Stifel struggling to put together 1994-95 Oklahoma cash management program.

DALLAS -- Stifel, Nicolaus & Co. is facing difficulties developing a $37.1 million cash management program for more than 50 school districts in Oklahoma amid federal investigations of similar financing arrangements in the past.

A Stifel executive said that the firm will decide whether to move ahead with the program in about one week after firm officials determine if they can place the bonds.

"We are working on marketing issues right now and talking to a number of potential buyers," Stifel executive Jim Fried said through a spokesman.

Fried said the buyers were analyzing the creditworthiness of the individual school districts. "When they complete the process, we will make a decision whether to proceed," he said.

Stifel's attempt to put together a cash management program for 1994-95 follows a long string of controversies over the system, which in the past has involved almost 300 school districts as well as vocational schools and counties.

The 1990-92 programs, underwritten by Stifel, have drawn sevral demands from the Internal Revenue Service for arbitrage rebate and prompted investigations by the Securities and Exchange Commission into violations of securities law.

With the problems coming to a head within the past year, industry sources said fewer districts and financial firms want to participate in the program. For example, Leo Oppenheim & Co. decided not to offer a cash management program this year, and the Oklahoma State School Boards Association dropped its tax anticipation and revenue note program earlier this year after it failed to get enough participants.

Despite the controversy, Stifel is attempting to do a smaller program, although firm officials said they do not plan on using its previous letter of credit provider, Sanwa Bank.

Fried said Stifel was not looking to other firms for a letter of credit because "there wasn't enough time ... to get another bank lined up." He said the Oklahoma Commission on School and County Funds Management approved the districts' applications for borrowing on June 21 and that left little time before the beginning of the schools' fiscal year, which begins today.

At a commission meeting last week, Fried also indicated that he would not use a rating agency to rate the bonds because that had not worked out in the past.

However, Chris Evangel, vice president and supervisor for the Southwest region at Moody's Investors Service, said Stifel dropped plans to have the bonds rated after the IRS demanded arbitrage rebate from several school districts that had been involved in earlier programs.

"We haven't been approached on anything new," Evangel said. "Unless there is something structurally different in Oklahoma, I don't know why we wouldn't be able to work with them. We have worked with other states in the past on cash management programs."

Since the 1990-1992 programs, the cash management programs in Oklahoma have become smaller, and the state is scrutinizing the schools more to determine whether they are overstating budget deficits.

For example, in 1990, 270 school districts, 14 vo-tech schools, and three counties borrwoed $524 million in tax anticipation notes to help cover temporary budget shortfalls. However, the IRS later said the budget deficits appeared to be exaggerated in the case of at least three school districts and demanded arbitrage rebate. Other districts also are being investigated.

As a result, the Oklahoma Commission on School and County Funds Management and the Oklahoma bond adviser have looked more carefully at school district applications to sell the notes, particularly this year.

"We applied a more stringent test than we have in the past," said Jim Joseph, the Oklahoma bond adviser. "We have a much better feel for what their cash needs are."

Joseph said the commission looked at historical figures on budget deficits as part of its test to determine what government agencies were eligible for the program.

After the review, more than 50 school districts, eight vo-techs, and one county were given approval this month to participate in the cash management program to meet their cash needs during the year.

The Oklahoma City and Tulsa school districts, which have agreed to pay arbitrage rebate to the IRS for participation in past programs, decided not to participate in the program.

However, the Putnam City district, which is negotiating an arbitrage settlement with the IRS, has applied to borrow more than $8.5 million.

If the cash management program is not realzed, Joseph said the school districts and county could seek bank warrants to borrow the money, although that would mean higher interest rates.

Meanwhile, industry sources said they questioned whether schools had any need for the program, since state aid is paid 11 times a year and the districts should not face cash shortfalls.

However, Joseph responded that the districts collect property taxes only two times a year, and as a result can face cash shortages at times during the year.

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