WASHINGTON -- California officials were struggling Friday to tear down remaining obstacles to paying the debt service on $2.2 billion of lease revenue bonds that come due tomorrow.

The State Senate was preparing to vote on a compromise budget drafted by Senate President David Robert, D-Los Angeles, and Senate Republican Leader Ken Maddy of Fresno. Legislators hoped to complete action on the budget and place it on Gov. Pete Wilson's desk by today.

The governor's signature on such a plan, which contains appropriations for the bonds' lease payments, would ensure timely payment for all 13 state issues that have $109 million of debt service due tomorrow, state officials said.

Meanwhile, state Controller Gray Davis' office worked all day Friday to iron out a remaining legal wrinkle that has prevented the controller from providing state Treasurer Kathleen Brown with the cash to make payment on most of the bonds even without an enacted budget.

The controller called in "a host of lawyers" to provide an opinion showing he has the authority to use cash on hand to make the lease bond payments through the government's "continuing appropriations" authority, said Marsha Kwaldwasser, deputy to Mr. Davis.

"It's a question of tightening up the opinion. I expect this will be resolved today, but we must be satisfied that everything is proper," she said Friday. "We are looking at some legal issues that haven't been raised since the 1930s."

At issue was whether Section 13340 of the government code, which "sunsets" the government's continuing appropriations authority for some programs when a budget has not been enacted, could prevent the controller from making the payments, state officials said. The state has been operating without a formal budget since July 1.

Once this remaining legal hurdle is cleared, the state will have paved its way to making tomorrow's bond payments, she said. On Thursday, state Finance Director Thomas W. Hayes provided Mr. Davis with additional authority that he needs to make the payments by certifying that the Legislature had not as yet approved the lease appropriations.

Mr. Hayes' certification should enable the state to avoid tapping into debt service reserves to pay the debt service on 11 of the 13 bond issues with payments due tomorrow, state officials said. The roughly $2 billion of issues are all by the state's Public Works Board.

One of the other two issues with payments due, a 1991 Department of Transportation to the East Bay Building Authority certificates of participation issue, is expected to be paid out of capitalized interest funds, rating officials said.

In addition, the state made headway Friday in its efforts to find the funds to pay a final bond issue -- a $163.5 million series 1988 Los Angeles State Building Authority issue -- without having to resort to the use of debt service reserves, they said.

With hopes rising that the state Legislature could complete a budget agreement by Monday, lawmakers on Friday tables emergency legislation that would authorize payment of the lease obligations out of existing revenues without dipping into the reserve funds.

"There is a 95% chance we will have a budget by [today], so we've put the bill on file for now," David Takashima, legislative analyst for Assemblyman Steve Peace, D-San Diego, who chairs the Assembly's Banking, Finance, and Bonded Indebtedness Committee, said Friday. "But if there isn't budget, we may take up the bill" today.

The legislation would put in place permanent authority for the state to make rental and energy service contract payments without an enacted budget, and thus would prohibit this year's lease payment debacle from reoccurring.

Gov. Wilson has signaled that he does not support the emergency legislation and would prefer to take the administrative route being paved by the controller's office.

However, rating agency officials, who have been watching the state's machinations over the lease bonds closely to determine whether another round of downgrades is warranted, said they would like to see the legislation enacted to prevent any future "scares" over the lease bonds.

Three major rating agencies last week put some or all of the state's lease revenue bonds on credit alert, pending resolution of the lease payment problem. Fitch Investors Service, in a release late Thursday, extended its alert to the state's GO debt as well as to its lease-secured bonds.

"The unwillingness of the state to insulate its obligations to bondholders from its internal budget dispute is extremely negative to overall credit," Fitch maintained.

Moody's Investors Service and Standard & Poor's Corp. had warned that the state should specifically avoid dipping into the debt service reserves to pay the bonds.

Standard & Poor's Vice President Jeffrey J. Theimann said resorting to the debt service reserves would be a kind of "technical default."

George Leung, Moody's managing director for state ratings, termed it a "payment default."

State officials from Ms. Brown on down have protested that the use of the debt service reserves does not constitute an event of default under the bond indentures for most of the issues.

"The indentures clearly specify what would represent a default, and using the reserve is not identified as one of those conditions," said George Valverde, assistant budget manager at the state Department of Finance, who plays a role in making bond payments on the Public Works Board issues.

Fitch agreed in its release. "The use of the reserve funds, while an indication that debt service does not hold a sacrosanct position, is not of itself that negative, if replenished, since a major purpose of the reserve is to protect against late budget adoption," the agency said.

Fitch nevertheless said the incident raises larger issues about the state's creditworthiness.

Mr. Leung also agreed that the indentures do not define use of the debt service reserves as a default, and noted that Moody's has been careful not to use that word in its releases. But he said that to some extent, whether it is considered a default is "in the eyes of the beholder."

"We distinguish between a big ~d' where the bondholder is not paid, and a little 'd,'" where the debt service reserves are accessed, he said.

"The bigger issue is that resorting to the reserve funds raises the issues of the willingness of the state to appropriate, as well as how it regards the importance of meeting its debt service obligation in a responsible manner to protect its payment record," he said.

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