Did a Maryland school board have to competitively bid the refinancing of a lease-purchase deal that had already funded and built a public school?

Plain-English summary

The Board of Education of Baltimore County had financed construction of the Seven Oaks Elementary School through an unusual arrangement: rather than the county issuing bonds in the traditional way, the board entered a competitively bid lease-purchase agreement in which a contractor built the school, leased it back to the board, and the board would gain ownership after installment payments over ten years. The contractor later assigned the agreement to Signet Bank, which financed the construction. To secure lower interest rates, the board wanted to refinance the deal, paying off Signet and entering a new agreement negotiated directly with a chosen underwriter rather than putting the refinancing out to competitive bid. Maryland's State Superintendent of Schools asked the Attorney General whether ED §5-110, the statute requiring competitive bidding for school construction contracts, or any other state law required the refinancing itself to be competitively bid.

The opinion concluded that no state law required competitive bidding for the refinancing. It read ED §5-110 as requiring competitive bids for contracts for the physical construction of a school building, reasoning that a merged construction-and-financing lease-purchase agreement (like the original Seven Oaks deal) counts as a "contract for the school building" and must be bid, but that a later, purely financial refinancing of a project that has already been built and paid for through a bid process falls outside that language's ordinary meaning. The opinion found support in a parallel statute, Article 31, §10, which separately governs competitive public sale of county bonds used to finance traditional school construction, reasoning that ED §5-110 and Article 31, §10 form a two-part scheme, one covering construction, the other covering financing, and that reading ED §5-110 to also police a later refinancing would improperly stretch it beyond that structure. The opinion acknowledged that 1957 legislative committee testimony had expressed concern that lease-purchase deals could be used to evade competitive bidding requirements altogether, but found that concern satisfied here because the original Seven Oaks construction agreement had, in fact, been competitively bid; a later refinancing that changes only the financing terms does not reopen that same evasion risk. The opinion closed by noting that whether refinancing without competitive bids was actually a good idea for the board was a separate policy question the board itself would have to decide; state law simply did not require the process to be competitive.

Currency note

This opinion was issued in 1991. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify the current text of ED §5-110, Article 31, §10 (since recodified), and any newer statutory or regulatory guidance on school construction financing before relying on any specific rule described here.

Common questions

Did a Maryland school board have to put a school construction loan refinancing out to competitive bid? No, according to the opinion, so long as the underlying school had already been built through a competitively bid lease-purchase agreement. The opinion concluded ED §5-110's bidding requirement covers contracts for the physical construction of a school building, not a later refinancing of the financing terms alone.

Wasn't there a risk that lease-purchase deals could be used to dodge competitive bidding altogether? The opinion acknowledged that concern, which 1957 legislative hearings had specifically raised, but found it was satisfied here because the original Seven Oaks construction contract itself had been competitively bid; a later, purely financial refinancing does not recreate that evasion risk since the construction contract was never in question.

Did this opinion mean refinancing without a competitive process was necessarily a good idea? No. The opinion was explicit that whether refinancing without competitive proposals was prudent was a policy decision left entirely to the school board; its conclusion was only that Maryland law did not legally require the board to competitively bid the refinancing.

Background and statutory framework

In December 1989, the Board of Education of Baltimore County entered a competitively bid conditional purchase agreement with a contractor to build the Seven Oaks Elementary School: the board would lease the land to the contractor, the contractor would build the school and sublease it back, and the board would obtain ownership after a ten-year installment schedule. The contractor assigned the agreement to Signet Bank, which provided construction funds. The office had earlier confirmed, in an unpublished 1989 opinion, that the board had authority to enter this kind of lease-purchase arrangement in the first place. By 1991, seeking lower interest rates, the board considered paying off Signet and refinancing through a negotiated sale of certificates of participation with a single underwriter rather than a new competitive process.

Traditional Maryland school construction proceeds in two regulated stages: local boards acquire land and enter construction contracts under ED §4-114(b) subject to State Board of Education rules (recognized in Ansell v. Howard County Council, quoting Dixon v. Carroll County Bd. of Educ., as vesting local boards with discretionary authority over new school construction), and ED §5-110 requires competitive bidding for "a contract for the school building, improvements, supplies, or other equipment" costing more than $7,500, awarded to the lowest responsible bidder under ED §5-110(b) and (c)(1). Financing traditionally runs through the county government's bond authority under ED §§5-104 and 5-106 (including ED §5-104(b)'s bond-issuance power, with certain state construction aid available under ED Title 5, Subtitle 3), with Article 31, §10 of the Maryland Code separately mandating competitive public sale of county bonds to the highest bidder after published notice.

Applying statutory construction principles from Jones v. State, Morris v. Prince George's County, and ANA Towing v. Prince George's County, and the "ordinary and popular sense" rule for undefined terms from Department of Motor Vehicles v. The Greyhound Corp. and Webb v. State, the opinion read "school building" in ED §5-110 as limited to the physical construction contract, noting the Court of Appeals in Hanna v. Board of Educ. had described the statute's purpose as securing "unrestricted competitive bidding for contracts for the construction and repair of public school buildings" specifically. The opinion considered but rejected reading "school building" more expansively to include financing costs, reasoning (per Morris and Kaczorowski v. City of Baltimore on reading words in context, and Greco v. State on construing overlapping statutes together) that ED §5-110 and Article 31, §10 form a deliberate two-part scheme, one for construction and one for financing, tracing ED §5-110's predecessor to Chapter 151, Laws of Maryland 1933 and Article 31, §10's predecessor to Chapter 630, Laws of Maryland 1939, operating in tandem for decades without any suggestion of overlap. It also noted a parallel structure in state government procurement and bond law (Title 11 and SF §8-123 of the State Finance and Procurement Article) that likewise has never been read to require competitive bids for construction financing arrangements.

The opinion took seriously broader judicial statements about ED §5-110's taxpayer-protection purpose, citing Board of Education v. Allender and Demory Brothers v. Board of Public Works on preventing favoritism and collusion, and Hanna's holding that a board cannot evade competitive bidding by making major post-award changes "indirectly what is prohibited from doing directly." It also reviewed 1957 legislative committee minutes on an unenacted bill that would have explicitly authorized school lease-purchase financing, in which legislators and construction-industry witnesses worried that such arrangements could be used to dodge competitive bidding. The opinion concluded that concern was adequately addressed here because the original Seven Oaks construction agreement had already been competitively bid as required, so a later refinancing of only the financing terms did not reopen the evasion risk the 1957 legislators had in mind, and cited Hanna's own recognition that ED §5-110 should not be read so strictly as to strip a board of reasonable latitude to respond to changing circumstances, including, by analogy, a changing credit market.

Citations and references

Statutes:

• §5-110 of the Education Article, requiring competitive bidding for school construction contracts
• ED §5-110(b), the bid advertisement requirement for projects over $7,500
• ED §5-110(c)(1), the lowest-responsible-bidder award standard
• ED §4-114(b), local board authority to acquire and build school property with State Board approval
• ED §5-104, county government authority to raise revenue for local board appropriation requests
• ED §5-106, related county revenue-raising authority for school capital projects
• ED §5-104(b), the county's bond-issuance power for school construction
• Article 31, §10 of the Maryland Code, requiring competitive public sale of county bonds
• ED Title 5, Subtitle 3, state funding for certain public school construction costs
• Chapter 151, Laws of Maryland 1933, the predecessor to ED §5-110
• Chapter 630 of the Laws of Maryland 1939, the original public debt competitive-sale statute
• Title 11 of the State Finance and Procurement Article, the parallel state procurement scheme
• SF §8-123, state bond sale provisions

Cases:

• Ansell v. Howard County Council, 264 Md. 629, 635-36, 287 A.2d 774 (1972), on a local board's discretionary authority over school construction
• Dixon v. Carroll County Bd. of Educ., 241 Md. 700, 703, 217 A.2d 364 (1966), quoted within Ansell
• Jones v. State, 311 Md. 398, 405, 535 A.2d 471 (1988), on statutory language as the primary source of legislative intent
• Morris v. Prince George's County, 319 Md. 597, 603, 573 A.2d 1346 (1990), on reading undefined statutory terms in context
• ANA Towing v. Prince George's County, 314 Md. 711, 715, 552 A.2d 1295 (1989), on examining statutory language to determine legislative goals
• Department of Motor Vehicles v. The Greyhound Corp., 247 Md. 662, 669, 234 A.2d 255 (1967), on construing undefined terms in their ordinary and popular sense
• Webb v. State, 311 Md. 610, 618 n.2, 536 A.2d 1161 (1988), same
• Hanna v. Board of Educ., 200 Md. 49, 54, 87 A.2d 846 (1952), on ED §5-110's purpose and the limits of post-award contract changes
• Kaczorowski v. City of Baltimore, 309 Md. 505, 514, 525 A.2d 628 (1987), on reading statutory language in its full context
• Greco v. State, 307 Md. 470, 478, 515 A.2d 220 (1986), on construing overlapping statutes together
• Board of Education v. Allender, 206 Md. 466, 475, 112 A.2d 455 (1955), on the purpose of preventing favoritism and collusion in public bidding
• Demory Brothers v. Board of Public Works, 20 Md. App. 467, 471, 316 A.2d 529, aff'd 273 Md. 320, 329 A.2d 674 (1974), same

Source

• Landing page: https://oag.maryland.gov/resources-info/Pages/attorney-general%E2%80%99s-opinions.aspx
• Original PDF: https://oag.maryland.gov/resources-info/Documents/pdfs/Opinions/1991/Volume76_1991.pdf (this opinion appears at printed pages 181-189 of the bound annual volume; Maryland's site does not publish a standalone PDF of this opinion)

Original opinion text

Best-effort transcription from a scanned PDF. Minor errors may remain — the linked PDF is authoritative.

Education - School Construction - Refinancing of Lease- Purchase Agreement

June 13, 1991

Dr. Joseph L. Shilling
State Superintendent of Schools

You have requested our opinion whether a local board of education, currently a party to a private lease-purchase arrangement that was used to fund the construction of a public elementary school, is required to employ a competitive bidding process to refinance that arrangement.

Specifically, the Board of Education of Baltimore County (the "board") entered into a lease-purchase transaction to fund the construction of Seven Oaks Elementary School ("Seven Oaks") in 1989 under a conditional purchase agreement. In order to secure lower interest rates, the board currently is considering refinancing the agreement and has asked that you obtain our opinion whether it may undertake a negotiated sale of certificates of participation with a single investment banker or underwriter, or whether §5-110 of the Education Article ("ED" Article) or any other provision of State law requires that the refinancing be bid competitively.

For the following reasons, we conclude that neither ED §5-110 nor any other provision of State law requires the board to employ a competitive bid process in refinancing the Seven Oaks lease-purchase agreement.

I

Background

In December 1989, after a competitive bidding process, the board entered into a conditional purchase agreement with Charles J. Frank, Inc., the contractor selected to construct the Seven Oaks Elementary School in Baltimore County.1 The agreement provided that the board would lease the school property to the contractor; the contractor would construct an elementary school on the land and sublease the property back to the board; and the board would obtain ownership of the school after making specified installment payments over the agreement term of 10 years.2 The Seven Oaks school was built and financed according to its terms. The contractor has assigned the agreement to the Signet Bank, which provided the construction funds and now holds the tax-exempt paper.

In order to secure lower interest rates for the Seven Oaks project, Baltimore County school officials have begun discussions of a possible refinancing of the lease-purchase agreement. They contemplate paying off the obligations to Signet under the original agreement and then entering into a new agreement with a selected underwriter or investment banker.3 Before proceeding on this course, the board sought our opinion whether the refinancing must be bid competitively.

1
Originally, the school was named the Hines Road Elementary School.
2
When the board contemplated this arrangement in late 1989, the Superintendent of Schools for Baltimore County requested our opinion regarding the board's authority to enter into such a lease-purchase transaction. We advised the Baltimore County Superintendent at that time that the board did possess the authority to enter into the agreement described above for the construction and financing of the Seven Oaks project. Opinion No. 89-041 (unpublished) (October 20, 1989).
3
We assume that any refinancing agreement will embody substantially the same elements as the original lease-purchase agreement. Accordingly, this opinion does not re-address questions concerning the propriety under State law of the underlying agreement, nor does this analysis apply to any refinancing arrangement other than a lease-purchase contract.

II

State Law Safeguards For
Competition in School Construction Projects

As a means for the construction of a local public school, the Seven Oaks lease-purchase agreement is apparently unique. We are not aware of an example of such a project in any other school system in Maryland.

Historically, school systems follow a fixed course in undertaking to build a public school: They buy the land, enter into construction contracts after a competitive bid process, and secure funding through the public sale of bonds by the county government. State statutes address this traditional method to ensure that both the construction and financing of public schools occur publicly and competitively.

Each local board of education possesses the authority, upon approval of the State Superintendent of Schools, to "[b]uy or otherwise acquire land, school sites, or buildings" and to "[r]ent, repair, improve, and build school buildings or approve contracts for doing so, if the plans conform to the bylaws, rules and regulations of the State Board [of Education]." ED §4-114(b). Subject to the State Board's regulations, the local board is thus "vested with discretionary power and authority in connection with the building of new schools." Ansell v. Howard County Council, 264 Md. 629, 635-36, 287 A.2d 774 (1972) (quoting Dixon v. Carroll County Bd. of Educ., 241 Md. 700, 703, 217 A.2d 364 (1966)).

The local board's discretion, however, is limited by ED §5-110, the provision mandating the use of competitive bid processes in the awarding of "a contract for the school building, improvements, supplies, or other equipment." ED §5-110(c)(1). Specifically, this statute requires local boards to advertise for bids for any project costing more than $7,500 and to award the contract to "the lowest responsible bidder who conforms to specifications ...." ED §5-110(b) and (c)(1).4

4 The relevant text of §5-110 reads as follows:
(b)(1) If the cost of any school building, improvement, supplies, or equipment is more than $7,500, the county board, at least 2 weeks before bids are to be filed, shall advertise for bids in at least one newspaper published in the county.
(2) The county board may name in the specifications and advertisements for bids the particular make, kind, or brand of article to be contracted for or purchased.
(c)(1) Except as provided in paragraph (3) of this subsection, a contract for the school building, improvements, supplies, or other equipment shall be awarded to the lowest responsible bidder who conforms to specifications with consideration given to:
(i) The quantities involved;
(ii) The time required for delivery;
(iii) The purpose for which required;
(iv) The competency and responsibility of the bidder; and (v) The ability of the bidder to perform satisfactory service.

The financing of school construction projects is subject to analogous statutory protections. Under provisions of the Education Article, the county government, rather than the school board, has the authority to raise revenues to meet the appropriation requests of the local board, including requests for capital projects. See ED §§5-104 and 5-106. This authority includes the power to issue bonds. ED §5-104(b). Typically, the local share of the cost of school construction projects is funded by the issuance of bonds.5

Article 31, §10 of the Maryland Code governs the issuance of public debt by county governments. This provision mandates that, unless otherwise provided by statute, "[a]ll bonds hereafter sold or offered for sale ... shall ... first be offered at public sale to the highest bidder or bidders therefor upon due notice of such sale being given by advertisement inserted at least twice in one or more daily or weekly newspapers ...." The provision goes on to specify the contents that must be included in the published notice and the timing of the sale with the respect to the date of publication of the notice.

In sum, the General Assembly has enacted a process requiring public notice and competitive bidding for all aspects of public school construction. The operation of that process, however, is clear only if the construction project is undertaken in the traditional manner. Since the Seven Oaks lease-purchase agreement is far from typical, and since such arrangements were not contemplated by the Legislature when it enacted ED §5-110, the applicability of those provisions to lease- purchase financing is less easily determined.

5
State funds are available for the payment of certain public school construction costs. See ED Title 5, Subtitle 3.

III

Application of §5-110 To
Lease-Purchase Financing Agreements

In construing ED §5-110 to discern whether it applies to the proposed Seven Oaks refinancing, we seek "to ascertain and effectuate legislative intent." Jones v. State, 311 Md. 398, 405, 535 A.2d 471 (1988). This effort begins with an examination of the text of ED §5-110, because the "primary source of legislative intent is the language of the statute itself." Id. See also, e.g., Morris v. Prince George's County, 319 Md. 597, 603, 573 A.2d 1346 (1990); ANA Towing v. Prince George's County, 314 Md. 711, 715, 552 A.2d 1295 (1989).

The text of ED §5-110 requires a competitive bidding process for any "contract for the school building, improvements, supplies, or other equipment ...." ED §5-110(c)(1). With regard to an initial lease- purchase agreement, in which the terms for construction and finance are merged, we conclude readily that the requirements of ED §5-110 apply. Such an agreement is, plainly and primarily, a contract for the construction of a "school building"; that the contract also establishes financing terms does not change its fundamental character. In the present situation, however, the Seven Oaks construction was completed pursuant to a competitively bid arrangement, and the board now seeks only to re-negotiate its financing.

As a general rule, we construe an undefined statutory term in its "ordinary and popular sense." Department of Motor Vehicles v. The Greyhound Corp., 247 Md. 662, 669, 234 A.2d 255 (1967). See also, e.g., Webb v. State, 311 Md. 610, 618 n.2, 536 A.2d 1161 (1988) (statutory language "must be given its natural and ordinary signification ...").

This principle of construction suggests that the Legislature intended ED §5-110 to apply only to contracts for the physical construction of a school building. While it is plausible to argue that the cost of a school building includes the cost of its financing as well, we do not believe that this construction follows from the interpretation of the words "school building" in their "ordinary and popular sense." Indeed, the Court of Appeals appears to have understood the scope of ED §5-110 to be limited to actual construction contracts. Holding that a school system could not make substantial modifications to a school construction contract without once again subjecting the construction project to competitive bidding, the Court observed that the predecessor to ED §5- 110 was intended to "obtain unrestricted competitive bidding for contracts for the construction and repair of public school buildings, and thereby to safeguard public funds by preventing favoritism, collusion and extravagance." Hanna v. Board of Educ., 200 Md. 49, 54, 87 A.2d 846 (1952) (emphasis added).

Nonetheless, our inquiry as to legislative intent should not be limited to a recitation of the ordinary meaning of "school building":

[W]hile the "ordinary and natural meaning" canon of construction can be helpful when properly used, it cannot always be relied upon to give the complete answer to a problem of interpretation. Words have many meanings. To determine the most appropriate one in given circumstances requires more than a glance at a dictionary. It requires careful study of the context in which the word is used.

Morris v. Prince George's County, 319 Md. at 606. See also Kaczorowski v. City of Baltimore, 309 Md. 505, 514, 525 A.2d 628 (1987). When we consider the context of ED §5-110, however, we do not find a sufficient reason to give the term "school building" an unusually expansive reading.6

ED §5-110 fits into a two-part legislative scheme. Read together, ED
§5-110 and Article 31, §10 ensure that all aspects of traditional public school construction are bid competitively. Because these statutes deal with overlapping subject matter, both must be considered in the process of construing a provision of either. E.g., Greco v. State, 307 Md. 470, 478, 515 A.2d 220 (1986) (cited in Kaczorowski, 309 Md. at 516).

The overall design of the legislative scheme emerges when the two provisions are considered together: ED §5-110 functions as the Legislature's public bidding safeguard for the school construction itself; Article 31, §10, for the project's financing. In the absence of any evidence that the Legislature intended ED §5-110 to subsume Article 31,
§10 when, as here, the latter statute does not apply, we are reluctant to construe the scope of ED §5-110 in such a dramatically broadened

6
The predecessor to ED §5-110 was enacted, with substantially the same provisions as ED §5-110 now contains, in 1933. Chapter 151, Laws of Maryland 1933. Although the statute has been amended on numerous occasions, none of those amendments significantly altered the provisions. In particular, the language extending the scope of the statute to contracts for a "school building" has not changed since the competitive bidding provision was enacted in 1933. Given the age of the statute and the insignificance of its recent amendments, the lack of a detailed legislative history is not surprising.
The original public debt statute, mandating the public sale of municipal and county bonds, was enacted in Chapter 630 of the Laws of Maryland 1939.

fashion. That reluctance is heightened by the reality that the statutes have operated in tandem since the enactment of Article 31, §10 in 1939, with no suggestion by the Legislature or the courts that they overlap in scope.7

We acknowledge broad judicial and legislative suggestions that ED §5-110 is intended to protect taxpayers in all aspects of school construction. In Board of Education v. Allender, 206 Md. 466, 475, 112 A.2d 455 (1955), the Court of Appeals stated that the purpose of the predecessor of ED §5-110 was "to secure unrestricted competitive bidding so as to prevent favoritism and collusion and thereby procure public improvements at the lowest cost to the taxpayer." 206 Md. at

475. See also Demory Brothers v. Board of Public Works, 20 Md. App.
     467, 471, 316 A.2d 529 aff'd 273 Md. 320, 329 A.2d 674 (1974) ("The purpose, of course, of [the statute] is to secure unrestricted competitive bidding thereby providing the lowest cost to the taxpayer."). Moreover, the Court of Appeals reasoned in Hanna that school officials should not be able to evade the competitive bid law by making major changes to the contract after its award: "[T]he municipality or agency cannot do indirectly what is prohibited from doing directly." 200 Md. at 55.

     A similar concern was expressed by some legislators during
     consideration of a bill in 1957 that would have explicitly authorized local school boards to enter into "agreements for the lease or lease- purchase of school buildings, lands, furnishings and equipment." House Bill 728 (1957 Session). In those hearings, committee members joined construction industry witnesses in expressing their concerns that the mechanisms proposed by the bill should not be used to subvert competitive bid requirements. The committee chairman proposed amending the bill to include such a requirement, and others questioned the competitiveness of the interest rates associated with lease-purchase agreements and sought testimony as to the relationship between the proposed forms of financing and traditional revenue bonds. Minutes of the House Budget and Finance Committee at 1-2 (Oct. 2, 1957). In short, on the occasion when a group of Maryland legislators most

     7
       We also note the existence of an analogous statutory scheme governing
     

     State construction procurement and debt issuance and observe that the procurement provisions have never been construed to require competitive bids for construction financing arrangements. See Title 11 of the State Finance and Procurement Article ("SF" Article) (State procurement) and SF §8-123 (State bond sales).

directly confronted issues related to your question, their primary concern was that lease-purchase school construction financing initiatives should not function as a means for evading the Legislature's competitive bidding mandate.

These expressions about legislative intent communicate a strong general interest in ensuring competition in school construction projects. However, we do not believe that they provide us with a sufficient basis for construing ED §5-110 to require competitive bidding in the specific circumstances of the Seven Oaks refinancing.

The concerns voiced by the legislators in the 1957 hearings are not ignored under our narrower reading of ED §5-110. The legislators at those hearings expressed fears that lease-purchase agreements may be used to evade the requirements of ED §5-110. As noted in Part I above, the original lease-purchase agreement between the board and the Seven Oaks contractor was bid competitively pursuant to ED §5-110, as we believe was required. As long as the initial lease-purchase agreement, which encompasses both the physical construction and the financing of the project, is bid competitively, the purpose of ED §5-110 is substantially met. In any event, the isolated comments of a few legislators, made in 1957 hearings regarding a bill that was never enacted, simply do not provide justification for the novel construction of a plainly written, preexisting statute.

Furthermore, the Court of Appeals has recognized the need to construe ED §5-110 so as to preserve the local school board's discretion in school construction decisions. With respect to post-award contract modifications, the Court acknowledged:

Of course, the statutory requirement should not be construed so strictly as to divest a Board of Education of the right to make minor changes in specifications after a contract has been awarded. If the Board had no latitude whatever in authorizing changes in materials when necessary or desirable, the public interest might be jeopardized in the event of emergencies or unforeseen obstacles.

Hanna, 200 Md. at 54. A similar disservice to the public interest might be threatened were we to construe ED §5-110 to limit the board's latitude to act quickly when, in an uncertain and swiftly changing credit market, it wants to make what it views as an advantageous financial arrangement.

In short, we can identify no policy reason sufficient to suggest that the General Assembly intended ED §5-110 to encompass pure refinancing transactions not linked to the construction of a school building.

IV

Conclusion

In summary, it is our opinion that neither ED §5-110 nor any other provision of State law requires the Board of Education of Baltimore County to open the refinancing of the Seven Oaks lease-purchase agreement to competitive bids. We do not believe that the pure refinancing of the agreement under which the Seven Oaks facility already has been built falls within the scope of the competitive bidding requirements of the statute.

This conclusion about the scope of State law should not be taken to be a comment on the advisability of refinancing arrangements entered into without benefit of competitive proposals. Whether that course is prudent is for the board to decide. Our conclusion is simply that current Maryland law leaves the choice to the board.

J. Joseph Curran, Jr.
Attorney General

Jo Ann G. Goedert
Assistant Attorney General

Jack Schwartz
Chief Counsel
Opinions & Advice