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4 ACRP LRD 41 Improvement Program Projects that consolidates the language required by the FAA to implement and comply with Grant As- surance 1, General Federal Requirements.2 Notably, the FAA guidance includes select clauses where federal directive estab- lishes explicit contract language that an airport must incorpo- rate into its procurement documents verbatim. In addition, for those Grant Assurance issues that do not require explicit lan- guage, the guidance provides suggested language acceptable to the FAA. Airports should consult this guidance document in connection with developing commercial contracts subject to Grant Assurances, including the preparation of procurement documents and final contract documents. While this digest focuses generally on government law con- cepts that impact how airports develop and execute commercial contracts, there are also a number of related ACRP publications that should also be referenced in conjunction with this digest and the development of airport commercial contracts. These publications are listed below and referenced in the specific sec- tion of the digest where the issues are addressed. â¢ ACRP Report 33: Guidebook for Developing and Managing Airport Contracts, Transportation Research Board (2010) â¢ ACRP Report 54: Resource Manual for Airport In-Terminal Concessions, Transportation Research Board (2011) â¢ ACRP LRD 30: Contract Risk Management for Airport Agree- ments, Transportation Research Board (2016) â¢ ACRP Synthesis 94: Attracting Investment at General Aviation Airports Through PublicâPrivate Partnerships, Transporta- tion Research Board (2019) â¢ ACRP Report 66: Considering and Evaluating Airport Privati- zation, Transportation Research Board (2016) â¢ ACRP Synthesis 1: Innovative Finance and Alternative Sources of Revenue for Airports, Transportation Research Board (2007) â¢ ACRP LRD 38: Legal Issues Relating to Large Scale Airport Construction Projects, Transportation Research Board (2020) â¢ ACRP LRD 59: Enforceability of Local Hire Preference Pro- grams, Transportation Research Board (2013)3 â¢ ACRP LRD 31: Preemption of Worker-Retention and Labor- Peace Agreements at Airports, Transportation Research Board, (2017) There are three broad categories where an airportâs status as a government entity may impact its development and execution of commercial contracts. The first is related to authority and whether the entity has the legal, budget, contracting, or other 2 Federal Aviation Administration, Procurement and Contracting Under AIP Federal Contract Provisions, https://www.faa.gov/airports/ aip/procurement/federal_contract_provisions/ (last visited Nov. 4, 2019). See also, 2 C.F.R. Part 200 for Office of Management and Budget rules for procurement, contracting, accounting and auditing for federally- assisted projects provides. 3 Note that this digest is published by the National Cooperative Highway Research Program and was not specifically intended to address issues related to airports; however, most of the observations set forth in that digest are equally likely to apply to airports. authority to engage in a commercial activity and, if it does, what restrictions attach to that authority. The second relates to the process, typically expressed as procurement laws, regulations, rules, and policies that an airport must follow in exercising its authority to enter into commercial contracts. Finally, there are a number of government contracting concepts, including issues related to liability and indemnification, termination, incentives, business inclusion and wage and labor issues, that are unique to or uniquely addressed in government contracts. The balance of this digest is organized into three sections. The first section summarizes issues related to the airportâs authority to contract, namely what types of contracts can the airport enter into and under what circumstances may it con- tract. The second section summarizes process-related concerns that may restrict the manner in which vendors are selected and contracts are awarded. The third section summarizes some of the more common government contracting issues that are rel- evant to airport contracts. It should be noted that the dividing lines between these three sections is not always clear and some issues could properly be seen as residing in more than one of the sections. The allocation of the issues discussed below merely reflects the authorsâ belief as to the most useful way to categorize these issues. II. AUTHORITY A. Contracting Authority In order for any government entity to enter into a contract, it must have authority to do so. The source and scope of authority for government or quasi-government entities to contract de- pends on the type of entity and how it was created or estab- lished. States in general exercise this authority and promote public policy goals through the laws and regulations that create, establish, and govern constituent government units. States pro- vide these units, such as counties and municipalities (in vari- ous states these may referred to, among other names, as cities, towns, townships, or boroughs), with the authority to enter into contracts. In âhome ruleâ states, municipalities, typically depen- dent on size, adoption, or some other criteria, are afforded the right to govern and conduct their affairs as they see fit provided such exercise does not violate state laws or regulations.4 In so- called âDillonâs Ruleâ states, municipalities are only permitted to exercise authority specifically delegated by the state.5 In either event, whether through restrictions on home rule authority or through delegation under Dillonâs Rule, the ability for munici- palities to contract is shaped by the state government. 4 Jon D. Russel & Aaron Bostrom, Federalism, Dillon Rule and Home Rule, American City County Exchange, (January 2016). https://www.alec.org/app/uploads/2016/01/2016-ACCE-White-Paper- Dillon-House-Rule-Final.pdf) See also, Hugh Spitzer, âHome Ruleâ vs. âDillonâs Ruleâ for Washington Cities, 38 Seattle U. L. Rev. 809 (2015) discussing inconsistent application of Dillonâs rule and home rule con- cepts by courts in Washington state. 5 Delegation of powers by legislatureâMunicipal powers under Dillonâs Rule, 2 McQuillin Mun. Corp. Â§ 4:11 (3d ed.).
ACRP LRD 41 5 cussed below, there may be state restrictions on or compliance procedures required in connection with the decision to contract out. 2. Outsourcing Functions Often airport managers consider whether it would be more efficient to move a service that is currently performed by gov- ernment personnel to a private sector vendor. Putting aside the economics and possible operational benefits of such an action, in many instances state law may restrict or limit an airportâs ability to take such an action. The courts in some states have found that privatizing government services violates constitu- tional civil service protections. For instance, in Konno v. County of Hawaiâi, 937 P.2d 397 (1997), the Hawaiâi Supreme Court held that a contract privatizing solid waste disposal services violated the stateâs constitution. The court reasoned that government services which have been customarily and historically provided by civil servants are governed by the âmerit principleâ requiring civil servant positions to be filled through a system of competi- tive examinations and qualification standards aimed at identi- fying competent candidates. Courts in Colorado, Nevada, and Washington have reached similar decisions finding that priva- tizing government services may violate constitutional civil ser- vice protections.8 Additionally, other states have enacted legislation requiring certain procedures to be met prior to privatizing government services. The scope of the procedural requirements varies from state to state. For instance, in Connecticut, the legislation re- quires compliance with a host of requirements, including: (1) the preparation of a cost benefit analysis determining the direct and indirect costs, savings; and qualitative and quantitative benefits, that will result from contracting out government services; (2) the preparation of a âbusiness caseâ adhering to twelve enumerated procedures; (3) notification to state em ployees impacted by the proposed privatization; (4) the assembly of a âbargaining unitâ to prepare a report detailing the potential cost saving measures the impacted employees can implement; (5) a review of the business case by the State Contracting Standards Board; (6) a report issued by the State Contracting Board detailing its review and evaluation of the business case; and (7) a minimum of two thirds of the State Contracting Board approving the privatiza- tion efforts.9 In comparison, other states require less onerous proce- dures to be met prior to privatizing a government service. For instance, in Oklahoma, the statute merely requires: (1) a writ- ten statement of the services proposed to be the subject of the privatization contract; (2) written notice to employees impacted by the proposed privatization; and (3) a period allowing the im- pacted employees to submit cost-savings recommendations.10 8 See, Colorado Assân of Pub. Employees, 809 P.2d at 988 (1991); University of Nevada v. State of Nevada Employees Assân, 520 P.2d 602 (1974); Washington Federation of State Employees v. Department of Social and Health Services, 966 P.2d 322 (Wash. Ct. App. 1998). 9 Conn. Gen Stat. Â§ 4e-16 (2014). 10 Okla. Stat. tit. 74 Â§ 589 (2019). Special purpose and quasi-governmental entities receive the authority to contract either from the state or through delegation of authority from a county or municipality. This direct or del- egated authority is typically specifically set forth in the entityâs implementing legislation or other organizing documents. That being said, implementing statutes do not always include clear and specific descriptions of or limits on authority. Issues with authority often arise when a special purpose entity contemplates actions that diverge from its initial or core purpose. For certain core functions, such as hiring a company to remove snow and ice from an airportâs runways, there may be little doubt as to whether the airport has the authority to contract; however, when the proposed activity becomes more attenuated from the core function of an airport, the distinction between home rule states and Dillonâs Rule states becomes important. Whether an airport has the authority to select an exclusive provider for transpor- tation services, such is the case with several large airports, or to authorize the use of airport lands for non-airport purposes will depend upon whether the airportâs organizing documents expressly authorize such activity and, if they do not, whether the airport operates in a home rule or Dillonâs Rule state. Such contract authority is not limited to the four corners of the statu- tory language and courts have consistently held that govern- ment entities have inherent authority to contract provided the contracting need can be reasonably inferred from the specified authority.6 Aside from simply following rules, an airport manager needs to understand these distinctions as it is generally the case that if an airport enters into a contract action that exceeds an airportâs authority, the contract will be deemed void and unenforceable. Complicating matters further, an airport must also consider matters that are outside the airportâs organizing statute or doc- uments as there are almost certainly other limits on what the airport may do. For example, the legislature may have charged another entity of the state with exclusive authority over a subject matter, process, or location. Accordingly, in addition to deter- mining whether an airport has internal contracting authority, it also needs to determine whether there are other laws, regu- lations, or governing structure that would prohibit, curtail, or modify that authority. Some of the more common restrictions on an airportâs inher- ent authority to contract are discussed below. 1. Inherently Governmental Functions Federal law generally recognizes a concept referred to as âinherently governmental functions.â The federal government is prohibited from contracting out inherently governmental functions, which include activities such as conducting criminal investigations, commanding military forces, conducting foreign relations, determining agency policies, directing and controlling intelligence operations, and disposing of government property.7 States do not have such statutory prohibitions although, as dis- 6 Power to make contractsâImplied power, 10 McQuillin Mun. Corp. Â§ 29:9 (3d ed.). 7 48 C.F.R Â§ 7.501 (2019).
6 ACRP LRD 41 Contracting out operations may also implicate labor and employment issues such as a requirement for a successful bid- ding contractor to hire or interview displaced employees or re- strictions imposed by collective bargaining agreements. 3. PublicâPrivate Partnerships Over the last ten years or so, many jurisdictions have enacted PublicâPrivate Partnership (P3) legislation that tends to provide specific authority for contracting out government operations. These P3 regimes are designed to access private financing for government-related projects or operations and address some of the traditional government contracting authority limitations. The scope of legislation varies from jurisdiction to jurisdiction. Generally, each jurisdiction with legislation on this matter either provides limited authority, broad authority, or specific authority to enter into P3 contracts. For instance, in Louisiana, the state enacted La. Rev. Stat. Ann. Section 48:1660.1, which authorizes the Regional Transit Authority to enter into P3 contracts for projects aimed at pro- viding services or facilities for the transportation of persons or goods. Similarly, Delaware enacted Del. Cod. Ann. Tit. 2, Sec- tion 2001, which authorizes the Secretary of Transportation to enter into P3 contracts to study, plan, design, construct and maintain transportation systems and facilities. While these stat- utes do not explicitly provide the authority to enter into P3 con- tracts for airport-related projects or services, the broad language of the statutes suggests that the jurisdiction may enter into a P3 contract for airport projects or services. In other jurisdictions, the state is limited to entering into P3 contracts for certain highway-related projects. For instance, in Colorado, the state enacted Colo. Rev. Stat. Sections 43-1- 1201 to 1209, which authorizes the state to enter into P3 con- tracts aimed at designing, financing, constructing, operating, maintaining and improving toll roads, turnpikes and highway toll lanes. In Colorado and jurisdictions with similar limited authority legislation, and absent legislative adjustment, it is likely that airport managers may not use the P3 approach for airport projects. ACRP Synthesis 94: Attracting Investment at General Aviation Airports Through PublicâPrivate Partnerships and ACRP Report 66: Considering and Evaluating Airport Privatization provide additional in-depth discussion of P3 issues at airports.11 B. Appropriation and Funding Authority The federal government, the states, and other governmental jurisdictions typically have anti-deficiency and appropriations laws that restrict the use of funds and can limit an airportâs authority to enter into contracts. Through state constitutions, statutes and local legislation, most states and municipalities are 11 Attracting Investment at General Aviation Airports Through PublicâPrivate Partnerships, (Airport Cooperative Research Program Report 94, 2019). http://www.trb.org/Publications/ Blurbs/179539.aspx.; Considering and Evaluating Airport Priva- tization, (Airport Cooperative Research Program Report 66, 2016). http://www.trb.org/Publications/Blurbs/167156.aspx. prohibited from incurring any debt or liability unless there has been an appropriation and require that all contracts involving the disbursement of money be preceded by an appropriation.12 As a result of these laws, it is improper for an airport to enter into a contract expending funds for a purpose for which an ap- propriation has not been made.13 These restrictions do not nec- essarily extend to special purpose funds where the use of the funds is generally subject to the fund implementing legislation. While jurisdictions may diverge on whether contracts made in advance of or in excess of appropriations are void ab initio, may be ratified by a subsequent appropriation or other act, and the extent to which the contractor may recover for goods or ser- vice provided under such a contract, the purpose of this digest is to raise issues and suggest solutions to avoid executing contracts not supported by proper appropriations.14 Airport commercial contracts need to be analyzed to ensure that the obligations cre- ated by the contract comply with the applicable appropriations requirements, particularly that there is sufficient and appropri- ate funding available to fund the obligations created by the con- tract. The issues may include the expiration of funding (often operating funds expire at the end of the fiscal year), the type of funding (operating, capital, bond proceeds), and whether ap- propriated use of the funding matches the scope of the work under the contract. For routine or recurring purchases, com- pliance with these requirements may be accomplished through an airportâs budget or accounting function. For new or unique commercial endeavors, however, it may be advisable to com- plete this analysis early in the contracting process. Airport managers should consider the following topics when assessing whether funding is available to support a specific con- tract action. 1. Object or Purpose Many government budgets govern both the entire expend- able budget for the entity and further categorize spending by object or purpose. Accordingly, it is important not only to deter- mine whether sufficient funding is available generally but that it is also expendable for the applicable purpose. 2. Capital Funding Issues Similar to object or purpose, many government entities are funded by both operating and capital budgets and there are different rules and often restrictions on the use of these fund- ing types, particularly capital funds. As capital funds are often (though not always) funded from bond proceeds, there are restrictions related to IRS municipal bond rules that govern the use of these funds. While beyond the scope of this digest, the IRS rules generally require that municipal bond proceeds 12 Necessity of Appropriation, 15 McQuillin Mun. Corp. Â§ 39:84 (3d ed.); See, e.g., 48A Fla. Jur. 2d State of Florida Â§ 319; 78 Ohio Jur. 3d Public Works and Contracts Â§ 29; 89 N.Y. Jur. 2d Public Works and Contracts Â§ 3; CRS Â§ 29-1-110. 13 Effect on Municipal Liability, 15 McQuillin Mun. Corp. Â§ 39:85 (3d ed.). 14 See, Appropriation, 10 McQuillin Mun. Corp. Â§ 29:25 (3d ed.) for discussion of impacts of failure to make appropriations.
ACRP LRD 41 7 changeable and capital funds often come with restrictions on their use. Typically, capital funds can be used for construction, including the associated architecture, engineering and other professional services; however, issues can arise as the services or goods become more attenuated. For instance, while the project managers hired to oversee and manage a particular project may be capital eligible, program managers overseeing a broad capi- tal program may not be. Similarly, while the furniture, fixtures and equipment installed in a facility is typically capital eligible, there may be issues with operating stock or other consumables, extended warranties and management and service contracts.19 3. Other Funding Restrictions The general rules requiring an appropriation as a condition precedent for a valid government contract applies only where the funds are payable from funds raised by taxation, which typically means funds that have passed through a government entityâs general fund. While the legal theory underlying the pro- hibition on creating contractual obligations in advance of or in excess of an appropriation may not apply to funding derived from certain bond proceeds, special purpose funds or other non-general fund sources, these other funding sources typically have their own rules and restrictions on the use of the funds. In addition to the IRS municipal bond rules discussed above, these may take the form of bond covenants, special purpose fund im- plementing legislation or grant documents. Accordingly, while the impact of a contractâs failure to comply with the controlling financing documents may be different than those related to a contract funded by general fund appropriations, the goal should still be to develop a contract that complies with any restrictions on the contract funding source. 4. Not-to-Exceed Many government entities have certification of funding and other budgeting processes, typically embedded in the procure- ment function, to determine whether sufficient and appropriate funding is available for a particular contract. While this certifi- cation process is fairly straightforward for lump sum contracts, it can cause issues for contracts structured based on unit prices, level of effort or other variable measure. Accordingly, such con- tracts should include not-to-exceed limit language that limits the contract value and the government entityâs cost exposure to the amount of funds appropriated or allocated to the contract. Putting contractors on notice that amounts spent in excess of the not-to-exceed amount may not be recoverable helps to in- 19 In June 2017, the Governmental Accounting Standards Board issued GASB Statement No. 87, Leases, which, except for a few narrow exceptions, requires government entities to report leases as if they were financing for the right to use the underlying asset. Governmental Accounting Standards Board, No. 87, Leases, (June 2017). This essentially requires what were previously considered to be operating leases to be accounted for and presented in a manner similar to capital leases. It does not appear, however, that this accounting treatment would require changes in funding eligibility, which would remain sub- ject to the entityâs funding policy, but may inform the way a particular jurisdiction develops or operates those policies and allocates operating and capital funding. be used to finance activities of, or facilities owned, operated or used by, the issuer for its purpose or another state or local gov- ernment for its own purposes.15 This can include financing the construction, maintenance, or repair of public infrastructure such as highways, schools, fire stations, libraries, or other types of municipal facilities. To be tax-exempt, such bonds must comply with the requirements that define governmental bonds and must not be considered a private activity bond. A municipal bond may be c onsidered a private activity bond if, with certain excep- tions, more than 10% of the proceeds of theÂ issue are used for any private business use (the âprivate business use testâ) and the payment of theÂ principal of orÂ interest on more than 10% of the proceeds of such issue is secured by or payable from property used for a private business use (the âprivate security or payment testâ). The IRS has created a number of exceptions to this gener- al rule, including one for airports, that allow for certain private activity called qualified private activities.16 Despite this general exception, there are other issues that may limit or undermine the exception, including state caps and other use restrictions that are beyond the scope of this digest.17 If a contract is funded, in whole or part, from the proceeds of tax-exempt bonds, an airport manager should consider whether the proposed contract implicates the private business use test or qualifies for an exemption. Failure to do so can create significant challenges as invalid funding issues often occur in connection with audits or subsequent budget analysis. When these issues are discovered after a project had begun, they can derail or delay the project due to lack of appropriate funding or, more trouble- some, cause the IRS to revoke the bondsâ tax-exempt status. As with many tax issues, this area is fairly complex and issues should be reviewed by bond counsel. With these qualifiers, there are several fairly common facility agreements that may pose private activity bond issues. These issues come into play when a private business leases or uses part of a facility that was financed through tax exempt bonds. Concession leases, cell towers, and solar arrays can all trigger this type of scrutiny and should be carefully examined by airport managers to determine whether they would trigger adverse tax consequences. Further, as described by IRSâs Tax- Exempt Govern ment Bond guidance, management and service contracts for a private entity to manage a bond-financed facility may trigger the private business restriction.18 Airport managers also need to consider the âtypeâ of funding prior to awarding a contract. It is not uncommon for govern- mental entities to have at least two types of funding available: operating funds and capital funds. These funds are not inter- 15 U.S. Department of the Treasury, Internal Revenue Service. (2019). Publication 4079: Tax-exempt Government Bonds (Cat. No. 34663R). 16 Innovative Finance and Alternative Sources of Revenue for Airports, (Airport Cooperative Research Program Synthesis 1, 2007). http://www.trb.org/Publications/Blurbs/158669.aspx. 17 See, e.g., I.R.S. P.L.R. 201847001 (Nov. 23, 2018). 18 IRS Publication 4079, supra note 15, at 3.
8 ACRP LRD 41 real estate speculation as that power is not generally authorized nor does it arise by implication from any of the ordinary powers of municipal corporations.21 The same restrictions on and dec- larations of authority apply to quasi-municipal entities created by statute and their authority to acquire and manage property is generally limited by their implementing statutes. The process through which government entities can exercise this acquisition authority is usually governed by either the statute granting the acquisition authority or the procurement laws and regulations. As discussed above, states and municipalities are authorized to hold title to real property for public purposes and lack the authority to use public funds for purposes that do not further the public good. Accordingly, the land held by states and their political subdivisions is held in public trust. The sale of public trust land must be conducted in accordance with applicable statutory authorization and disposition procedures. Public property disposition schemes generally require two categories of procedures, which may or may not be found in the same statutory sections and which may or may not be able to be conducted in parallel.22 First, the property must be declared to be surplus, which in- volves a determination that the property is no longer required for public purposes. Second, the disposition generally must be conducted pursuant to a process to promote competition and transparency. For instance, for property disposed of by the State of Massachusetts, the Commissioner of capital asset management and maintenance must notify state agencies and executive of- fices of the proposed disposition and determine whether the property is surplus to current and future state agency needs. If the property is surplus to current and future state agency needs, the Commissioner must notify the city or town where the prop- erty is located and conduct a hearing to determine whether the property is suitable for direct public use by another public agency. Depending on the outcome of this hearing, the Com- missioner may transfer the property for a direct public use, rent or lease property determined as surplus for a period that pre- serves the future public use, or dispose of the property to an individual or entity. In addition, the Commissioner is required to conduct procedures, including a hearing, to establish any restrictions to be included in the disposition and conduct an appraisal of the property.23 In addition to these surplus declaration procedures, the disposition must be conducted in accordance with sepa- rate disposition procedures, including advertising the proposed disposition and seeking proposals. This section also requires publication in the central register of the acquiring party and the disposition price and, if the commissioner decides to dispose of 21 Purposes for which property may be acquired, 10 McQuillin Mun. Corp. Â§ 28:10 (3d ed.). 22 In addition to these state and local disposition requirements, air- port property dispositions may be subject to approval by the FAA. FAA Airport Compliance Manual, FAA Order No. 5190.6B, Â§22 (Sept. 30, 2009). 23 Mass. Gen. Laws ch. 7C Â§ 34(a). centivize contractors to manage their spending and notify the airport when the not-to-exceed limit is nearly exhausted. The language can also serve to remind them that changes to the not-to-exceed may only be made by authorized personnel thus helping to avoid the contractor taking direction from unauthor- ized personnel and exceeding the not-to-exceed amount. In addition, requiring the contractor to communicate when it has reached a percentage of the not-to-exceed level helps the airport manage the work and make sure that there is ample opportunity to increase the not-to-exceed or otherwise direct the contractor before the contractor runs out of funding. Sample not-to-exceed language: Not-to-Exceed Amount. This Agreement shall have a not-to-exceed amount of One Hundred Thousand Dollars ($100,000) (such amount, the âNTE Amountâ). In no event shall the Contractor be entitled to receive more than the NTE Amount unless otherwise authorized by a duly au- thorized contracting officer of the Airport in advance and in writing. The Contractor shall advise the Airport in writ- ing when seventy five percent (75%) of funds in the NTE Amount has been exhausted and again when eighty five percent (85%) of the funds in the NTE Amount have been exhausted. C. Real Property The contracting authority discussed above typically relates to the acquisition of goods and services (or, as discussed in Sec- tion III.D, the sale of goods or grant of business opportunity) and in most cases does not extend to or is modified when the acquisition or disposition is related to real property. Municipal corporations and government entities generally may acquire real property and the authority for such acquisition is provided in statutory or charter provisions. This authority may include acquiring and holding real property located beyond the limits of the municipal corporation. For instance, in Texas there are home rule cities and several categories of general law cities all of which are provided the authority to acquire, hold and manage prop- erty with some additionally authorized to hold property outside the municipal boundary.20 Municipal corporations, however only have authority to acquire and hold real estate for corporate or municipal purposes, which are also generally authorized in the applicable charter or statute. Municipal corporations must acquire property for municipal purposes and may not deal in 20 In addition to the authority provided within its right to self- govern, home rule cities are specifically authorized to âhold property, including any charitable or trust fund, that it receives by gift, deed, devise, or other manner.â V.T.C.A., Local Government Code Â§ 51.076. General law Type A cities to carry out a municipal purpose, âmay take, hold, purchase, lease, grant, or convey property located in or outside the municipality.â V.T.C.A., Local Government Code Â§ 51.015. Type B cities are authorized to âhold and dispose of: (1) personal property; and (2) real property located within the municipal boundaries.â V.T.C.A., Local Government Code Â§ 51.034. Type C cities have, depending on their size, the authority granted to Type A or B cities unless specifically prohibited by the code. V.T.C.A., Local Government Code Â§ 51.051.