District sees no conflict in Prop AA campaign contributions and contracts

District sees no conflict in Prop AA campaign contributions and contracts
A sign denotes Proposition AA stadium improvements at San Dieguito Academy. The biggest contributors to the $449 million bond campaign were later awarded a contract. But the district believes there are no pay-to-play issues, because firms were "prequalified" beforehand. Photo by Jared Whitlock

REGION — Recently, crews have been hard at work installing a new track and field as part of a stadium revamp project at Canyon Crest Academy.

Money for those upgrades is coming from Proposition AA, the San Dieguito Union High School District (SDUHSD) bond that passed by a whisker in fall 2012.

Sacramento-based engineering firm Lionakis has been overseeing the completion of the Canyon Crest Academy project since it began in June 2013.

Lionakis was one of five companies that contributed $25,000 to support the school bond campaign. Since the $449 million bond passed, Lionakis has secured several Prop AA contracts with an overall worth of $4.78 million.

In reviewing Prop AA campaign disclosures and contracts, seven businesses that gave more than $10,000 to promote the campaign later netted at least one contract, some totaling in the millions of dollars.

Across the state, the connections between bond contributions and subsequent contract issuances have raised “pay-to-play” concerns with some oversight groups.

But there’s no such conflict at SDUHSD, said Eric Dill, the district’s associate superintendent of business services. That’s because firms like Lionakis were “prequalified” to do construction and financing work before the bond campaign kicked off.

Test-driving firms

At the beginning of 2011, SDUHSD decided to put together a master plan for district-wide upgrades and new buildings.

“A lot of the campuses were falling behind,” Dill said. “We weren’t sure if we were going to move forward with a bond, but we still required a long-term facilities plan.”

For an idea of what was needed at campuses and the cost, the district requested proposals from architecture and construction firms, known as RFPs.

A district finance team further evaluated the pool of applicants based on school construction expertise, history and fee structures.

Several months later, once the district had estimates and blueprints, it needed a way to fund projects.

At that point, it looked as though SDUHSD was going to put a bond on the ballot. District staff then prequalified 10 firms that proved their mettle during the master-planning process.

“We looked at this as a very prudent long-term interview process, as opposed to what many agencies do,” Dill said. “They pass a bond, they put out RFPs, they get documents and then they have interviews. Based on a half-hour interview, they assign $12 million worth of work.

“We actually got to test drive all of these groups,” he added.

The eight biggest contributors to the Prop AA campaign have landed valuable contracts so far, with the exception of Ruhnau Ruhnau Clarke Associates, a firm that wasn't "prequalified."

The eight biggest contributors to the Prop AA campaign have landed valuable contracts so far, with the exception of Ruhnau Ruhnau Clarke Associates, a firm that wasn’t “prequalified.”

Of those 10 prequalified firms, which includes four architecture firms, three construction businesses and three finance companies, all contributed to the Prop AA campaign.

Looking at the 10 biggest contributions to the campaign, eight were from prequalified firms. Five of them each contributed $25,000, later receiving valuable contracts.

Contributions for the bond totaled $213,317. The majority came from prequalified companies, while a mix of other contractors and parents made up the remainder of donations.

Dill stressed that contract amounts are subject to negotiations and competitive rates.

Also, if the district isn’t happy with a firm, he said it could opt to go with another firm on future projects.

Also, many contracts have gone out to firms that weren’t prequalified. And the process remains competitive, Dill said. For instance, the district has received numerous bids for work on the second phase of the San Dieguito Academy field construction.

So far, the district has issued $160 million in Prop AA bonds. The money from that first draw should continue to fund projects for the next year.

District staff recommends contracts to SDUHSD’s board, which ultimately must approve them.

Staff members and the board haven’t talked about contributions with potential firms, neither before, during or after the bond campaign, Dill said.

“There was no overt and no implied expectation,” Dill said. “I myself don’t know who made donations to the campaign.”

While unspoken, because firms were prequalified beforehand, could that process have encouraged them to contribute?

“That’s their own internal business decision that they would make, whether this is worthy of supporting and at what level,” Dill said.

“Corporations make lots of investments in things that they think will bring a return,” he added.

But districts that allow contributions — no matter if firms are selected before or after the bond campaign — open the door for conflict of interest issues, said Anton Jungherr, co-founder of the California League of Bond Oversight Committees, a group that educates oversight committees on school bonds.

“The timing (of a contribution) doesn’t matter…it’s still troublesome,” Jungherr said.

When contributions are a significant factor, he added that it’s difficult for board members and district staff to stay independent and give taxpayers the best deal.

Regardless, Jungherr said it’s legal for firms to contribute to a bond campaign.

However, sometimes the relationship between school officials and companies can get too cozy.

In Chula Vista’s Sweetwater Union High School District, officials have indicted 15 people in connection with school bond corruption. Some board members reportedly accepted meals, trips and tickets for plays in exchange for influencing bond contracts.

In response to increasing concerns over pay-to-play issues, several districts across the nation have voluntarily decided they won’t take contributions for school bonds. And Cajon Valley Union School District in El Cajon capped donations at $2,000 for its 2012 bond.

One taxpayer group supported Prop AA, while two came out against it. Even with the opposition, Prop AA just cleared the 55 percent threshold needed to pass. The measure increased property taxes for those in the district by about $23 per $100,000 of assessed home value.

State law forbids districts from using public funds to support a bond campaign. Friends of San Dieguito School and Yes on Prop AA — a group made up of parents — raised money for the bond.

In some cases, the Friends of San Dieguito School asked for contributions from firms, while in other instances the companies approached the organization, said the group’s Co-Chairman Brad Shoen. He noted that a number of parents in favor of Prop AA also donated to the campaign, adding that a list of contributors was posted online for the public to review before the Prop AA election.

“You could see who was donating — this was all transparent,” Shoen said.

Competitive versus negotiated sales

One of the $25,000 donations to the Prop AA campaign came from De La Rosa & Co., Prop AA’s underwriter.

Donations from underwriters have drawn increased scrutiny from lawmakers and the public in recent years.

Underwriters are essentially middlemen that buy bonds from districts and sell them to investors. For the first $160 million issuance, De La Rosa earned a fee of $750,000.

Before the election, the district reviewed the backgrounds of four potential underwriters and went with De La Rosa. Then, SDUHSD went about negotiating directly with De La Rosa over the firm’s fee, what’s known as a negotiated sale.

Jungherr said this practice invites contributions, because underwriters want a measure to pass so they can earn money from selling bonds.

To land taxpayers the best deal, Jungherr said districts should go with a competitive sale. That approach involves firms competing by offering the lowest interest rate after the election.

Due to the size of school bonds, even a small difference in the interest rate can have a big impact on the debt repayment.

Dill said De La Rosa was chosen because of the firm’s history with the district and history of locking in low rates for school bonds. The firm did not respond to requests to comment.

Dan McAllister, the county’s elected tax collector, said he’s heard arguments both for and against competitive versus negotiated underwriter agreements.

“Some would argue, if negotiated, you can get a better deal, because it’s relationship based,” McAllister said.

On the other hand, others say a competitive process results in the lowest interest rate due to firms vying for the best rates, he added.

“I’ve seen both done, and both done well,” McAllister said.

Legislation targeting pay-to-play

Lawmakers’ attempts to rein in underwriter and contractor contributions have failed in recent years due to opposition from construction and finance firms, as well as from school districts.

“School districts don’t know how they can pass these bond measures without the financial support of the people giving the money, and the only people with a vested interest that benefit are parents and contractors,” McAllister said.

Some have also made the argument that limiting financial firms from donating tramples on their 1st Amendment rights, he noted.

The newest legislation, AB 621, is a bill that would prohibit school districts from doing business with underwriters and financial advisor businesses that contribute to a campaign. However, the bill has been stalled in the California Senate’s Governance and Finance Committee.

Also, with the prevalence of underwriter donations, several years ago, the Municipal Securities Rulemaking Board required that bond underwriters report contributions to the agency. The board is reviewing that data to gauge if new regulations might be necessary.

McAllister said it’s potentially suspect when contractors make up the majority of contributions to a campaign and then are awarded contracts after the bond passes. He believes SDUHSD mitigated pay-to-play concerns by prequalifying contractors beforehand.

“I think that it does help to mitigate concerns and ameliorate the perception of a conflict of interest, when the contractors and team is selected in advance of the ballot measure,” McAllister said.

“If it happens after that, then it becomes a wink and a nod deal…and I’m not sure that’s as transparent as San Dieguito’s attempting to be,” he said.

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