BILL ANALYSIS Ó AB 2316 Page 1 Date of Hearing: May 4, 2016 ASSEMBLY COMMITTEE ON EDUCATION Patrick O'Donnell, Chair AB 2316 (O'Donnell) - As Amended 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: a) "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. b) "Best value score" means the total score awarded to a proposer for all scored evaluation factors. c) "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. AB 2316 Page 2 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: a) 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 AB 2316 Page 3 used by the successful proposer for the award of subcontracts. b) 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. c) 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. d) 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 AB 2316 Page 4 qualification score for award of the instrument under this section. e) 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. f) Proposals shall be evaluated and the instrument awarded in the following manner: i) All proposals received shall be reviewed to determine those that meet the format requirements and the standards specified in the request for sealed proposals. ii) 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. iii) 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. iv) 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 AB 2316 Page 5 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. v) 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. g) The governing board of the school district, at its discretion, may reject all proposals and request new proposals. h) 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. i) Nothing shall preclude a school district from segregating the request for proposals into a request for AB 2316 Page 6 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: a) The contractor proceeded with construction, alteration, repair, or improvement based upon a good faith belief that the instrument was valid. b) The school district has reasonably determined that the work performed is satisfactory. AB 2316 Page 7 c) Contractor fraud did not occur in the obtaining or performance of the instrument. d) The instrument does not otherwise violate state law related to the construction or leasing of public works of improvement. 7)Specifies that in no event shall payment to the contractor exceed either of the following: a) The contractor's costs as included in the instrument plus the cost of any approved change orders. b) 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: AB 2316 Page 8 1)Requires the governing board of a school district to competitively bid and award to the lowest bidder contracts involving the following: a) An expenditure of $50,000 or more for the purchase of equipment, materials, or supplies, services (except for construction services), and repairs. b) 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 AB 2316 Page 9 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 AB 2316 Page 10 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. AB 2316 Page 11 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 AB 2316 Page 12 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 AB 2316 Page 13 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 AB 2316 Page 14 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. AB 2316 Page 15 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 2316 Page 16 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 AB 2316 Page 17 Analysis Prepared by:Sophia Kwong Kim / ED. / (916) 319-2087