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The data correlation between campaign contributions and lease-leaseback contract awards summarized in Will Carless’ recent article reminds us of the adage from the organ grinder era, “money makes the monkey dance.”
This still rings true today about the hundreds of millions of taxpayer dollars school boards have lavished on their favored contractors over the last decade by awarding inflated no-bid, lease-leaseback contracts.
Since the 1950s, the Education Code has allowed school districts that did not have sufficient funds to immediately pay for construction to lease property to another person. That person, through sealed competitive bidding based on approved plans and specifications available to all interested bidders, offered the lowest rental price to construct and then lease the completed school facility back to the school district. The district leased the facility over a period of years to recover the cost of construction, plus the cost of financing the project.
Unfortunately for the last decade, California’s school districts have not been strictly complying with the lease-leaseback provisions of the Education Code to finance school construction in their districts.
Instead, districts are encouraging contractors to finance bond passage campaigns in return for a tacit understanding that those districts will subsequently award lavish bond funded contracts to those same contractors.
As proven in Poway and countless other school districts, taxpayers lose on both ends of the bond/construction process. They end up paying too much on the front end to borrow the bond money — Poway taxpayers will pay more than a billion to borrow $105 million — and they end up paying too much on the back end to have their school facilities built by the bond-passing contractors, which do not have to really compete with other contractors for no-bid, lease-leaseback contracts.
Promoters of this perverted form of lease-leaseback contracting assert the contracts are awarded by a “competitive proposal process.”
While such a process appears fair and fiscally prudent at first glance, the dirty secret is that contractor selection is done prior to final plans and specifications being approved for construction.
Consequently, there is no objective basis by which to obtain an “apples to apples” comparison of proposals. Moreover, selection is not even based on price (because the real price cannot be defined without final plans). Instead each contractor proposes an estimated “guaranteed maximum price” that will be adjusted later based on final plans and subcontractor bids.
No surprise, at the end of the day, districts end up paying at or above the “guaranteed maximum price” suggested during the “competitive proposal process.” What is known for sure during the “competitive proposal process” is which contractor contributed the most to the passage of the district’s bond campaign or sponsored the last annual school building staff conference or hosted the last golf trip to Napa or delivered the last bag of cash to a school official at a restaurant.
But of course supporters of the current lease-leaseback process would have you believe none of that would or could have anything to do with which contractor is awarded a contract for millions of dollars of taxpayer money.
As a result of their financial, marketing and political efforts, a small cartel of contractors, consultants and school attorneys are profiting tremendously by persuading school boards to enter into lease-leaseback contracts that do not have the advantages of sealed competitive bidding or provide real project financing over a period of years, as required by the Education Code.
The lease-leaseback cartel contends Education Code Section 17406 exempts them from competitively bidding the sublease by which the school districts pay for the costs of construction.
It’s an invalid assertion because Education Code Section 17406 only applies to the lease of the site from the district to the contractor (competitive bidding is not required because contractor pays the district). Education Code Section 17417 applies to the sublease of the site from the contractor back to the district (competitive bidding is required because district pays the contractor).
Presently, school districts are not soliciting proper competitive bids on their sublease agreements from all interested contractors and awarding their contracts, if at all, only to the lowest responsive and responsible bidders, as required by Education Code Section 17417.
The contractors and others profiting from this lack of competitive bidding use the false argument that you would not go with the lowest bid if you were building your own home, so why would you expect a school board to use competitive bidding when awarding multimillion-dollar construction contracts? (Indeed, a school district superintendent used this exact example in Carless’ investigation.)
The taxpayers in Poway and many other school districts in California can give you billions of reasons why the justifications asserted by the lease-leaseback cartel are egregiously wrong.
Kevin Carlin is a local attorney and principal of the Carlin Law Group. He is currently suing the Sweetwater Union High School District over its use of lease-leasebacks.
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