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Renovation project raises questions on public bidding

March 27, 2013

When the Evansville Vanderburgh School Corp. wanted to turn an old warehouse into an administration building, it utilized a financing method that kept the project from being publicly bid.

The school corporation contended its actions – selling the building to the EVSC Foundation, having the foundation do the renovation, then buying the building back – were within its authority and within the bounds of the state law. The 2011 renovation was not a public project subject to public bidding law, according to the school corporation.

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Eight contractors disagreed. This is a public work, the companies argued, paid with public funds making it subject to the statutes governing public bidding.

A recent decision by the Indiana Court of Appeals agreed with the contractors. However, the case, Alva Electric, Inc., Arc Construction Co., Inc., Danco Construction, Inc., Deig Brothers Lumber & Construction Co., Inc., et al. v. Evansville Vanderburgh School Corp. and EVSC Foundation, Inc., 82A01-1201-PL-2, highlights how a rise of public-private partnerships is creating confusion when determining what is a public project and what are public funds.

Indeed, in their brief to the Court of Appeals, the construction companies noted while other states have encountered projects that similarly avoid public bidding, no public entity in Indiana has tried to do this.

Sam Laurin, partner at Bose McKinney & Evans LLP, called this case fascinating. Neither he nor his firm is representing any of the parties in this matter.

In his practice, Laurin has represented schools and contractors. Oftentimes disagreements erupt in these public projects over how the process was handled, he said, but to have people arguing the work should have been put up for public bidding is pretty unusual.

The Court of Appeals pointed out the Indiana General Assembly has enacted two ways for school corporations to undertake large construction projects. Both processes, under the public work statute and through lease-purchase agreements, require opportunities for the public to learn about the work and raise questions.

Writing for the majority, Judge James Kirsch held the Evansville Vanderburgh School Corp. and the EVSC Foundation did not follow either of these legislative schemes.

“Instead, they entered into what they contend were six separate transactions to accomplish their goal of renovating the building with public money, yet evading public scrutiny and input,” Kirsch wrote. “School Corporation and Foundation cite to various parts of the Indiana Code to support their contention that each transaction was legal. The fact remains, however, that, notwithstanding the six contracts, this was one transaction – the renovation of a building owned and paid for by School Corporation using public funds.”

The Evansville matter boils down to how all the statutes are read, Laurin said. Intent is irrelevant. If public money is being used to finance a construction project, then it has to be publicly bid. If public funds are not being used in the project, then it does not matter if this financing method was employed to avoid the public bidding process.

Budget crunch

The decision to renovate the building on Walnut Street in Evansville was made for budgetary reasons, according to court documents. Faced with a $6.5 million reduction in annual funding, the school corporation found that consolidating the administrative offices into one location would bring a savings of $517,360 each year.

Court documents also note the school corporation did not have sufficient funds to complete the renovation project.

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Representing the corporation, Patrick Shoulders, partner at Ziemer Stayman Weitzel & Shoulders LLP in Evansville, said following the traditional method of requesting bids that the Court of Appeals pointed to would have placed an added burden on taxpayers.

“If the school corporation had done the project in the manner the majority (of the Court of Appeals) prescribed, property taxes would have increased in Vanderburgh County,” Shoulders said.

The contractors dispute that.

Faegre Baker Daniels LLP partner Jon Laramore, one of the attorneys representing the construction companies, said the school corporation’s assertion about saving taxpayers money is impossible to verify because the project was not open for public bidding. The objective of the bidding process is to get the lowest cost and protect against corruption.

Both the school corporation and the foundation maintain the six transactions they engaged in to do this project were authorized by multiple Indiana statutes. According to the Court of Appeals opinion, the corporation selling the building as excess property is covered under I.C. 20-26-7-1 and I.C. 36-1-11-5.5; the foundation purchasing, owning, holding and improving the building is provided for in I.C. 23-17-4-2; and the corporation reacquiring the building from the foundation is allowed under I.C. 36-1-4-5.

Even as it granted summary judgment in favor of the school corporation and the foundation, the trial court conceded the transaction “may smack of ‘favoritism most foul’ or may not pass the ‘smell test.’” Yet, it concluded each individual transaction was “entirely legal and authorized by the statutes.”

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