Walters: Fresno’s dicey school construction deal sends ripples statewide

complex legal dispute over construction of a $36.1 million middle school in Fresno has been meandering through California’s courts for more than a decade, but it appears to be reaching a climactic showdown over whether the money must be repaid.

The outcome could affect how billions of dollars in school construction deals may be legally structured as state officials weigh whether to place a new school bond on the ballot later this year.

In 2010, Fresno Unified School District persuaded voters to approve a school construction bond and two years later signed a $36.1 million “lease-leaseback deal” with Harris Construction Co., which had a close relationship with the district’s superintendent at the time, Michael Hanson, and had donated to the bond issue campaign. The company had also served as adviser.

Lease-leaseback arrangements, authorized by the Legislature in the 1950s to help schools cope with a flood of baby boomers after World War II, allow school districts to lease school sites to developers, who then build schools with their own money and lease the buildings back to the districts with long-term payments. Such deals are allowed skip the usual competitive bidding requirements for public works.

The Fresno district’s deal with Harris, however, deviated from that model by providing progress payments during construction, using bond funds, and turning the school over to the district immediately upon completion.

The deal angered another contractor, Stephen Davis, who alleged that it was a subterfuge to give Harris a no-bid contract and freeze out other would-be bidders. He filed a lawsuit challenging its legality.

As the relationship between Harris Construction and Hanson became public knowledge, he was forced out. The district, however, continued to defend the deal in court, winning two clashes at the trial level, only to lose in the appellate courts, including the state Supreme Court.

The latter’s last ruling in 2023 proclaimed that the deal with Harris was not a valid contract entitled to the usual legal protections, sending the case back down to the trial court to determine what remedy, if any, should be imposed. A trial is scheduled for March.

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As the dispute was winding its way through the courts, it sent shudders through the school construction industry because Fresno Unified wasn’t the only school district to use the questionable process. Officials had ignored a 2004 warning from the State Allocation Board, which parcels out state school bond money, that lease-leaseback procedures were being distorted, potentially undermining the legal integrity of state school bonds.

In 2016, contractors and school officials joined forces to persuade the Legislature to write a new law protecting builders from having to fully repay districts if their deals were deemed illegal, limiting repayment to just their profits.

The attorney for Davis, Kevin Carlin, contends that the legislative fix doesn’t apply to the Fresno case because it pertains to competitive bidding disputes and not a conflict of interest involving Harris Construction’s twin positions as an adviser to the district as well as a contractor.

Carlin recently sent a lengthy letter to Fresno Unified officials, saying he intends to seek not only the “disgorgement” of the $36.1 million paid to Harris but $26.8 million in interest, urging the district to join his side rather than continue defending the Harris deal. He said the district had spent at least a million dollars on lawyers for its vain effort to validate the deal.

While the financial outcome is still undetermined, the Fresno case illustrates how public officials and private interests can bend laws meant to provide transparency and accountability for spending taxpayer money. The Legislature should be strengthening those laws, not undermining them.

 Dan Walters is a CalMatters columnist.

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