Fresno Unified’s legal tangles with no-bid contracts put California school districts on alert

A sign thanking Fresno for Measure K funds is shown outside the Gaston Middle School construction site in October 2012. Fresno Unified’s use of a $37 million lease-leaseback contract with Harris Construction to build the school is now at the heart of a court case.
A sign thanking Fresno for Measure K funds is shown outside the Gaston Middle School construction site in October 2012. Fresno Unified’s use of a $37 million lease-leaseback contract with Harris Construction to build the school is now at the heart of a court case. Fresno Bee file photo

School districts are being careful about the way they handle construction projects after the state Supreme Court refused last week to depublish an appellate court decision that criticizes Fresno Unified’s use of a no-bid contract.

The high court has denied Fresno Unified School District’s petition for review, allowing local contractor Stephen Davis to head back to Fresno County Superior Court, where he will allege that the school district used the “leaseback” method of financing in order to avoid the competitive bid process and guarantee that the $37 million Gaston Middle School project would go to Harris Construction.

The deal has led to a federal investigation of Fresno Unified.

Leaseback agreements were designed to allow cash-strapped districts to build schools by going outside of the traditional competitive bidding process and handpicking consultants who will front the cost of a project and then be repaid by the district in increments over time. Leaseback agreements remain legal, but the latest court action calls into question under what conditions school districts should actually use them.

The Fresno-based 5th District Court of Appeal said in June that in Fresno Unified’s case, the contract was not genuine and was a leaseback agreement in name only. The district had the money to pay for the project, and the court said it used the leaseback method improperly.

The court also said that Davis has grounds to pursue his claims that the district broke conflict of interest laws, since Harris Construction provided consulting services on the project and then was awarded that project.

Fresno Unified officials have downplayed the 5th District decision, pointing out that the Davis allegations have yet to be proven in court. But for now, the appellate court ruling is the binding law in California.

$37 millionHow much Fresno Unified paid Harris Construction on leaseback project

Los Angeles Unified School District – which voiced support for Fresno Unified last month, saying it has spent billions on leaseback contracts – has backed off of leaseback agreements.

“The district intends to rely on other procurement methods in the future until uncertainty surrounding the use of (leaseback) is addressed legislatively,” a spokeswoman for L.A. Unified said Monday.

Clovis Unified and Sanger Unified school districts said they, too, are proceeding with caution.

“Based on last week’s decision, we’re in regular communication with legal counsel and staying abreast of the statewide conversation about it,” Clovis Unified spokeswoman Kelly Avants said. “As far as future agreements go, it’s going to be based on what our legal counsel says on this matter.”

Sanger Unified Assistant Superintendent Eduardo Martinez said his district also has consulted with attorneys and is “trying to do things as transparent as possible.”

Madera Unified Superintendent Edward González said his district always has avoided using the leaseback method, and he has witnessed the way the use of the alternative route has evolved over the years.

“Ten years ago the only districts using it were small ones where it was legitimate because they didn’t have the money in hand to move construction costs along,” he said. “But then the bigger districts started doing it and that’s when it became murky. One could argue that big districts took advantage of a loophole.”

It was unclear at a school board meeting last week whether Fresno Unified would continue using the leaseback method, with Superintendent Michael Hanson saying, “we haven’t figured that out yet.”

Fresno Unified and its counsel will continue to work hard to ensure that its use of the leaseback process is proper.

Bob Nelson, Superintendent Michael Hanson’s chief of staff

Fresno Unified officials said they are optimistic about going forward with the case, and that the latest opinion leaves the law unclear and has created uncertainty for school districts and contractors all over the state.

“We understand that our district is playing a pivotal role in the future of the lease-leaseback construction delivery method,” said Bob Nelson, Hanson’s new chief of staff. “At this point in time, no ruling has been made at any level determining that Fresno Unified’s contract with Harris was illegal or that Fresno Unified may not continue to use the lease-leaseback process in the future.

“The opinion only addresses some aspects of lease-leaseback implementation and that has resulted in different parts of the state implementing the law in different ways,” Nelson said.

But the 5th District opinion now must be followed by every public entity in California that uses a leaseback agreeement, said James Ardaiz, former presiding justice of the 5th District Court of Appeal who now is with the private firm of Baker, Manock & Jensen of Fresno.

“When the Supreme Court denies a hearing and leaves a published opinion in place, it is now the binding interpretation of the law in California,” Ardaiz said. “All lower courts must follow the opinion.”

As long as the 5th District’s interpretation of the law is not disagreed with by another appellate district, it’s the law of the land.

“Historically when the Supreme Court denies a petition for hearing and refuses to depublish a case, that significantly decreases the likelihood of any of the other Courts of Appeal disagreeing with the decision,” Ardaiz said.

Mackenzie Mays: 559-441-6412, @MackenzieMays