Litigation involving a taxpayer and the Fresno Unified School District over the lease-leaseback process for construction projects has school districts across California—including in San Benito County—checking their contracts or not starting them at all.
At least two school districts in the county—San Benito High School and Aromas-San Juan—have lease-leaseback agreements in place, though the Hollister School District chose to fund a recent project a different way while waiting for the result of the litigation.
Gary McIntire, the superintendent of the Hollister School District, called the public’s interests “very well served” by the lease-leaseback process, which forgoes open bidding, but the district chose not to use it recently after consulting with its legal counsel.
“We’re not going to until we get this sorted out legally,” McIntire said. “We were honestly heading down doing a lease-leaseback and ended up in the end not doing it just because of the pending legal questions about the process, and we just felt that until that’s resolved we’re going to follow the advice of our attorney and we’ll take other approaches.”
McIntire mentioned how he used the process in a former school district. He added that at the time the Hollister School District considered the process for a portable restroom project at Rancho and R.O. Hardin, the case was fairly new and there might be more mature views on the subject now, but at the time it looked “pretty murky,” he said.
“I think it has a very strong structure that allows for planning projects with the contractor to ensure that the project gets done on time and for the maximum guaranteed price,” the superintendent said.
The topic surfaced at a regularly scheduled board meeting at San Benito High School District earlier this month where trustees approved a $6.9 million lease-leaseback agreement to build an addition to the physical education building with general fund money.
That contract became the latest of five construction or modernization projects approved as lease-leaseback agreements.
Those in favor of the process—including the superintendent, the board president and the law firm representing the San Benito High School District—say the process allows the district to work with a well-established, bonded contractor; it means the project is more likely to be on time and on budget; and the district often pays less in claims or change orders. Opponents of the process say it by steps public bidding, a key step to getting the best price for projects funded with taxpayer dollars.
“We know when there’s competition, the quality goes up and the prices goes down,” said Mark Hinkle, the president of Silicon Valley Taxpayers Association.
In the Stephen K. Davis v. Fresno Unified School District case, Davis, a taxpayer, challenged a noncompetitive bid contract between the Fresno Unified School District and Contractor Harris Construction Co., Inc. regarding a lease-leaseback contract for the building of a $36.7 million middle school. Davis alleged the project should have been competitively bid because it did not satisfy the criteria of the exemptions listed in education code.
The 5th District Court of Appeal ruled in June that the Fresno Unified School District’s leaseback contract was used improperly and the California Supreme Court denied the district’s request to review the court’s decision, according to media outlets.
Meanwhile, the Gilroy Unified School District in the neighboring county canceled six already signed lease-leaseback contracts in June. The Fresno ruling was not binding on Gilroy, but trustees and staff huddled with the contractors and, out of “an abundance of caution,” terminated the contracts and put the projects out for competitive bidding, according to Alvaro Meza, the district’s assistant superintendent for business services.
“Essentially the law does require that school districts bid for public projects,” said Sam Santana, a lawyer with Dannis Woliver Kelley, the San Benito High School District’s law firm. But there’s a statutory exemption to that for lease leasebacks and that’s in the education code and states a district can choose a lease leaseback process, the lawyer explained.
Santana spoke in a conference call with the Free Lance last week that included John Perales, the district superintendent; Roseanne Lascano, the director of finance and operations; and Ray Rodriguez, the board of trustees president.
“The guaranteed maximum price, even though it can be a little high or a little low, it can be very attractive for budgeting purposes,” Rodriguez said. “My limited experience with it is the modernization project that we just did for the 300s (wing) and 400s (wing). Not only did it come in below the guaranteed maximum price but it looks like we’re going to get a sizable amount back.”
That amount would be about $600,000, Perales said.
In June, the San Benito County Grand Jury—made up of 19 volunteers—recommended the high school district re-examine the use of lease-leaseback arrangements for construction projects. The district responded formally in writing and their response disagreed with the grand jury’s statement that there is an ‘inherit conflict’ between lease-leaseback and competitively bid construction.
“They are both authorized methods of construction contracting for school districts in California,” the statement said.
In the Davis vs. Fresno Unified School District case, the court found the district was using the lease-leaseback method but it wasn’t a lease at all, Santana explained during the conference call. It did not meet the statutory requirements in the education code and had no lease payment schedule or terms, he said.
“Our lease-leasebacks are not ‘in name only,’ ” the lawyer said. “They’re actually in line with the statutory requirements.”
The Aromas-San Juan Unified School District also has a lease-leaseback project—with a guaranteed maximum price of $350,000—in place for the relocation of portables from Aromas School to Anzar High School.
“We needed the lease-lease back to better manage our cash flow, meaning we really did not have adequate cash to pay for the moving of the building at the time of the move and we needed to spread out the payment over time,” explained Superintendent Ruben Zepeda in an email to the Free Lance.
Gavilan College did not have any lease-leaseback agreements in place, Jan Bernstein Chargin, the director of public information, confirmed in an email to the Free Lance last week. Administrators at eight other smaller school districts in the county did not respond by deadline to emails requesting a count of the number of lease-leasebacks—if any—that were in place in their district.
Gilroy Dispatch Editor Jack Foley contributed to this report.
