Watchdog Report: FUSD avoids competitive bidding

New method of awarding contracts has some contractors crying foul, but officials defend it.

The Fresno BeeOctober 27, 2012 

Six months after passage of a $280 million bond measure in 2010, Fresno Unified School District changed the way many of its construction contracts were awarded.

The traditional practice of choosing the lowest bid was placed on the back burner. Moved to the front was a method called lease/leaseback that let the district simply pick the contractor it wanted.

Not unexpectedly, the dramatic switch has fans and critics.

Fresno Unified Superintendent Michael Hanson says that lease/leaseback has helped the district make good on its Measure Q promise of upgrading schools, stimulating the hard-struck Valley construction industry, hiring local workers and helping revive the city's urban core.

But Ken Gray, co-owner of Selma-based BVI Construction Inc., sees things differently. He says the manner in which the school district devised the new system opened the door to influence-peddling.

"The district seems to have re-established the good old boys club," said Gray, who is the mayor of Selma. "Contractors are making political contributions and they're expecting payback in the form of being awarded contracts. I don't think that's a healthy thing for the public."

Of this there is no doubt: Harris Construction Co. Inc., owned by Richard Spencer of Fresno, has received the lion's share of Fresno Unified's business since the method was changed in May 2011. Since then, Harris has received seven contracts totaling about $78 million. These contracts include building the new Rutherford B. Gaston Sr. Middle School and making major renovations at Fresno High School.

During the same time frame, five other projects totaling $51 million were awarded to five separate contractors using the new award system.

Flavoring the debate about lease/leaseback -- particularly among Valley contractors -- is the fact that Spencer, a longtime contributor to political campaigns at the local, state and federal levels, gave $25,000 to the Measure Q campaign. Harris Construction pitched in $5,000 more. These contributions made Spencer and his company the biggest donor to a campaign that raised about $259,000.

Now, with the upcoming school board election seen by some people as a referendum on Hanson's performance, Spencer, his family members and employees of his companies contributed nearly $10,000 to the campaigns of three candidates supportive of the superintendent, according to elections records through Sept. 30.

The lease/leaseback method isn't new. Originally it was intended as a way for cash-poor districts to build and update schools. A district would lease land to a developer for a nominal amount, typically $1 a year. A school would be built, and the district would pay the developer back over an extended period of time.

But school districts throughout California -- frustrated by poor construction work and projects that increased in price because of change orders -- began using lease/leaseback even when they had ample construction bond money on hand.

Instead of hiring an architect to design what they wanted and selecting the contractor and subcontractors based on the lowest responsible bids, districts choose a general contractor to work with a selected architect and negotiate a guaranteed maximum price. When the job is done, the builders are paid in full.

Kings Canyon Joint Unified School District in Reedley, for example, switched to lease/leaseback in 2002. Clovis Unified and Sanger Unified have used lease/leaseback as well.

The method is touted as superior to hard bids in a 12-minute video on the Harris Construction website. The video also includes testimony from prominent local architects about how well lease/leaseback works. In addition, Harris has hosted sessions with campaign and polling experts instructing districts on how to pass bond measures and implement lease/leaseback. The sessions took place at company headquarters in Fresno.

"Lease/leaseback lends itself to quality work, and you're also able to pick the subcontractors" said Juan Garza, the Kings Canyon superintendent. "With the hard bid, you're stuck with the lowest bid and you wind up with a lot of change orders."

Since the district changed methods, Harris has been selected for every project in the district, Garza said.

But, unlike how Fresno Unified selects the general contractor under its version of lease/leaseback, Kings Canyon allows all contractors to compete. The district then takes the top three offers to its board of trustees, which makes the final decision after public presentations from contractors.

"Harris has won every time, but they've also had to up their game," Garza said. "It's not a given and they know that."

The district has Measure K, a $40 million bond, on the Nov. 6 ballot. Through Sept. 30, the committee backing the bond raised about $33,500 -- about half of which came from construction interests.

"One thing that's clearly said to donors is, 'Don't have any expectations that you're going to get a job with us,' " Garza said. "You have to compete. We want to be totally transparent."

But San Diego lawyer Kevin Carlin says that lease/leaseback is ripe with opportunity for political corruption. Carlin has filed suits on behalf of clients against no-bid construction contracts awarded by two Southern California school districts and says he has clients in Fresno who intend to challenge lease/lease back contracts in Fresno Unified.

"It's really just a sham to circumvent competitive bidding," Carlin said. "Any time a staff member or elected official picks and chooses between one bidder and another bidder, there arises an opportunity for influence.

"The way lease/leaseback is being implemented, there's a very strong correlation at all steps in the process of bonds passed, people elected and contracts awarded."

Last year, the Fresno Unified board, acting on the recommendation of staff, approved a pool of 14 contractors for lease/leaseback contracts. The selections were based on criteria such as experience, past performance, technical expertise and ability to work with local subcontractors.

Fresno-based Davis-Moreno Construction Inc. was ranked 14th overall, but was excluded from the final pool because the district sought a blend of companies with bonding capacity to fulfill small, medium and large contracts, said Karin Temple, the assistant superintendent who oversees construction management.

The exclusion angered Stephen Davis, president of the company. His firm, which has a bonding capacity of $49 million -- mid-range for Fresno Unified -- built the Clovis North Aquatic Complex, a competitively bid project, and helped renovate the Old Administration Building at Fresno City College. His company's letter portfolio includes praise for many projects, including participation in two large projects involving Merced Community College District.

Said Davis: "We don't give them money, we don't pander to politicians and now we've been frozen out."

Gray, the Selma-based contractor whose company made Fresno Unified's cut and received a lease/leaseback $4.23 million contract to build classrooms and a kindergarten building at Winchell Elementary, says the district's way of awarding contracts doesn't include enough competition.

"Lease/leaseback came about because of the district's desire to avoid contracts with contractors who had poor performance," Gray said. "I'm OK with the concept. Where it became problematic is when it developed into a pick-and-choose process."

Gray said he approached the district about bidding on the modernization of Hamilton, a K-8 school, but was rebuffed: "I was told, 'You already have a project, we don't want you to bid.' "

Karin Temple, the district's assistant superintendent overseeing construction, said that six contractors were invited to bid on the $6.7 million Hamilton project. She confirmed that Gray was excluded from that job.

"We wanted to provide opportunities to other contractors as well," Temple said.

But on other projects -- both large and small -- Harris has received contracts absent competition. This fact shows that the district is guilty of favoritism, Gray said.

Spencer didn't return phone calls to his voice mail and to his secretary seeking an interview.

But Hanson defended the district's record of awarding contracts, saying it was transparent and fulfilled both the goals and spirit of Measure Q.

And Temple said that going forward, there will be small and mid-sized construction projects that more companies can bid on. The district, she said, continues to use competitive public bidding on smaller renovation projects.

Asked why Harris has received so much work, the superintendent said the company was uniquely qualified to perform complicated jobs such as renovating Fresno High amid the hustle and bustle of a typical school day. Harris, he said, was needed to tackle Gaston Middle School because of the project's complexity.

"We are doing the projects necessary to improve our schools and our communities and to turn the economic engine," Hanson said. "We feel great about the various ways that we're letting projects and getting projects on the street. Ninety-two percent of our current dollar value is going to folks in the local area doing the work.

"We go back to Harris because we have price, we have quality, we have scale and scope, and they've delivered for us."

Spencer and his companies also have delivered for three Fresno Unified school board candidates.

Through Sept. 30, incumbent Carol Mills, who represents the Fresno High area, had received $4,300 in donations from Spencer and employees of Spencer companies. In addition, Cru Winery, a Spencer-owned company, provided wine for a Mills fundraiser and Spencer Enterprises contributed $350 worth of photography.

"I had never even looked at the Measure Q contributors," Mills said. "I sent out letters to people who contributed to campaigns. I was told by a couple of people that Mr. Spencer contributed to local campaigns and was civic-minded."

Mills pointed out that all of the lease/leaseback contracts awarded by the board have been by unanimous vote, with frequent Hanson critics Larry Moore and Michelle Asadoorian joining five other trustees to affirm the staff's recommendation.

Mills said that she voted for using lease/leaseback because the method has several advantages over traditional public competitive bidding: "With the old style, we had constant change orders that drove up the price. With lease/leaseback, we would have a fixed cost and the control to hire local people."

The trustee also said that she was offended by suggestions that Spencer's contributions to Measure Q and to board candidates had influence over the board's decisions.

"It absolutely didn't happen," Mills said.

The only time she was aware that there might be a problem with lease/leaseback, Mills said, was when Fresno sheet metal contractor Ernie Nolte told the board about not getting jobs despite being the low bidder. Mills said that the district investigated Nolte's complaint and reported back that under lease/leaseback, other factors were weighed besides price.

"The district and board have to be open to tweaking and changing the process so that it's fair to everyone," Mills said. "But if Mr. Davis, for example, thought it was unfair, I would have thought he would have been at the board meetings. We need to hear if there are flaws."

Ryan, the Hoover High incumbent, has received $1,250 in campaign donations from Spencer, his relatives and employees of his companies. Harris Construction contributed $300 worth of beverages for a campaign fundraiser.

Ryan said she met with Spencer about a year ago to talk about her approach to education and whether she would run for re-election.

"I told him we have to educate all children at a high level if we want to end this cycle of poverty in Fresno," Ryan said. "That's my sole reason for running -- to make Fresno a community where 13% unemployment no longer is the best we can do."

Ryan also said that her understanding of lease/leaseback was that it was a "hybrid" system that would produce quality work at a low price and flexibility to select local contractors.

Told that in some cases, qualified contractors were excluded from competing for jobs, Ryan said, "I don't think projects should be spread out among contractors. They should go to the best proposal at the lowest price."

Ryan, too, said that she never has been influenced by political contributions: "It's questions and accusations like this that convince good people not to run for office."

The third candidate receiving contributions from Spencer is Luis Chavez, aide to Fresno City Council Member Sal Quintero and former aide to Fresno County Supervisor Susan Anderson. Chavez received $4,100 from Spencer, Spencer family members and his company employees through Sept. 30.

Chavez said he solicited a donation from Spencer via a campaign letter and then called to thank him for the contribution.

"I told Mr. Spencer that I was going to focus on vocational education, and that was it," Chavez said.

The candidate said that people who say he is running on a pro-Hanson platform are mistaken.

"The superintendent has done a good job for the district with financial stability," Chavez said. "But there is a lot more work to do with parent outreach, reducing the dropout rate and increasing student achievement, especially with English learners."

Chavez also said that because of his experience as a government employee, he is an advocate for competitive public bidding: "I don't believe in monopolies. We need a fair process where everyone gets a shot. Ultimately this is for the kids, and we have to be good stewards of our dollars."

Mills said that construction industry contributions must be judged in the context of all donations. She pointed out that the Fresno Teachers Association Political Action Committee had a large fund to back its three endorsed candidates -- Andy Doris in the Fresno High district, George Whitman in the Hoover district and Esmeralda Diaz in the Roosevelt District.

The teacher's union PAC, through Sept. 30, donated $10,000 each to Doris, Whitman and Diaz. In addition, the PAC had nearly $221,000 remaining in its account.

Hanson was asked about the potential of campaign and bond measure donations combining with the lease/leaseback method to create an appearance of pay-to-play in the district.

He responded: "From my perspective, I would say, ask that same question with all candidates and all contributors. This conversation happens in every elected race across America. This is who's contributing and what do they think they're going to get from that?

"Readers should decide after they look at the list of contributors to all the candidates. People need to look at that information and if they want to make a guess after that, fine."

The reporter can be reached at (559) 441-6632, bmcewen@fresnobee.com or @fresnomac on Twitter.

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