Hundreds of school districts and contractors may have to find a new way to do business if the California Fifth District Court of Appeal has its way (pdf) on no-bid contracts.

School districts don’t call them no-bid contracts—those are illegal—but the way they misuse state-approved “lease lease-back” deals involving billions of dollars allows contractors to work on projects without bidding, the court said. In the case of Fresno Unified School District (FUSD), the court agreed with an attorney who called it a “sham and subterfuge.”

Contractor Stephen Davis took the school district to court in November 2012 over a $36.7-million lease lease-back deal with Harris Construction to build a middle school. Davis also alleged a conflict of interest because the contractor participated in planning the project as a consultant to FUSD before the contract was awarded.

The three-member court agreed with Davis on the lease-back and the conflict of interest, but did not agree that such deals also had to be restricted to projects that districts cannot pay for up front.

Lease lease-back deals were designed by the state in 1957 to help financially struggling school districts finance construction projects by letting them lease the property to a contractor who builds the facility and then leases it back to the district. The construction company becomes the landlord (and the banker) and the school district becomes the tenant. When the leases expire, everything ends up the district’s possession.

School districts, like FUSD, have been leaving off the last step, turning the deal into a regular straight contract, without that annoying bidding process.

Lawmakers and the courts look favorably upon bidding for public projects. The appellate court decision noted it is a deterrent to favoritism, fraud, corruption and misuse of public funds while stimulating marketplace competition.

In addition to those unacknowledged perks from bypassing the bidding process, school districts argue it lets them handpick contractors who will hire local subcontractors, and control the quality by using a metric other than who’s the cheapest.

Fresno appealed the decision to the California Supreme Court last week, arguing that everyone does it. “The lease-leaseback arrangement between FUSD and Harris was structured exactly the same way as other school districts throughout California have structured their lease-leasebacks for years,” Fresno argued.

There could be a lot of money at stake beyond the cost of doing business differently from now on. “Contractors are deemed to know the public contracting laws and regulations,” Kevin Carlin, a lawyer for the plaintiff, told the San Francisco Chronicle. “If they accept a contract that violates those, they have to pay all the money back.”

–Ken Broder

To Learn More:

Fresno Unified Files Petition on Leaseback to State Supreme Court (by Mackenzie Mays, Fresno Bee)

Court Clarifies that Lease-Leaseback Arrangements Must Be “Genuine” (by Erin Kunze, California Public Agency Labor & Employment Blog)

No-Bid Practice for Funding School Projects Found Illegal (by Jill Tucker, San Francisco Chronicle)

Controversial Lease-Leaseback Contracts Have Become Popular in Mt. Diablo District (by Theresa Harrington, Contra Costa Times)

Steven K. Davis v. Fresno Unified School District (California Fifth District Court of Appeal)