WASHINGTON - Attorneys in the Richmond, Calif., Unified School District case have tentatively agreed to settle an investor lawsuit over the district's defaulted certificates of participation by repaying the $9.8 million issue in full through a state-authorized refinancing scheme.

Michael E. Hersher, deputy general counsel of the California Department of Education, said that while attorneys have drafted the tentative agreement, not all of the principal parties have signed it, and it still is subject to approval by the Contra Costa County Superior Court.

The settlement is also contingent on the state Legislature approving, and Gov. Pete Wilson signing, a bill authorizing the district to pay off the 10-year issue through a new 30-year certificates issue, attorneys said. The defaulted issue is now two years and nearly $4 million in arrears.

The bill, which also would permit the district to pay all lawyers' fees and penalties incurred in the case, may pass the state Senate today and clear the Assembly as early as the end of the week, said Rachel Richman, spokeswoman for the bill's sponsor, Assemblyman Tom Bates of Berkeley, Calif. Hersher said that the governor, in a reversal from last year when he opposed the refinancing provision, now "would like to see the litigation closed up" and is willing to sign the refinancing bill as long as he is assured that doing so resolves the case.

But other attorneys in the case, who asked not to be identified, said that the governor has not personally decided whether to sign the bill. The litigants have only received assurances from his staff that Wilson probably would sign the bill if it puts an end to the controversial lawsuit, the attorneys said.

"The governor is still in doubt. But he's the only one who with a stroke of his pen could kill this thing," said one attorney.

The tentative settlement comes only days before various state agencies were scheduled to go on trial to defend their role in managing the district at the time of its August 1991 default on the issue. Hersher and Keith Yamanaka, deputy state attorney general, denied, however, that the prospect of the trial motivated the settlement.

Rather, Hersher said, the decision to settle came out of the "strong moral sense" of the district's superintendent since last year, Herbert Kohl, that the district was "getting a windfall out of [the default] and they had borrowed the money and should pay it back.

"They realized that if they ever wanted to borrow again, they would have to clean up the name of the district." Hersher said.

The settlement, if confirmed, means that some important legal and constitutional issues raised in the case and affecting lease financing throughout the state may remain unresolved indefinitely, attorneys said.

The most ponderous of those is a constitutional issue raised by state attorneys at the inception of the lawsuit in April 1992. They sought to establish before the courts that Richmond's use of lease securities to finance an operating deficit violated the state constitution's prohibition against going into debt without the approval of voters.

A December ruling by the superior court had gone against the state on that issue, but state and school district attorneys had vowed to appeal it.

The state still believes the use of leasing for debt financing is unconstitutional, all further litigation on the issue will be put in abeyance upon repayment of the certificates, under terms of the settlement, state attorneys said.

The constitutional question "would simply go unanswered for the time being," Hersher said. "People collectively decided we didn't want it to be answered," and not only because of the obvious risk that the state could lose once again in the higher courts, he said.

A state education law passed by the Legislature last year in the wake of the Richmond debacle already prohibits other school districts from attempting such debt financings, Hersher said, and the refinancing bill pending in the Legislature would also prohibit the practice.

Yamanaka said that the state accomplished what it wanted through the "practical" outcome of the case: other small issuers in the state are not likely to try the Richmond debt financing scheme in light of the bad publicity that Richmond received. Because of that, he said, the state decided not to risk further litigation.

Also left hanging by the settlement is a superior court ruling that the issue's trustee, U.S. Trust Co. of New York, appealed last year. In that ruling, the court refused to enforce a covenant to budget lease payments that was included in the Richmond contract, as with most other lease contracts in California.

Bond attorneys previously believed that such covenants were enforceable through a superior court order. And Standard & Poor's Corp. has said it relies on the covenants in giving somewhat higher ratings to California leases than the leases in other states, where issuers reserve the right to suspend payment each year.

While such legal issues will remain clouded, attorneys said the reasons for settling the case were compelling.

"I think the terms of the settlement are the best that anyone could hope for," Yamanaka said. "And with litigation, there's always a risk."

Hersher noted that "there are so many aspects to the case beyond the pure legal issues" that the state had to take into account. In particular, the financial picture of the state itself has changed and it has gone heavily into debt with financings of its own since the lawsuit was filed, he said.

"We realized there was a relationship between the case and what agencies of the state were doing," Hersher said. In a sense, the state through Richmond was "fouling its own nest by appearing to take a windfall position," he said.

The realization that the case had negative implications for the state as well as other issuers particularly was important in prompting Gov. Wilson to reverse his previous opposition to the refinancing bill, Hersher said. Wilson had threatened last year to veto a Richmond ballout bill that contained a similar refinancing scheme.

On the other hand, a bill that Wilson did sign this spring suspending repayment for two years on the district's $29 million of debt to the state helped to create the financial breathing room the district needed to arrange the refinancing and broach a settlement, Hersher said.

The district now contemplates that it will be able to make approximately $800,000 in annual payments on the refinanced issue by reshuffling items in its $100 million annual operating budget without any additional assistance from the state, attorneys said.

To overcome the Richmond district's now-notorious reputation and attract buyers to the issue, the refinancing bill contains a unique provision permitting the state comptroller to intercept state aid funds to the district to repay the certificates if the district misses any payments.

"The new COPS will have the same structure as the old ones but they will be much more secure," Hersher said, because of the intercept provision and because they will be paid out of an escrow account to be maintained by the issue's trustee.

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