'One Big Headache'

Eureka City Schools takes divergent paths on proposed lease-leaseback projects



Eureka City Schools is backing away from at least one of its controversial no-bid construction contracts.

Back in September, the district decided to forgo the no-bid construction contract it had promised DCI Builders to renovate the Alice Birney Elementary School site, opting to put the process out to bid instead. But less than a month later, the district opted to stay the course at Lincoln Elementary School, keeping Dinsmore Construction under a no-bid contract to complete the third phase of the modernization and renovation project.

District officials were unavailable to explain the decisions before the Journal's deadline. Superintendent Fred Van Vleck asked the Journal to submit questions via email last week, then responded to say he was out of town and wouldn't be able to answer the questions until after the district's Thanksgiving break.

No-bid school construction projects in Eureka and throughout the state were thrust into the spotlight in June, when an appellate court found reason to believe the Fresno Unified School District may have violated state law in a $36.7 million project to build a new middle school. Specifically, the court found that Fresno Unified may have illegally skirted the competitive bid process by abusing a decades-old law that aimed to make it easier for cash-strapped school districts to build new facilities.

In 1957, the California Legislature recognized that school districts had few funding options at their disposal. State law prohibited them — in addition to counties and cities — from carrying any debt that exceeded the amount of a single year's revenue, meaning districts couldn't get private loans to build new facilities, unless they first got the approval of 66 percent of district voters. Looking to help districts in areas where voters weren't keen on passing bonds or allowing them to carry large debts, the Legislature came up with what's now known as the lease-leaseback arrangement.

Outlined in the state education code, the lease-leaseback arrangement allows a district to lease its property to a contractor for a nominal fee — usually $1 a year. The contractor then finances and builds whatever the district desires, which it then leases back to the district for a monthly fee that covers the cost of financing and construction. This allows districts to spread the costs of new building or renovation over decades and, once the final bill is paid off and the term of the lease is up, the property ownership reverts back to the district. The arrangement essentially allows districts to shift project financing debt to contractors and pay them back over time.

But in creating this new funding avenue, the Legislature also realized that subjecting it to competitive bidding would be too cumbersome for districts, leaving them to consider too many variables — interest rates, lease lengths, construction costs — for a low-bid-take-all process to account for. Consequently, the Legislature exempted lease-leasebacks from competitive bidding requirements.

Lease-leaseback arrangements remained a little-used provision of state law until the mid 2000s, when school districts in Southern California began seeing the practice as a way to skirt competitive bidding, allowing them to hand-pick the contractors they want to work with, disguising traditional building contracts as lease-leasebacks. Over the last decade, the practice has exploded throughout the state.

Districts, contractors and other proponents argue lease-leaseback is a valuable tool for districts and say low-bidder projects are cumbersome, cost ineffective and often fraught with problems. But tax payers' leagues and others argue that anything that gives district officials complete discretion over how they award millions of dollars in contracts opens the door to fraud, corruption and favoritism.

Last November, Measure S — a $50 million bond for Eureka City Schools — passed by 41 votes, after what many believe was the most expensive bond campaign in Humboldt County history. School officials maintain the bond was desperately needed, pointing to a host of upgrades needed at all of the district's eight campuses.

Immediately after the vote, Eureka City Schools got moving on two projects long in the pipeline — the renovation and modernization of Lincoln and Alice Birney.

For the Alice Birney project — which is slated to include the installation of three portable classrooms, restroom and classroom modernizations and the installation of a new pickup/drop-off area — Dennis DelBiaggio's DCI Builders was tapped as the general contractor. For Lincoln — a campus-wide modernization project — Fortuna's Dinsmore Construction, which had consulted on the plans and already completed the first phase of the project, was chosen. Both contractors donated $5,000 to the Measure S campaign. A Journal analysis of campaign finance disclosure forms (See "The $50 Million Henhouse," Aug. 27) revealed that the campaign raised $65,000 from a dozen entities in the construction, architecture or finance business. Of those 12 donors, seven were contracted to perform Measure-S-funded work and another three have been pre-qualified by the district for future projects.

But the legal landscape shifted under Eureka City Schools' feet in June, when the appellate court in the Fresno case ruled that plaintiff Stephen Davis presented good reason to believe Fresno Unified's $36.7 million lease-leaseback contract may be illegal. The court ruled that lease-leaseback arrangements, to be legally valid, must keep with the Legislature's original intent and include a genuine financing element. In other words, a district that has the money to fund a project can't simply write up the construction contracts as lease-leasebacks to avoid putting the project out to bid.

Van Vleck and Assistant Superintendent of Business Services Paul Ziegler were adamant that they believed their contracts were valid under the court's Fresno ruling. But Kevin Carlin, the attorney who represented Davis in the Fresno case, reviewed the Eureka City Schools' contracts with Dinsmore and labeled them a "sham" lease-leaseback.

According to minutes from the Eureka City Schools Board of Education's Sept. 10 meeting, Ziegler told the board the lease-leaseback process is legal, but there are "particular style points that need to be met" for contracts to withstand a challenge. Consequently, Ziegler said the district was going to pull the no-bid contract it had been negotiating with DCI Builders and put the Alice Birney project out to competitive bidding.

But just a few weeks later, staff recommended proceeding under the lease-leaseback contract for Dinsmore Construction to complete the third phase of modernization at Lincoln.

Because district officials did not respond to the Journal's questions, it's unclear why they chose the two different paths forward. For the Alice Birney project, the district also approved the $462,000, no-bid purchase in April of a three-classroom modular building from American Modular Systems, which donated $2,000 to the Measure S campaign. It's unclear how the district can approve a no-bid purchase of that size for a project that's no longer going through the lease-leaseback process. It's also unclear if the district still plans to use the lease-leaseback model for future work, including the anticipated renovation of the Eureka High School gymnasium.

In the meantime, Dinsmore Construction owner Dirk Dinsmore said he's just awaiting final plans to get started on the third and final phase of work at Lincoln, which will include work on the campus' kindergarten classrooms, bathrooms, multi-purpose room and kitchen facility. Asked why the district continued on with the lease-leaseback arrangements for this project while they put Alice Birney out to bid, Dinsmore said he thinks continuity was important. He said the last phase of work at Lincoln will have to connect with the fire system, plumbing and electrical work he did in earlier phases.

"If they don't have that continuity between phases, it's going to be one big headache," he said.


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