify specific types of subcontractors and establish the process for awarding construction subcontracts.
2. Specify that the provision authorizing a contract to be signed prior to receiving DSA approval is for the purposes of utilizing preconstruction services and specify that the provision does not waive any of the requirements for funding under the SFP.
3. Authorize, rather than require, a contractor who entered into a lease-leaseback contract prior to July 1, 2015, to be paid the reasonable cost, excluding profit, of the labor, equipment, materials and services furnished by the contractor if the instrument is determined to be invalid by a court.

FISCAL EFFECT: None. This bill is keyed non-fiscal by the 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.

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. 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.

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 establishes 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 proposer for the award of subcontracts, and the key elements of the instrument (lease structure). This 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 average daily attendance, regardless of funding source.

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. This bill authorizes a contract to be signed prior to DSA approval, but prohibits construction work to be conducted until after approval by the DSA has been granted. Amendments adopted in the Senate clarify that this provision does not change the requirements for funding under the SFP, and specifically, the requirements for DSA approval prior to apportionment for funding.

Disgorgement. This bill provides contractors who entered into a lease-leaseback contract prior to July 1, 2015 that is found to be invalid by a court to be paid the 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. This bill excludes any profit. Amendments adopted in the Senate authorize, rather than entitle, the contractor to be paid reasonable costs.

Analysis Prepared by: Sophia Kwong Kim / ED. / (916) 319-2087 FN: 0004858

 THIRD READING  

Bill No: AB 2316

Author:

:

Vote:

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:

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.

Senate Floor Amendments of 8/19/16 remove the hard cap on preconstruction services included as part of a school facility project’s request for proposal, and replace it with a requirement for the contractor to justify the cost. Amendments are also make technical and clarifying changes.

ANALYSIS:

Existing law:

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:
   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)

This bill:

1. Modifies lease-leaseback provisions applicable to school construction projects. Specifically, this bill:
   1. Deletes the authority to let such a contract without advertising for bids.
   2. Requires that such a contract be awarded through a competitive process generally based upon existing design build and best value processes with certain exceptions. This bill:
      1. 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.
      2. 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.
   3. Establishes provisions to be applied to lease-leaseback school construction projects. This bill:
      1. 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.
      2. 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.
   4. Extends prequalification requirements applicable to lease-leaseback under existing law from 2019 to 2022.
   5. 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 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 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 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.

1. 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.

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.

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: Fiscal Com.: Local:

SUPPORT: (Verified 8/2/16)

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

Small School Districts’ Association

State Building and Construction Trades Council

United Contractors

Western States Council of Sheet Metal Workers

OPPOSITION: (Verified 8/2/16)

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:

8/22/16 23:01:11

**** END ****

 THIRD READING  

Bill No: AB 2316

Author:

:

Vote:

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:

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:

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:
   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)

This bill:

1. Modifies lease-leaseback provisions applicable to school construction projects. It:
   1. Deletes the authority to let such a contract without advertising for bids.
   2. 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:
      1. 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.
      2. 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.
   3. Establishes provisions to be applied to lease-leaseback school construction projects. It:
      1. 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.
      2. 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.
   4. Extends prequalification requirements applicable to lease-leaseback under existing law from 2019 to 2022.
   5. 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 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 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 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.

1. 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.

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.

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: Fiscal Com.: Local:

SUPPORT: (Verified 8/2/16)

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

Small School Districts’ Association

State Building and Construction Trades Council

United Contractors

Western States Council of Sheet Metal Workers

OPPOSITION: (Verified 8/2/16)

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:

8/4/16 14:23:14

**** END ****

SENATE COMMITTEE ON EDUCATION

Senator Carol Liu, Chair

2015 - 2016 Regular

Bill No: AB 2316

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 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:
   1. Deletes the authority to let such a contract without advertising for bids.
   2. 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:
      1. 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.
      2. 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.
   3. Establishes provisions to be retroactively applied to lease-leaseback school construction projects. It:
      1. 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.
      2. 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.
   4. Extends prequalification requirements applicable to lease-leaseback under current law from 2019 to 2022.
   5. 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.

1. 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.
2. 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.

1. 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 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.

1. 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.
2. 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 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.

1. 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.
2. 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.

1. 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.

1. 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 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:

1. How broad an insulation from action against improper activity should be allowed?
2. 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?
3. How many lease leaseback contracts were entered into prior to 2015 that are affected by the disgorgement provisions?
4. 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.
• 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:

1. The contractor proceeded with construction, alteration, repair, or improvement based upon a good faith belief that the instrument was valid.
2. The school district has reasonably determined that the work performed is satisfactory.
3. Contractor fraud did not occur in the obtaining or performance of the instrument.
4. 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 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 --

ASSEMBLY THIRD READING

ATR Bill Id:AB 2316

Author:(O'Donnell)

As Amended Ver:April 26, 2016

Majority vote

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:
   1. "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.
   2. "Best value score" means the total score awarded to a proposer for all scored evaluation factors.
   3. "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.
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:
   1. 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 used by the successful proposer for the award of subcontracts.
   2. The school district shall give notice of the request for sealed proposals in the manner of notice provided in Public Contract Code Section 20112, with the latest notice published at least 10 days before the date for receipt of the proposals.
   3. A proposer must be prequalified in accordance with subdivisions (b) to (m), inclusive, of Public Contract Code Section 20111.6, 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 Public Contract Code Section 20111.6, 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.
   4. 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 qualification score for award of the instrument under this section.
   5. 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.
   6. Proposals shall be evaluated and the instrument awarded in the following manner:
      1. All proposals received shall be reviewed to determine those that meet the format requirements and the standards specified in the request for sealed proposals.
      2. 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.
      3. 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.
      4. 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 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.
      5. 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.
   7. The governing board of the school district, at its discretion, may reject all proposals and request new proposals.
   8. 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.
   9. Nothing shall preclude a school district from segregating the request for proposals into a request for 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 Education Code 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:
   1. The contractor proceeded with construction, alteration, repair, or improvement based upon a good faith belief that the instrument was valid.
   2. The school district has reasonably determined that the work performed is satisfactory.
   3. Contractor fraud did not occur in the obtaining or performance of the instrument.
   4. 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:
   1. The contractor's costs as included in the instrument plus the cost of any approved change orders.
   2. 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 the Code of Civil Procedure Section 337.1 or 337.15.
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.

FISCAL EFFECT: None. This bill is keyed non-fiscal by the 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.

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 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 (Dutra) of 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.

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 establishes 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 proposer for the award of subcontracts, and the key elements of the instrument (lease structure). This 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 average daily attendance (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 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 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. This 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 trial 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. If a court finds that the conditions have not been met, this bill will not apply.

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.

Analysis Prepared by: Sophia Kwong Kim / ED. / (916) 319-2087 FN: 0002928

Date of Hearing: May 4, 2016

ASSEMBLY COMMITTEE ON EDUCATION

Patrick O'Donnell, Chair

ABPCA Bill Id:AB 2316 (

Author:O'Donnell) – As Amended Ver: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:
   1. “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.
   2. “Best value score” means the total score awarded to a proposer for all scored evaluation factors.
   3. “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.
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:
   1. 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 used by the successful proposer for the award of subcontracts.
   2. 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.
   3. 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.
   4. 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 qualification score for award of the instrument under this section.
   5. 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.
   6. Proposals shall be evaluated and the instrument awarded in the following manner:
      1. All proposals received shall be reviewed to determine those that meet the format requirements and the standards specified in the request for sealed proposals.
      2. 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.
      3. 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.
      4. 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 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.
      5. 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.
   7. The governing board of the school district, at its discretion, may reject all proposals and request new proposals.
   8. 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.
   9. Nothing shall preclude a school district from segregating the request for proposals into a request for 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:
   1. The contractor proceeded with construction, alteration, repair, or improvement based upon a good faith belief that the instrument was valid.
   2. The school district has reasonably determined that the work performed is satisfactory.
   3. Contractor fraud did not occur in the obtaining or performance of the instrument.
   4. 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:
   1. The contractor’s costs as included in the instrument plus the cost of any approved change orders.
   2. 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:

1. Requires the governing board of a school district to competitively bid and award to the lowest bidder contracts involving the following:
   1. An expenditure of $50,000 or more for the purchase of equipment, materials, or supplies, services (except for construction services), and repairs.
   2. 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 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 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.

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 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 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 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.

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.

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

Analysis Prepared by: Sophia Kwong Kim / ED. / (916) 319-2087