California School Districts and Their Cronies Evade Competitive Bidding with Subterfuge

By Editorial Staff
May 9, 2017

Deep inside, many California school district officials detest awarding construction contracts through competitive bidding to the “lowest responsible bidder.” Some of their reasons are valid, some are corrupt. But give school district officials a legal opportunity to circumvent competitive bidding, and many will take it.

San Diego attorney Kevin Carlin of Carlin Law Group has become a leader in bringing public accountability to California school districts that award construction contracts without competitive bidding. He has identified numerous school districts that have outright ignored California law or have cleverly exploited ambiguities in California law to give contracts to favored companies. In response, he has filed several lawsuits to restrain school districts from continuing to give large no-bid contracts to companies with obvious conflicts of interest.

His crusade for the public interest and competitive bidding has stirred up opposition and anger. Since 2000, California voters have authorized the State of California and local school and community college districts to borrow about $200 billion for educational facilities construction. That massive pool of money has become a lucrative target for a powerful coalition of educational construction interests that has figured out how to get it through relationships rather than price.

Admittedly, There Is No Foolproof Way for Government to Choose a Contractor

School district officials have valid reasons to regard competitive bidding for a “lowest responsible bidder” as a perilous way to do business. Being able to submit the lowest price for a job doesn’t always mean being the best candidate for the job. It’s often wise to supplement objective measurements of performance (such as cost and meeting minimum standards in a pre-qualification questionnaire) with subjective evaluations based on experience and instinct.

Sometimes school districts get stuck with a low bidding contractor whose executives have become too ambitious or needy for work and overestimate their capability to complete a specific project within a certain price and schedule. Sometimes a low bidding contractor operates and promotes a company culture that clashes with the culture of the school district and the community. And sometimes school districts are cursed with low bidding contractors whose management is disorganized, irresponsible, or unethical. All of these conditions can result in the failure of a project.

In contrast, school district officials often prefer to work with construction companies that have a proven record in the district of completing projects on-time and on-budget without compromising quality. They see benefits to hiring a company that is actively involved in the local community through employment and service and therefore has accountability to the people living there. They also prefer working with construction company executives with whom they have professional – and often, personal – relationships. Positive relationships build understanding and trust.

Those relationships can become the problem when governments award contracts without competitive bidding or by supplementing price with criteria dependent on subjective scoring evaluations. The beginning of the California Public Contract Code (Section 100) lists four objectives of public contract laws:

(a) To clarify the law with respect to competitive bidding requirements.

(b) To ensure full compliance with competitive bidding statutes as a means of protecting the public from misuse of public funds.

(c) To provide all qualified bidders with a fair opportunity to enter the bidding process, thereby stimulating competition in a manner conducive to sound fiscal practices.

(d) To eliminate favoritism, fraud, and corruption in the awarding of public contracts.

Without legitimate competitive bidding, companies that can fulfill the contract at the best price can find themselves excluded from public contracts if other contractors have developed better relationships with the public officials making the decisions. Those “better” relationships may be based on nepotism, bribery, extortion, union political pressure, or even discrimination based on race, sex, ethnicity, religion, national origin, or membership in private clubs.

How Are California School Districts Evading Competitive Bidding?

One clever way for California governments to subvert competitive bidding is through “alternative delivery methods” that allow districts to select contractors through a somewhat subjective scoring system based on “best value” criteria. A company that submits the lowest price may not necessarily win the contract if other companies have a better weighted score in other aspects of the bid.

Terms often associated with these alternative delivery methods are “design-build,” “construction manager at risk,” and “job order contracting.” However, the most brazen way for California school districts to evade competitive bidding is commonly referred to as “lease-leaseback.” It is authorized in California Education Code Section 17406.

Lease-leaseback is essentially a clever way to take an law authorizing school districts to lease property and turn it into a construction procurement method. A school district leases property to a favored construction company for $1. Then the company subleases the property back to the school district, which pays regular “lease payments” to the company that are in reality payments for construction-related services.

Initially regarded as a construction method for large projects, lease-leaseback is now used by school districts for all sorts of small projects that stretch the idea of a “lease” of property. Districts have recently leased football stadium turf, cement plaster repair, parking lot pavement, wi-fi installation, and low-voltage wiring. School districts have been able to award these contracts without any sort of advertising for bids or competitive bidding.

Giving Taxpayers Power to Restrain Favoritism in School District Contracts

San Diego attorney Kevin Carlin has become the leading critic of lease-leaseback arrangements at school districts. He claims that many of these lease agreements are actually “sham leases entered into as a subterfuge.”

As borrowed money poured into California’s school construction programs, interest groups that see school construction as an opportunity for lucrative contracts appeared to stretch the boundaries of what could be regarded as a lease-leaseback contract. In some cases, school districts didn’t even bother to fulfill the minimal requirements that state law authorized for the lease of school property. The lack of public oversight and opposition to obscure and complicated lease-leaseback contracts invited abuse, if not corruption.

Carlin has tried to rectify this lack of oversight and establish restraints on lease-leaseback by appealing to the state’s judicial branch. He has filed several lawsuits that expose conflicts-of-interest and failures of lease-leaseback contracts to comply with the requirements of state law.

In June 2015, school districts and school construction interests panicked when a California appellate court reversed a Fresno County Superior Court decision in Davis v. Fresno Unified School District and ruled in favor of a construction company that had failed to obtain a lease-leaseback contract. The losing bidder argued that the company that obtained the $36.7 million project had a conflict-of-interest because it was already a consultant for the district.

The appellate court agreed that the losing contractor had grounds to file the lawsuit because the consultant was involved in development of a contract for which it had a financial interest. The court also declared that the Fresno Unified School District lease-leaseback contract did not conform to state laws that allowed the alternative delivery method to be used. That court decision brought news media attention to various cases throughout the state in which cronyism and favoritism appeared to play a role in the awarding of noncompetitive lease-leaseback contracts.

The Latest Victories for Taxpayers to Ensure Competitive Bidding on School Contracts

Compelled by this court decision, the California legislature passed and Governor Brown subsequently signed a bill (Assembly Bill 2316) that required school districts as of January 1, 2017 to advertise lease-leaseback contracts for bid and established a “best value” procedure for selecting a contractor. This would eliminate the outright award of construction contracts under lease-leaseback to favored companies without any sort of formal evaluation process.

To protect contractors that had already entered into illegal lease-leaseback, Assembly Bill 2316 allowed a school district to continue making its lease payments to a contractor under a lease-leaseback contract entered into before July 1, 2015, even if a court invalidated the agreement. Taxpayer organizations opposed this grandfathering provision, while construction trade associations supported it. It is true that this exemption may allow contractors to evade responsibility for entering into illegal lease-leaseback schemes.

In Carlin’s latest victory for taxpayers, a California appellate court issued a May 2, 2017 decision  in California Taxpayers Action Network v. Taber Construction that taxpayers do have standing to ask courts to compel contractors to return sublease payments to school districts if the lease-leaseback agreement was illegal because of conflicts-of-interest.

As long as California voters continue to authorize school districts to borrow money for facilities construction, interests that make money off of the system will continue to devise ways to evade competitive bidding. Taxpayers are the only force of restraint and oversight for this tendency.

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