SAN DIEGO--(BUSINESS WIRE)--A June 1, 2015 California Appellate Court decision entitled Davis v. Fresno Unified School District has sent shock waves up and down California’s school construction industry based on its conclusion that most leaseback school construction and consulting contracts promoted over the last decade by a handful of large contractors statewide are illegal and all monies received by these contractors, tens of millions of dollars per school district, will have to be paid back to those school districts.
As discussed in a June 8, 2015 letter to the construction industry’s lobbyist that was linked to a June 18, 2015 Fresno Bee article, leaseback contractors and their lobbyists are currently engaged in an attempt to get California State Legislators to amend existing law retroactively before the Legislature breaks for the summer recess next week. Lobbyists for the Associated General Contractors (David Ackerman), Construction Employers’ Association of California (Scott Govenar), and the Coalition for Adequate School Housing (David Walrath/Tom Duffy) are hard at work petitioning Sacramento Legislators behind closed doors to change Government Code 1091.5, Education Code Section 17406 and Public Contract Code 5110 in ways that would nullify the June 1, 2015 Davis decision and retroactively immunize contractors.
The proposed amendments reverse long standing California law prohibiting consultants to school districts from having a financial interest in the contracts on which they are providing advice to avoid conflicts of interest and favoring competitive bidding of taxpayer funded contracts.
“That the Legislature would even consider such patently offensive retroactive legislation for the benefit of these large contractors should be shocking to the conscience of all Californians,” said Kevin Carlin, of Carlin Law Group, who handled the original Fresno case and subsequent successful appeal on behalf of taxpayer Stephen Davis. “How can the Legislature pass laws immunizing school contractors who have fleeced millions of taxpayer dollars through illegal contracts with obvious conflicts of interest? It’s crony capitalism at its worst.”
According to Carlin, the construction industry lobbyists hope to pass their amendments quickly and quietly in the Legislature and then move them on to the Governor. Pending bills that could be amended to include the contractors’ ‘get out of jail free’ language include, but are not limited to, AB 552 (O'Donnell), AB 566 (O'Donnell), SB 569 (Anderson), AB 975 (Frazier) and/or AB 1185 (Ridley-Thomas). However, Carlin said the contractors’ amendments could be attached to any pending bill since the contractors are purposefully keeping their language under wraps for as long as possible to avoid public scrutiny.
The appellate court decision in the Davis case affirmed well established California conflict of interest law and public policy that contractors who act as consultants to help school districts prepare plans and set budgets for school projects cannot be awarded contracts to construct those projects.
“It is common sense not to hire a fox to guard your henhouse,” says Carlin.
In the Davis case, the appellate court further stated the leaseback contracts in use and promoted by large general contractors statewide did not comply with applicable statutes enacted in 1957. The court ruled these statutes allowed a limited exemption from competitive bidding only if the contracts were real leases over time and the contractors provided genuine financing for the project. The court observed the challenged contracts provided no genuine financing and were not real leases because they ended concurrent with the completion of construction. As such, the court concluded the leaseback contracts were used as a subterfuge to avoid competitive bidding and were therefore illegal.
Because they are similar, the Davis decision invalidates the vast majority of recent leaseback contracts awarded to a handful of large and politically active contractors throughout California. These contractors fund local school bond campaigns and school board elections and in return are handed no bid leaseback contracts. One of the largest leaseback contractors in California by market share is Balfour Beatty Construction, LLC which is related to UK based Balfour Beatty, a publicly owned company traded on the London Stock Exchange. In 2008 Balfour Beatty paid $116 million in cash to buy Barnhart Construction which according to their press release at the time named Barnhart the sixth largest school building contractor in the nation. Barnhart pioneered the resurgence of leaseback contracting by schools over the last decade by promoting it as an alternative to competitive bidding where schools could hand pick their contractors giving rise to a ‘pay to play’ culture in California.
The California Legislature breaks for summer recess on Friday, July 17.