CONCORD -- The Mt. Diablo school district routinely avoids open bidding and contracts directly with favored companies, a practice critics says is unfair and possibly illegal.
For about two dozen contracts valued at more than $83.1 million, the district bypassed the usual open bidding requirement through a controversial process known as "lease-leaseback." The district leases property to its chosen construction company for $1 a year and then leases it back later for a price equivalent to the building costs for the projects, which range from security upgrades to classroom construction.
About 76 percent of the contracts, or $63.2 million worth, have been awarded under this process to one company -- Taber Construction in Concord -- while a dozen other firms have split the remaining contracts. District officials say lease-leaseback allows them to choose companies that have a good reputation for quality or a strong track record on similar projects, rather than simply picking the lowest price. But some district residents have been critical of the method, noting the small number of companies solicited for the jobs.
"All I'm looking for is a fair and consistent process and I haven't seen that yet," resident John Parker told the board last fall. "I don't have a problem with lease-leaseback per se. You want the best contractor to do the work. I just want to make sure that everybody else in the public knows that we're not just giving the job to our buddy down the street."
While many districts in the Bay Area avoid lease-leaseback, Mt. Diablo is one of several that use it, and it employs the method extensively.
The method has been cleared by attorneys hired by the district and works to its advantage, said Tim Cody, interim project manager for the district's $348 million Measure C construction bond projects, approved by voters in 2010. The leasing system also allows the district to invite requests for qualifications and proposals from selected, experienced contractors rather than advertising open bids. Once a contractor is chosen and a lease is in place, the contractor performs the construction work and leases it back to the district. The district makes monthly payments until the contracts are paid off, and then the lease ends. The Mt. Diablo district sometimes uses the system for projects that don't even involve construction, such as painting or security system installation.
District resident Alicia Minyen, who serves on the California League of Bond Oversight Committees -- a state watchdog committee that advises district bond oversight groups -- said she is concerned about whether lease-leaseback contracts are legal, in part based on challenges being raised in two California appellate courts.
"There are inherent risks, which have been expressed in a report from the State Allocation Board," Minyen said. "I have additional concerns because they are being used for projects that don't even involve real property. They are basically trying to circumvent the Public Contracts Code and frankly, I don't understand why they're pushing the envelope that way and I don't think it's worth it for taxpayers."
The risks include possible corruption and lack of competition to get the best deal for taxpayers on publicly financed projects, which is normally protected by the Public Contract Code, she said.
Lease-leaseback has drawn similar controversy elsewhere.
In 2004, a State Allocation Board staff report questioned the legitimacy of lease-leaseback contracts for projects that are entirely paid for by districts with state and local funds because they are never truly financed by the contractor and they skirt the state Public Contract Code intended to eliminate favoritism, fraud and corruption. The board -- which apportions funding to school districts and has the ability to adopt policies and regulations related to school construction -- directed staff to give school districts written notice to proceed with caution when using lease-leaseback agreements and interpreting the law.
Attorney Kevin Carlin, who is pursuing appeals against the Torrance and Fresno school districts over lease-leaseback agreements representing citizens in those areas, also argues they are illegal because they ignore a California Education Code section that he believes requires districts to solicit open bids for the facility leases.
He said agreements for projects such as security systems don't involve real property that can be leased.
"It's a sham lease," Carlin said, "being used as a subterfuge to get around the competitive bidding laws that would normally apply."
But attorney Phil Henderson of Los Angeles-based Orbach, Huff and Suarez LLP defends the practice. He said being forced to use the lowest bidder prevents the district from considering other important factors such as a contractor's past experience, performance or litigation history.
In a Mt. Diablo district presentation, he cautioned that it is not a cost-saving tool because the contractor commits to a maximum amount and may not have an incentive to finish the work for less than that.
Other districts in the Bay Area using the leasing mechanism include the Oak Grove, Alum Rock and Orchard school districts in San Jose, the Millbrae school district in San Mateo County and Martinez district in Contra Costa County. In response to concerns raised by Parker, the Mt. Diablo district has recently begun inviting up to 15 vendors to submit proposals for its lease-leaseback projects.
Cody said the Mt. Diablo district pursues the leases in a more competitive way than some others because it invites multiple bids and also posts the jobs on its website.
But after continued questions, Cody began presenting more detailed information to trustees last year, comparing the information received from various contractors. He also invited consulting attorney Henderson to explain the pros and cons of lease-leaseback and open-bid contracts to the district's bond oversight committee.
Still, concerned about the lack of competition using this system, district Trustee Lynne Dennler abstained from voting on a preliminary services agreement with Taber Construction for districtwide security upgrades last year, saying she didn't believe Parker's concerns had been adequately addressed.
"He felt we were just getting the same people over and over again and perhaps not getting the best for our money," Dennler said in a phone interview. "After I talked to John (Parker) and to Tim (Cody), I realized that we have found some very good companies to work with who do excellent work for us and finish on time and are near the bottom as far as the price goes, but not always the bottom."
Since September, lease-leaseback contracts in the Mt. Diablo district have sailed through easily with little board discussion and unanimous approval. Even the surprising redirection Wednesday of a $6.5 million aquatic center contract to Taber because the initial contractor, Kenridge Builders, failed to obtain required performance and security bonds after starting the project, drew few questions from the board, which unanimously approved the action. Cody said staff selected Taber to complete the project because the company had the next-best proposal and agreed to do it for $8,000 less. However, Cody did not say how much it would cost the district to terminate the Kenridge contract.
Brett Taber of Taber Construction said his company has earned its contracts by working in the district since 2005 on projects through both open bidding and lease-leaseback contracts. Most recently, he said, his company completed new classrooms at several schools.
"We had about 89,000 man hours, with 64 percent Contra Costa County residents (hired to do the work)," he said. "There were no injuries, no accidents and no claims. I know it's my work, but it's a really high-quality product."
Parker, who sits on the district's bond oversight committee, said he doesn't dispute the quality of Taber's work. He just wants to be sure the process is fair and transparent.
"I just don't think anybody else cares and I can only waste my breath so much," he said. "I get tired of standing there talking to the wall. I think they've improved (competition) a little. But I still think they just do things the way they want to and the way they think they should."
Arntz Builders, Milpitas (no LLB contracts)
BHM, Vallejo (no LLB contracts)
Black Construction Management, Santa Clara (no LLB contracts)
Gilbane, San Jose (no LLB contracts)
Kenridge, Napa ($6.5 million NGHS aquatics center contract stopped; re-awarded to Taber)
Landmark Construction, Loomis ($2.5 million YVHS wing modernization)
Rodan, Burlingame (no LLB contracts)
Roebbelen, San Francisco (no LLB contracts)
S and*Construction, Fremont ($453,000 MDHS IHTA kitchen)
Southland Construction, Pleasanton (no LLB contracts)
Taber Construction, Concord ($63.2 million)
Turner Construction, Oakland (no LLB contracts)
Vanir Construction Management, Oakland (no LLB contracts)
XL Construction, Milpitas ($2.9 million MDHS wing modernization)
Zovitch Construction, Concord (no LLB contracts)
Source: Mt. Diablo Unified School District