California’s public schools saw an enormous enrollment surge during the 1950s from the post-World War II baby boom.
It overwhelmed many school districts’ capacities to build new facilities, and one response, enacted in 1957, was called “lease-leaseback.”
The law authorized a district to lease a school site to a contractor for a token amount. The contractor would build the school and then lease it back to the district for up to 40 years, after which ownership would revert to the district.
One feature was that a school contractor/lessor could be chosen without competitive bidding, which may have been a fatal flaw.
It became a much used – or misused – way for school boards and administrators to build facilities without going through the messy process of asking voters to approve bonds and therefore tax themselves.
By and by, some school officials – with the encouragement of contractors – also bent the system’s original purpose by using it to avoid competitive bidding. In their projects, the “leases” would last only through construction, at the end of which the contractor would be paid off.
And in some cases, the phony leases were paid off with notorious “capital appreciation bonds,” which accumulate interest for decades before huge balloon-payments kick in, often several times more than their face amounts.
In 2004, the staff of the State Allocation Board, which parcels out school construction money, described how lease-leaseback was being distorted, questioned the legality and noted that in some cases state money was being used.
The report declared, “the integrity of the use of general obligation bonds … must be above reproach” and suggested that the lease-leaseback law be clarified.
The warning was ignored and no-bid contracts proliferated.
How many? At least 100 districts have issued contracts involving countless billions of dollars. Los Angeles Unified alone did more than 70 projects worth more than $2.7 billion, according to filings in a lawsuit.
Some have been scandals, involving favors to local school officials and campaign financing from contractors.
The U.S. attorney’s office is investigating a 2012 contract for a middle school in Fresno Unified that had been slapped down by a state appellate court as violating the state’s competitive bidding and conflict-of-interest laws.
Last week, the state Supreme Court refused to hear an appeal of the decision.
So finally, after decades, phony lease-leaseback contracts have been declared illegal.
Just hours before the Supreme Court rebuffed the appeal, legislative leaders stalled action on a contractor-backed bill to protect them from having to repay lease-leaseback proceeds through a legal process called “disgorgement.”
This will be very messy as attorneys for contractors frozen out of the process and taxpayer groups press districts to recover illegal payments. But it could have been prevented had the State Allocation Board staff warnings been heeded.