State legislators recently agreed to abolish an earthquake recovery fund, ending months of debate over whether it was adequately financed.

Legislators approved the California Residential Earthquake Recovery Act after the 1989 Loma Prieta earthquake that damaged Santa Cruz, San Francisco, and other nearby areas. The earthquake fund, financed by small annual surcharges on home owners, was designed to fill the gap caused by high insurance deductibles. It covered the first $15,000 of home damage.

But John Garamendi, California's insurance commissioner, subsequently raised opposition to the fund. He cited concerns it was underfinanced and left the state vulnerable to liability if a large quake used it up.

Gov. Pete Wilson also supported abolishing the fund, and legislation to that end will take effect Jan. 1, 1993.

State officials initially had raised the possibility of selling taxable bonds to raise up-front money for the fund, but they abandoned that idea.

The Los Angeles County Board of Supervisors last week approved a $246 million lease revenue bond refunding that is expected to include the first use of a new swap derivative product from Lehman Brothers, the senior manager.

John Edmisten, senior finance analyst in the county treasurer and tax collector's office, said it is hoped the refunding will save $5 million during the life of the bond issue, with $3.5 million of that in fiscal 1993.

The bond issue will be structured as a Yield-Enhanced Security, or Yes, according to Doug Montague, senior vice president for Lehman Brothers in Los Angeles.

"We're expecting to try what for us is a new security structure," Mr. Montague said, adding that he could not elaborate at this time.

Mr. Edmisten said the structure would involve inverse floating-rate securities, which Lehman introduced into the tax-exempt market in early 1990 with Ribs and SAVRs, the firm's service marks for this product.

Unlike earlier such deals, however, Lehman's new Yes product will not use a Dutch auction,according to Mr. Edmisten.

Morgan Stanley & Co. structured an inverse floater for the county last fall that also did not rely on a Dutch auction, instead using the weekly J.J. Kenny Index of high-grade short-term securities to set the variable rate for a portion of the loan.

The county's outstanding bond issues targeted for refunding are Bonelli Regional Park, the Civic Center Heating and Refrigeration Plan, Downey Municipal Court-house Le Sage Complex, Olive View Medical Center, and San Fernando Municipal Courthouse.

The California Debt Advisory Commission has released an "issue brief" comparing the advantages and disadvantages of selling bonds on a competitive or negotiated basis.

The six-page report outlines factor for issuers to consider and recommends, among other things, that government officials participate in all aspects of bond issuance to ensure selling debt "at the lowest possible interest cost."

The commission noted that the method of sale hinges on assessing the level of demand for an issue, and advised focusing on the total cost of a financing rather than on any one component, such as the underwriting spread.

It also suggested that "issuers should avoid becoming too comfortable with a particular approach," but rather evaluate the method of sale for each bond issue.

Finally, the commission recommended hiring a financial adviser in instances where an issuer lacks the knowledge to prepare and evaluate a bond sale properly.

The commission, which tracks bond issuance in the state and provides educational material for state and local agencies, plans additional briefings on other topics of interest.

Additional information on the report comparing negotiated and competitive deals can be obtained by calling Steve Juarez, the commission's executive director, at 916-653-3269.

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