An alternative view of California’s public school system is that it is a huge industry with six million customers who spend more than $100 billion a year.
There’s big money to be made in supplying the goods and services those young customers demand, which translates into political jousting for pieces of the financial pie.
A recent California appellate court decision dealt with the syndrome — putting the brakes on one especially insidious practice that allowed those with political pull to profitably twist a law meant to help local school systems build much-needed facilities.
It dates back to 1957, when the Legislature, seeking to help school districts cope with a tidal wave of baby boomer students, enacted something called “lease-leaseback.”
It 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, bypassing the traditional use of voter-approved bonds.
The law allowed a school contractor/lessor to be chosen without competitive bidding, and some school officials began misuing that exemption with projects whose “leases” would last only through construction, after which contractors would be paid off with state and local bond funds.
The Warning Went Unheeded and No-Bid Lease-Leaseback Contracts Proliferated
In 2004, the State Allocation Board, which parcels out school construction money, questioned the propriety of such contracts, declaring “the integrity of the use of general obligation bonds…must be above reproach” and suggested that the lease-leaseback law be clarified.
The warning went unheeded and no-bid lease-leaseback contracts proliferated. Los Angeles Unified alone did more than 70 projects worth more than $2.7 billion. Some have been scandals, involving favors to local school officials and bond campaign financing from contractors.
A notorious example occurred in the Fresno Unified School District in 2012 when Harris Construction Co. received a lease-leaseback contract for a middle school without bidding. The district paid for the construction in installments, and then assumed ownership on completion.
Stephen Davis, a rival contractor, filed a double-barreled lawsuit alleging that the contract violated competitive bidding and conflict-of-interest laws, the latter because Harris had also been retained as a “consultant.”
Fresno Unified’s superintendent, Michael Hanson, received intense criticism in local media for his close relationship with Harris Construction’s owner, Richard Spencer, including Spencer’s buying radio ads to praise Hanson’s performance and underwriting his “state of education” event. Eventually, as the lawsuit wound through the courts, Hanson lost his job.
School Construction Firms Attempted and Failed to Get Legislation
Both facets of the lawsuit prevailed, with one going to the state Supreme Court. Only one issue remained — whether Harris could be compelled to return the $37 million it was paid for the school, which the law calls “disgorgement.”
With dozens of questionable lease-leaseback deals at risk, school construction firms attempted and failed to get legislation that would have protected them from disgorgement.
Last month, an appellate court declared that “the remedy of disgorgement is available” in the Fresno Unified case, overturning a lower court ruling.
Justice Donald Franson Jr. wrote in his opinion that the middle school contract functioned as a traditional construction contract and not a genuine lease, and should have been awarded by competitive bidding.
Harris Construction may take the issue to the state Supreme Court, but having been rebuffed earlier, is unlikely to prevail.
It’s a big win for Stephen Davis and Kevin Carlin, a San Diego lawyer who represented him and has pursued other questionable lease-leaseback cases.
More than anything, however, the decision is a warning to construction companies and school officials that bending the law with sweetheart contracts is intolerable.