Appellate Court Confirms that Competitive Bidding is Not Required for School Districts Entering into a Lease-Leaseback Arrangements

Los Alamitos Un. Sch. Dist. v. Howard Contr., Inc., G049194, 2014 WL 4638855 (CA 4 Dist. 2014)

For many years, school districts throughout California have avoided competitive bidding for school facilities projects by entering into “lease-leaseback” arrangements with contractors pursuant to Education Code section 17406 (“Section 17406”). That section expressly authorizes a school district to enter into a lease-leaseback contract “without advertising for bids.”

Despite the statutory language, there has been a longstanding debate as to whether this statute really does dispense with a competitive bidding process for such contracts. After all, competitive bidding of public works contracts has long been a strong public policy in California, and is used a means “to guard against favoritism, improvidence, extravagance, fraud and corruption; to prevent the waste of public funds; and to obtain the best economic result for the public.” Domar Electric, Inc. v. City of Los Angeles (1994) 9 Cal.4th 161, 173.

On September 10, 2014, the Fourth District Court of Appeals published its opinion in Los Alamitos Unified Sch. Dist. v. Howard Contracting, and held that Section 17406 does exempt school districts from obtaining competitive bids when entering into lease-leaseback arrangements for improvements to school property.

In that case, the Los Alamitos Unified School District (“District”) entered into a lease-leaseback agreement with a contractor for improvements to the District’s high school track and athletic field. Thereafter, in June 2012, the District filed a complaint in Orange County Superior Court seeking an order validating the legality of its lease-leaseback agreement. Another contractor, Howard Contracting, responded to the District’s complaint and challenged the lease-leaseback contract as invalid based on the lack of a competitive bidding process for the project. Howard argued that, despite the language in the Education Code, California’s public contract law requiring competitive bidding applied, making the lease-leaseback contract illegal. The trial court disagreed, and the appellate court, reviewing the question independently, affirmed.

The appellate court found that the language of Section 17406 exempts lease-leaseback agreements from a competitive bidding process that would otherwise apply to a public works contract. Among other things, the court pointed out that, in 1973, the California Attorney General interpreted an earlier version of Section 17406 and concluded that lease-leaseback arrangements by school districts were exempt from competitive bidding. The court also noted that the statute was amended in 1986, and the words, “without advertising for bids,” were added. Further, the court explained that, in 2004, the California Legislature unsuccessfully proposed to amend Section 17406 to expressly require school districts to solicit competitive bids for lease-leaseback contracts. Thus, the court concluded that the attempt to amend Section 17406 in such a manner implies that Section 17406 currently does not require competitive bidding.

Finally, while the court acknowledged the important purpose of competitive bidding in public works contracting, the court also explained that it is a statutory requirement. In other words, absent a statute requiring competitive bidding, a public entity is not required to engage in competitive bidding. Here, the statutory authorization for a lease-leaseback arrangement is found in the Education Code, and Section 17406 relieves a school district from any requirement to use competitive bidding for such a project.