Last year, a state appellate court ruled that when Fresno Unified School District hired a construction company to consult on a middle-school project and then awarded it a no-bid contract to build the school, it violated state conflict-of-interest laws.
The state Supreme Court refused to take up the case, immediately placing billions of dollars in school construction payments all over the state in jeopardy as attorneys demanded that districts recapture funds that were paid under illegal contracts.
Meanwhile, lobbyists for the construction industry – particularly firms that specialize in “lease-leaseback” projects – began pressing the Legislature for protection from “disgorgement,” as it’s called.
Protective legislation – dubbed a “get-out-of-jail-free card” by critics – was drafted but the effort stalled, in part because legislators were leery about intervening in what had become, in Fresno, a federal investigation of insider dealing.
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The contractor involved, Harris Construction, not only was a preconstruction consultant on the middle school, but had contributed heavily to the bond issue campaign that financed the school, and had a personal relationship with the district’s superintendent.
The legal rationale for disgorgement as a remedy for conflict of interest has since been underscored by another appellate court decision involving a similar situation in the Torrance Unified School District and $109 million in construction payments. And the construction industry is mounting a new effort in the Legislature to gain protection from having to repay billions of dollars.
Assemblyman Patrick O’Donnell, D-Long Beach, who leads the Assembly Education Committee, had already introduced a bill that would require competitive bidding in lease-leaseback projects, in which a school district leases a school site to a contractor, then leases back the school that’s built on the site.
O’Donnell is now drafting amendments to Assembly Bill 2316, to be introduced in the next few days, that would expand the bidding requirement to include preconstruction consulting contracts. But they would protect contractors who had previously built schools under no-bid lease-leaseback contracts after serving as consultants from having to repay money.
The first reform, requiring competitive bidding on these multimillion-dollar contracts, is clearly overdue.
Allowing lease-leaseback contracts without bidding was aimed at bringing private capital into school construction, but in Fresno and other districts, it was abused by being extended to projects in which the district already had the money in hand but entered into “leases” that were paid off as soon as projects were completed. Thus it became a subterfuge to hand no-bid contracts to favored insiders.
Protecting contractors from having to repay funds they received from such questionable deals is another matter altogether. While some may have acted in good faith, it’s evident that others got caught doing something they should have known was unseemly and shouldn’t have done. The pending bill would, in effect, reward them for bad behavior.