WASHINGTON - California's attorney general yesterday asked the Contra Costa County Superior Court to invalidate the Richmond Unified School District's defaulted certificates of participation on the grounds that the lease issue created debt prohibited under the state constitution.
In a forceful response to an investor lawsuit filed in April, the state not only explained its role in the district's decision last year to walk away from the $9.8 million issue, but invited the court to draw the line against what state officials believe are egregious uses of lease financing.
"This case presents an issue of first impression in California: whether a school district, or other municipality, can enter into a debt financing scheme, designed to produce cash for operating expenses, in which the currently utilized property of the district is leased and then leased back," argued attorney general Daniel Lungren.
"This matter is before the court because Richmond, instead of facing its budget crisis and cutting expenditures, joined with [the certificate holders] and created a lease/lease-back financing device to be used for purposes that have never been authorized by the Legislature," he said.
"The result was that the district went further into debt, and finally filed a petition in bankruptcy. Such action is irresponsible and against public policy; the state urges that this agreement cannot be enforced."
The state contended that the lease-back arrangement underlying the certificates was "illegal" because there was a "paucity" of statutory authority to support it, and it failed to fall within the widely recognized "lease exception" to the state constitution's voter approval requirement for debt.
In issuing the certificates in 1988, the state said the district did not comply with state education code requirements that, among other things, schools lease property for cash only if the property is vacant or surplus. Richmond has continuously used the eight school administrative properties tied to its defaulted issue.
With no clear statutory authority behind the issue, the certificates run aground on the constitutional debt limitation, the state argued.
In 50 years of California court rulings creating a "lease exception" to the debt limit, none has exonerated a financing like Richmond's, which was used to close operating deficits. "Rather, all the approved financings were used for the construction or acquisition and subsequent lease of the property being leased," the state said.
Also, "no opinion of the attorney general has held that pledging the assets of a municipality in order to obtain operating capital is permitted under the constitution," it said.
"Furthermore, the opinion given by the several counsel advising Richmond which affirmed the validity of the lease-back arrangement ... was contrary to respected legal opinion," the state said, citing advice given by Orrick, Herrington & Sutcliffe of San Francisco against using lease financings for operating expenses.
In presenting its case, the state questioned the role of the Richmond issue's bond counsel, Brown & Wood of San Francisco, and other law firms that assisted with the issue, Stradling, Yocca, Carlson & Rauth of San Francisco, and Taylor & Field of Oakland.
They "willingly entered into this transaction with full knowledge of the district's financial difficulties and of the paucity of legal authority for the transaction, and should not be permitted to enlist the aid of this court in enforcing such an illegal agreement," Mr. Lungren said.
The school district and the state education department also charged that the defaulted issue was invalid and unconstitutional in their briefs before the court yesterday, completing the full-court press that attorneys had promised to get a summary dismissal of the three-month-old investor lawsuit.
The district's attorney, Martha Buell Scott of Breon, O'Donnell, Miller, Brown & Dannis of San Francisco, said the constitutional debt limit was enacted in 1879 to "curb extravagant expenditures by local agencies that resulted in obligations which could not be paid out of the current year's revenues, but were rolled forward, creating large long-term debts."
"This is precisely the evil that befell the Richmond" schools, she said. The district's financial plight is so dire, she said, that any court order forcing the district to start paying the certificates again "will result in a return in a return to insolvency and possibly bankruptcy."
Michael E. Hersher, deputy general counsel for the education department, said the state and the district are hoping the court at a July 31 hearing on the case will quickly dismiss the investors' action, filed on behalf of certificate holders by the issue's trustee, U.S. Trust Co. of New York.