Los Angeles Unified School District Suretyship & The Large Public Owner Mark Hovatter Chief Facilities Executive Los Angeles Unified School District The Pearlman Group Woodinville, Washington September 5, 2013

Why Am I Here?

A couple of years ago, I came here because I wanted to stop the pendulum swinging between hard and soft contracts

Why I came back… The District had reached a point of frustration We had begun to question the return on investment with privately funded construction bonds We pay through our contractors a lot for bonds and get a little and we have to fight just to get that We want more small contractors doing business for the first time with LAUSD to be able to get bonds

History of Our $28 Billion GO Bond Program Proposition BB… Approved in April 1997 $2.4 Billion Measure K… Passed in November 2002 $3.35 Billion Measure R… Passed in March 2004 $3.87 Billion Measure Y… Passed in November 2005 $3.985 Billion Measure Q… Passed in November 2008 $7 Billion Other state and federal matching funds $7.395 Billion

Current Bond Program Accomplishments 130 of 131 New K-12 School Projects Completed 65 of 65 New K-12 Addition Projects Completed More than 23,000 Modernization Projects Completed 99 % Decrease in Schools Operating on Multi-Track Calendar 227 Schools in 2002 Versus One in 2013 Full Day Kindergarten Implemented District-wide

There’s Still More Work To Be Done….. Despite $20 Billion in Capital Investments Completed So Far, More Than $70 Billion of Unmet Capital Needs Were Identified District-wide in 2008 Operational Funding for Deferred Maintenance Does Not Keep Up With Capital Need Overcrowding Has Severely Increased Wear And Tear Of Buildings And Decreased Their Life Expectancy

School Upgrade Program Funding Program Reserve from Current Bond Program $75 Million Interest Earned on State Bond Cash Balances $100 Million Unissued Measure R and Y Bond Proceeds $677.9 Million Unissued Measure Q Bond Proceeds $7 Billion Total $7.8 Billion State and Federal Funding??? $ 2.2 Billion $10 Billion

Best Case Recovery Plan: $40 Billion Requirements $10 Billion (Including Federal and State) 10 Years to Spend 2.5% of Requirement Completed Per Year 40 Year Recovery Plan $10 Billion seems like a lot of money, but we still have to be very smart on how we invest this $10 Billion

School Upgrade Program Sample Recommended Project Types: Major renovations/reconfigurations focused on the learning environment Critical school repair and safety projects Upgrades and reconfigurations to support specialized instructional programs Technology infrastructure upgrades to ensure access Facilities May Not Align with Educational Needs Upgrade and equip schools to provide modern technology Build and repair aging Early Education Centers Provide/Update Adult and Career Education Centers Upgrade/Reconfigure Special Education Centers

WHAT GOT US All RILED UP..... Why we are unhappy with our current payment and performance bond program: We use bonds because the law requires it We spend a lot of money through our contracts to protect the public, but we seem to get little return on our investment We have done a lot to reduce the risks to sureties providing bonds to new small businesses, but few actually get bonds

Why We Want to Increase the Number of Small Businesses: Local Community Votes for Bonds to Support Projects Small Businesses Create Jobs for Local Residents Small Businesses Create a Tax Base for the Local Economy Building Projects Spill Over to Other Industries Small Businesses are Motivated to do a Better Job Small Businesses Resolve Issues More Easily

Small Business Participation Average Percentage of Small Business Participation for LAUSD Construction and Modernization Projects is 48% Mostly in a Subcontractor Role Most of our Small Business Primes are Longstanding

We Recognize Small Businesses are Higher Risk Because: They may be inexperienced with laws and regulations governing public projects Prime contractors may be less likely to hire small business subcontractors Sureties are less likely to bond small businesses New small businesses are more susceptible to performance issues

What We Have Done to Mitigate Risks to the Bond Providers: Educational/Training Programs Bond Assistance Program Payment Escrow Account Line of Credit/Guaranteed Loan We Guarantee First 40%

What We Got For Our Efforts: Seemed like a slam dunk

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Our Efforts to Find Out Why We Were Not Getting Results We communicated with the Sureties More people bidding on projects than projects available and sureties choose to bond their perceived lowest risk Sureties asked if we would issue the bonds to small businesses if it were our money?

YES… We Would Like the Opportunity However, the law requires us to go through a surety Solution:

YES… We Would Like the Opportunity However, the law requires us to go through a surety Solution: Change the law

Potential Alternative Solution: Master Owner Bond Program Concept We pay the premiums directly and everyone we award to gets a bond Modeled after our Successful Owner Controlled Insurance Program (OCIP) $20 million in credit Economy of Scale Equalizes Small and Large Contracts $3 Million Speech

Benefits of a MOB: (Master Owner Bond) Economy of scale Structured as a loss sensitive program to reduce risk to sureties Encourages more partnership between owners and sureties More new business participation

In the Words of the World's Greatest Suretyship Expert of All Time………… Conclusion: In the Words of the World's Greatest Suretyship Expert of All Time…………

If everything isn’t black and white, I say … “Why the Hell Not ?”