BILL ANALYSIS                                                                                                                                                                                                    Ó



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          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.









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          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  








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               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  








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               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  








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                 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  








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               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.










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             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:  








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          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  








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          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  








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          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.  










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          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  








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          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  








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          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  








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          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.  
           









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          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.








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          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











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