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Renovation project raises questions on public bidding

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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.

laurin Laurin

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.”

Shoulders likewise maintained each step of the financing method was sanctioned by Indiana law, and he noted the dissenting opinion authored by Judge Ezra Friedlander takes the same view.

bidding“The majority opinion calling it one transaction seems to ignore the separate independent statutes,” Shoulders said.

Partnerships

The question of whether the project is public or private is coming to the courts as more and more public-private partnerships are formed for large-scale projects. A hallmark of these cases has been the inconsistent rulings by the courts.

Jennifer Watt, associate at Kroger Gardis & Regas LLP co-authored an article on this topic for the January 2008 issue of the “Surety Claims Institute Newsletter.” Two cases tried before the Minnesota Court of Appeals underscore how a court can be unpredictable in reaching a decision on the same basic public or private question.

In Judd Supply Co., Inc. v. Merchants & Manufacturers Ins. Co., 448 N.W.2d 895 (Minn. Ct App. 1989), a private project that had a large public financing component, the court analyzed the statutes regarding economic development and public works to conclude this was not a public work.

A few years later in Green Electric Systems, Inc. v. Metro. Airports Comm’n, 486 N.W. 2d (Minn. Ct. App. 1992), a project where the public entity shared revenues with the private company, the court ruled it was a public work. This time it did not review the statutes but rather came up with four factors gauging ownership and funding.

While the Evansville case is very specific, Watt thinks it will cause the entities in public-private partnerships to lean toward public bidding on their projects so as not to violate state statute.

That was a motivating factor for the contractors in deciding to press the Evansville case, Laramore said. They did not want the method the school corporation and foundation used to become a road map for other public entities.

Both Gary Dankert, partner at Ice Miller LLP, and Lisa Tanselle, staff attorney at the Indiana School Board Association, said many public agencies are coping with budgets constraints similar to the Evansville school corporation.

They are trying to do more with less and looking for ways to inject private capital into public projects, Dankert said. Still, as this case shows, these entities must be cautious when structuring their relationships.

Tanselle concurred. “I think the lesson of this case is we have to be careful with how creative we get,” she said. “We can’t be too creative even though we’ve got declining budgets.”•
 

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