Report on P3 Projects and Legislation in California

This guide to California law as it applies to public-private partnerships is republished with the kind permission of Peckar & Abramson P.C., a construction law firm.

Introduction

In recent years, one approach to infrastructure construction upon which the state and local governments have increasingly relied is the public-private partnership (“P3”). P3s place on private entities a broad range of project responsibilities and risks, some of which traditionally have been borne by public agencies alone. Typically, a P3 agreement calls on the private partner to not only design and build a facility, but also finance, operate and maintain it. In exchange, the private party may be entitled to tolls or user fees that the facility generates, or may receive direct payments from the government. This report discusses the status of California law as it applies to P3s, and examines the ongoing debate surrounding a major P3 project in Long Beach.

Statutory Authority

California statutory law authorizes the use of P3s for certain state and local government projects. As described below, P3s are authorized for Caltrans, the Judicial Branch, the High-Speed Rail Authority (HSRA) and local government agencies.

Caltrans
In 1989, the Legislature authorized Caltrans to use the P3 project delivery system on up to four projects. Caltrans subsequently entered into two P3 agreements, one to build toll lanes on State Route (SR) 91 in Orange County, and the second to build SR 125, which connects the Otay Mesa border-crossing area with the state highway system.[1] Each contract required the private developer to design, build, finance, operate and maintain the respective facility.

Caltrans's P3 authority was amended in 2009 in California Streets & Highways Code section 143. That year, the Legislature authorized Caltrans to enter into an unlimited number of P3 agreements for various transportation infrastructure projects through 2016. Such projects must achieve one or more objectives as determined by the California Transportation Commission. These objectives include: improving travel times and reducing transportation delays; improving transportation operation or safety; providing quantifiable air quality benefits; and meeting a forecasted demand of transportation. Additionally, all Caltrans P3 agreements must, prior to signing, undergo a 60-day review by the Legislature and the California Public Infrastructure Advisory Commission.

After passage of the 2009 statute, Caltrans entered into a P3 agreement for Phase II of the Presidio Parkway project in San Francisco. The agreement calls on the private partner to design, build and finance the second phase of a roadway replacing Doyle Drive, a 1.6-mile segment of Route 101 that provides southern access to the Golden Gate Bridge. The private entity is also responsible for operating and maintaining the structure for 30 years. In return, the State agreed to pay the private partner an estimated $1.1 billion over the life of the contract.

Judicial Branch
Existing law grants the Judicial Branch authority to enter into P3 contracts.[2] Such agreements are subject to legislative approval of performance standards adopted for the project by the Judicial Council and its staff in the Administrative Office of the Courts (AOC).

To date, the only P3 project commissioned by the Judicial Branch is the Long Beach Court Building. The new facility is the first social infrastructure project in the United States procured under the principles of performance-based infrastructure (PBI) contracting. Total development cost is approximately $490 million, with design-build cost of approximately $343 million. Under the PBI agreement, the Judicial Council of California (JCC) will own the building, and the Superior Court of Los Angeles County will occupy approximately 80% of the space. The JCC will pay Long Beach Judicial Partners (a private consortium) an annual, performance-based service fee for 35 years. The PBI delivery method will leverage the private sector’s access to financing, technological expertise, and management efficiency to quickly provide a high-quality facility that will serve the Superior Court of Los Angeles County. When complete, the five-story, 545,000 square-foot building will house 31 courtrooms, as well as court administration offices, Los Angeles County lease space, and retail leasable space.

A study by the AOC compared various types of delivery methods, including design/bid/build and design/build for a court-only building using traditional state management and financing. Ultimately, the P3 delivery system was found to be the most cost-effective for construction as well as maintenance over the life of the Courthouse, and the AOC found that use of the P3 system would likely save up to $52 million as compared to a traditional state-funded project. The Courthouse opened on time and within budget in September, 2013.

High-Speed Rail Authority (HSRA)
The Legislature approved establishment of the HSRA in 1996, and authorized the agency to enter into a P3 for development of a train system linking northern and southern California.[3] While capital expenditures by the HSRA require legislative consent, there is currently no statutorily-mandated process for formal review and approval of P3 projects. In any event, forecasts presented in the HSRA’s 2012 business plan suggest the agency will not enter into a P3 agreement until at least 2023.

Summary of State Public-Private Partnership (P3) Authority

State Department
Type of Infrastructure
State Law
Brief Description
Projects to Date
Caltrans Highways Chapter 107, Statutes of 1989 (AB 680, Baker)
Allowed Caltrans to enter into up to four P3s.
State Route (SR) 91 and SR 125
Caltrans and regional transportation agencies
Highways, local roads, and transit
Chapter 2, Statutes of 2009 (SB 2X 4, Cogdill)*
Allows Caltrans and regional agencies to enter into an unlimited number of P3s through 2016.
Presido Parkway
High-Speed Rail Authority (HSRA)
High-speed rail
Chapter 796, Statutes of 1996 (SB 1420, Kopp)
Allows HSRA to enter into P3 contracts for the proposed rail system.
High-speed train system
Administrative Office of the Courts (AOC)
Court facilities
Chapter 176, Statutes of 2007 (SB 82, Committee on Budget and Fiscal Review)
Establishes process for review of AOC P3 projects.
Long Beach Courthouse

* Replaced the P3 authority previously provided to Caltrans under Chapter 107.
Source: Mac Taylor, Maximizing State Benefits From Public-Private Partnerships, Legislative Analyst’s Office

Local Government Agencies
California's Infrastructure Finance Act (IFA), adopted as AB 2660 (1996) (Aguiar) and published in California Government Code section 5956, authorizes local governments to utilize private sector investment capital for carrying out "fee-producing infrastructure facilities." A fee-producing facility is one whose operation is paid for by the persons benefited by or utilizing the facility. Also, the IFA applies to a host of governmental entities, including cities (general law and charter), counties (general law and charter), school districts, community college districts, public districts, county boards of education, joint powers authorities, transportation authorities, or any other public or municipal corporations.

Under the IFA's broad authority, a local government agency may contract with private parties to study, plan, design, construct, develop, finance, maintain, rebuild, improve, repair or operate fee-producing infrastructure facilities. The government agency also may elect to grant private parties with ownership or lease rights to such facilities for up to 35-year terms.

The IFA permits various sorts of projects, including, but not limited to, the following: irrigation; drainage; energy or power production; water supply, treatment, and distribution; flood control; inland waterways; harbors; municipal improvements; commuter and light rail; highways or bridges; tunnels; airports and runways; purification of water; sewage treatment, disposal and water recycling; refuse disposal; and structures or buildings that will not be utilized primarily for sporting or entertainment events.

However, local governmental agencies may not use the statutory authority to design, construct, finance or operate state projects, including toll roads on state highways, state water projects, state park and recreation projects, and state-financed projects.

Case Law Relating to P3s

The status of P3s in California received a boost by virtue of the decision in Professional Engineers in California Government v. Department of Transportation, (2011) 189 Cal.App.4th 17. The P3 at issue in that case was Phase II of the Presidio Parkway Project ("Project") described earlier. CalTrans, the implementing agency for the Project, awarded the P3 contract to Golden Link Partner G.P. The Project was to be financed by the State through fuel tax revenues. After a public hearing, the contract was submitted to the California Legislature and to the Public Infrastructure Advisory Commission (PIAC) for review and comment.

Soon after, Professional Engineers in California Government (“PECG”) filed an action to halt further implementation of the Project. PECG claimed the Project violated California Streets & Highways Code section 143 (the statute authorizing Caltrans to enter into P3 agreements). Affirming the trial court, the Court of Appeals rejected PECG's claim for relief.

PECG contended, first, that Caltrans was not the “responsible agency” for the P3 as mandated by the statute, because private engineers, and not Caltrans employees, would conduct the work on the Project. The Court dismissed this argument, holding that while the statute required Caltrans to be responsible for performance of the work, it did not obligate Caltrans to use its own personnel for carrying out the work. The Court stated that under a common sense reading of the statue, to be a "responsible agency" connotes only supervisory control.

Additionally, PECG claimed that the Project failed as a proper P3 under the statute, since it would not be funded through tolls or user fees. The Court also rejected this argument. While the statute states that P3 agreements must authorize the use of tolls and user fees, it does not require their use as a necessary funding source in every P3, said the Court.

Following the Appellate decision, PECG again appealed, but in November 2011, the California Supreme Court declined to hear the case.

Debate Surrounding the Long Beach Court Building P3

As discussed above, the Long Beach Court Building (the "Courthouse") is, at present, the only P3 project commissioned by the Judicial Branch. The value of constructing the Courthouse using a P3 approach has been the subject of considerable disagreement, particularly between two government agencies, the Judicial Council and Legislative Analyst's Office (LAO).

An LAO report titled Maximizing State Benefits from Public-Private Partnerships, dated November 8, 2012, states that the Courthouse was selected as a P3 candidate primarily due to the project's size and the surrounding area's market for the sort of property management staff that could operate a P3. The report claims, however, that the selection process did not include several "best practices" that the report indentifies as having "been found to maximize the potential benefits of P3s and minimize its potential limitations." The report gives the example that the selection process did not evaluate whether the project was technically complex. It goes on to say that the project, in fact, "lacks unique or complex features that would likely benefit from innovative design and construction techniques." The report also critiques several assumptions used in an AOC-commissioned analysis demonstrating the cost savings to the State when using a P3 method compared with more traditional procurement options. The report concludes that the P3 approach was "problematic," "inappropriate," and, under a revised set of assumptions, more expensive to the State than a traditional approach.

A few weeks after the report was published, the Judicial Council offered its rebuttal in a letter to LAO. The letter states that the Judicial Council "worked closely with the Executive Branch and responded to concerns from the Joint Legislative Budget Committee and [LAO] as [the Judicial Council] developed the performance criteria and agreements that structured [the] project." The letter then challenges the LAO report's claim that the project "lacks unique or complex features" by maintaining that a Courthouse such as Long Beach contains various "inherently complicated and technically challenging" features, including "electronic systems for security, life safety, energy management, and communications," as well as "hundreds of detention cells with specialized equipment." These features, the letter argues, made the Courthouse "a good candidate for leveraging private sector expertise through a P3." The letter then defends the assumptions used in the AOC-commissioned analysis, contending the analysis was "performed reasonably" and "consistent with industry practice."

New Protections for Subcontractors on Certain P3 Projects

On August 13, 2013 California Gov. Jerry Brown signed AB 164, legislation that amends the Government Code related to infrastructure financing that authorizes local government agencies to use P3s to design, finance, and maintain a variety of fee-producing infrastructure facilities. The new law requires inclusion of “payment bonds to secure the payment of claims of laborers, mechanics, and materials suppliers employed on the work under contract” and “performance bonds as security to ensure the completion of the construction of the facility.”

The new law extends California’s “Little Miller Act” which requires the prime contractor to furnish surety bonds on public construction projects in excess of $25,000 in the amount of 100% of the contract to assure that the project will be completed, protecting taxpayer dollars, and that subcontractors and suppliers will be paid.

Conclusion

In a landscape of intense budgetary constraints and fiscal austerity, P3s offer government agencies in California and across the nation an alternative mechanism for financing much-needed infrastructure projects. Opportunities for construction industry professionals to collaborate with public entities may increase in the future by virtue of P3 delivery methods. These professionals should be sure to stay abreast of applicable state and local laws, including frequent changes thereto, and should seek the assistance of counsel throughout the P3 process.

Endnotes

[1] Ultimately, the SR 125 project became the subject of heavy criticism. The private partner failed to service its debt obligations, and filed for Chapter 11 bankruptcy protection, citing lower than projected usage of the toll road due to macroeconomic factors.

[2] Government Code sections 70371.5 and 70391

[3] Public Utilities Code section 185036





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