LOS ANGELES -- A federal court ruling in an anti-discrimination lawsuit against Contra Costa County, Calif.. has delayed construction of a county hospital funded with $125.6 million of certificates of participation, raising credit concerns.

A temporary restraining order by a federal judge in San Francisco halted grading and other pre-construction work on the planned 144-bed hospital. which is intended to replace Merrithew Memorial Hospital in Martinez. Calif.

The injunction, handed down on Aug. I by U.S District Judge Saundra Brown Armstrong, came in reaction to a federal class action lawsuit brought against the county by the NAACP Legal Defense and Educational Fund.

Armstrong told parties to meet this Thursday for a status conference. and, if a settlement is not reached, a trial date could be set.

"The county is preparing appeals and plans to file those" this week. said Jean M. BuCkley, a vice president for Prager. McCarthy & Sealy, the county's financial adviser, on Friday.

The National Association for the Advancement of Colored People alleges that the proposed hospital would violate the civil rights of the minority poor who live in the eastern and western parts of the county. The NAACP claims these individuals could not easily get to Martinez, located in the center of the 733square-mile county.

In her 34-page opinion, Armstrong wrote: "Construction of the new county hospital in [the] central county, without any improvement in public transportation or the availability of, health care services to the west and east county minority poor, will. in effect, entrench and perpetuate the county's alleged systemic discrimination against the county's indigent minorities."

This is the first time in memory that the specter of civil rights violations has been applied to a lease financing, California public finance market participants said.

While the ruling "caught everybody off guard," one participant said the legal questions involved do not appear to have far-reaching implications for the state's billions of dollars of outstanding lease-related obligations.

COPs are popular borrowing vehicles in California because they can be used to circumvent the two-thirds voter approval required for local general obligation bond issues.

In the Contra Costa County case, certificates issued in May 1992 by the county-run Public Facilities Corp. were rated a provisional Aplus by Standard & Poor's Corp. and a conditional A1 by Moody's Investors Service.

The provisional and conditional designations are a customary practice in lease financings, and they are removed once the rated facility is completed and occupied:

In response to. the court order, Moody's on Friday issued a credit comment that said the Contra Costa County hospital credit was "under review."

"We are somewhat concerned about it, obviously," said Michael Roberge, an assistant vice president at Moody's. "It isn't something that anyone foresaw when those certificates were issued.

"There is a concern about project delays," Roberge said. "We're pretty confident the county will do what it can do to resolve it in a favorable manner."

Standard & Poor's is "monitoring the situation," said Roy Chun, a Standard & Poor's associate director.

Chun said he had reviewed the judge's opinion, which made clear that the NAACP lawsuit is not challenging the use of COPs to finance the hospital.

"The federal court ruling is pretty specific to the issue of accessibility of health care in Contra Costa County," Chun said. "It is not challenging the construction of the facility, or the use of COPs."

The judge's injunction "did catch the county by surprise," said Buckley of Prager, McCarthy.

Last April the county won a similar case that was brought bY the U.S. Department of Health and Human Services' office for civil rights.

The earlier ruling "basically cleared the county Of any assumption there was a discriminatory practice" in the county's plans for a central hospital, Buckley said.

Based on that ruling, county officials "hoped to break [ground on] construction on the main hospital in late August," she said. "That obviously is not going to occur until the court action is resolved."

Buckley said the legal structure of the 1992 certificates was designed to guard against construction delays.

While construction was intended to be finished by late 1997, the issue was funded with capitalized interest that extends almost to yearend 1998.

To date, four semiannual interest payments have been made to certificate holders from proceeds set aside for that purpose in the original issuance.

Certificate holders are scheduled to receive their first semiannual principal payment, totaling $2.85 million, on Nov. 1, 1998, Buckley said.

Buckley Said her firm and Orrick, Herrington & Sutcliffe, the county's bond counsel, are meeting with county officials to investigate "alternatives," if legal proceedings delay the project beyond the period of capitalized interest.

One possibility, Buckley said, is for the county to "fund more interest."

But answers are not clear-cut bec.ause "there is no precedent" in this situation, she said. "At this point, we don't see a dire outcome" resulting from the legal proceedings, she said.

Contra Costa County has about $600 million of long-term obligations outstanding, of which the biggest component is $337 million of pension obligation bonds. Only the hospital credit is under rating agency review. "Everything else is fine," Buckley said.

The county, with a population of 868,600, is California's ninth largest, and is often described as a bedroom community for San Francisco, which is located 15 miles east.

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