DALLAS -- The Texas attorney general's office has told Houston officials they cannot legally sell any of a voter-approved $500 million general obligation bond issue because of the way the ballot referendum was worded.

City officials met yesterday to discuss their options after learning Friday that the bonds were not valid because the November 1992 referendum required Houston voters to approve "all or none" of the proposed capital projects. The attorney general's office said that stipulation violates state constitutional principles.

The issue passed by an almost two-to-one margin.

The validity of the bonds comes into question now because city officials are preparing to sell the first block of bonds under the authorization. Under Texas law, the attorney general's office must approve all bonds before they are sold. No outstanding debt is affected by the attorney general's decision.

Mayor Robert Lanier said the set-back is likely to force the city to delay capital spending until the validity question is resolved.

"It's going to be an inconvenience, but we're going to solve the problem," the mayor said in a mid-morning press conference.

City leaders say they may ask the Texas Legislature, which opened a 30-say special session yesterday, to validate the bonds with a statute.

A second alternative would be to hold another referendum early next year. However, the mayor estimated that could cost the city's already tight general fund budget up to $900,000.

Lanier said the city is studying whether to seek a legislative validation of the bonds in the current special session, which has been called to deal solely with school finance.

A spokesman for Gov. Ann Richards said she can amend the agenda, which is legally known as the call, for the session to include any subject. But so far, she has not been formally asked to do so.

"I think it's possible the governor might open the call to items that would not take up a lot of time," the mayor said. He said that if the city had to wait until the regular session in January, planned capital projects would be delayed by months.

Houston Controller George Greanias said the city must also determine whether voters should be given the chance to decide on specific projects, as the attorney general ruling says.

"The argument is that we deprived the voters of the right to say ~yes, we want this' and ~no, we don't want that,'" said Greanias. "I'm trying to make sure that point is not lost as we try to find a practical solution."

Houston had planned to sell up to $100 million of GO bonds by year-end as part of a five-year capital program, but the attorney general's ruling snags those plans and leaves the city in danger of running out of money for infrastructure projects within a matter of weeks.

"It will probably impact thier capital improvements program," said Robert Stanley, vice president and assistant director of Southwest regional ratings at Moody's Investors Service.

He plans to discuss the setbak with Houston officials today in a previously scheduled meeting, but declined to say how the city's double-A rating could be affected. "Its a little early to tell," Stanely said.

Standard & Poor's Corp., which rates the city AA-minus, said it will monitor the situation. "It would not have an effect on their ratings until we understand fully how they intend to proceed," said Peter D'Erchia, a senior vice president at the agency.

The decision surprised many in the Texas bond industry, who said they could not remember the last time a bond issue was invalidated for such a reason. Others said many states prohibit referenda from lumping unrelated bond proposals together.

Ray Hutchison, senior partner at Hutchison, Boyle, Brooks & Fisher in Dallas, said there are state and federal rulings that support the attorney general's decision.

Hutchison, whose firm does not work for Houston, said there are legal prohibitions against asking voters to approve unrelated bond projects in one referendum. As a result, bond proposals are traditionally broken down so voters can accept or reject specific projects on individual merit.

"In other words, you can't give them a bitter pill. You can't give them something they want with something they might now want," he said.

City officials said the 1991 bond program was the first to ever be put before voters in an all-or-nothing format, noting that lawyers for then-Major Kathy Whitmire felt the issue would be valid if approved.

Before the election, city officials consulted with the attorney general's office concerning the validity of the issue, but never sought a formal opinion on the matter.

"At that time, I said that I had some concerns," said assistant attorney general Jim Thomassen, chief of the state's public finance section. "We gave them no assurances."

Despite concerns, city officials proceeded with election. With nearly 65% support, Houston voters last year approved plans that included spending $274 million for streets, $40 million for storm drains, $33 million for police facilities, and smaller amounts on projects from parks to libraries.

However, several sources said city officials chose the new format because of concerns that voters's might reject plans to use $20 million of the bond program to delovep low-income housing.

"They were afraid it would be lose," said one person familiar with the decision.

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