WASHINGTON -- California Controller Gray Davis yesterday received the go-ahead from state lawyers to provide cash for debt service payments due today on $2.2 billion of lease revenues bonds, while the state Legislature continued to piece together a budget.

Backed by an opinion from the attorney general's office and other counsel that says the controller has continuing authority to appropriate $109 million of lease payments on the bonds, his office spent much of yesterday going through the mechanics of getting the cash into Treasurer Kathleen Brown's hands.

State officials put the kibosh on speculation earlier in the day that the state's much-depleted cash reserves might force the controller to issue tax-exempt interest bearing registered warrants, or IOUs, in place of cash payments.

One state official, who asked not to be identified, said that "talk" in the controller's office briefly yesterday about making payment with IOUs was ironic in view of the "extraordinary amount of energy expended" by attorneys in the last few days to provide the controller with the legal backing to make cash payments.

Considering the controversy that issuing IOUs might create, the official said he expected the state to come through, as promised, with cash payments.

Jennifer Openshaw, spokeswoman for Ms. Brown, agreed.

"All of the bond funds will be paid with good funds, none will be paid with IOUs," she said, adding that the treasurer also did not expect to have to avail herself of the bond's debt service reserves.

Rating officials appeared to draw the line against using the debt service reserves in issuing credit alerts on some or all of the state's lease bonds last week. Standard & Poor's Corp. said it would be a "technical default" for the formerly triple-A rated state to tap into debt reserves for the first time.

But with assurances yesterday that the state had secured the legal authority to make timely payment in cash, rating officials said things were looking up.

George Leung, Moody's Investors Service's managing director for state ratings, said the agency was preparing to inform investors about the state's timely payments and other legal developments.

Jeffrey J. Thiemann, Standard & Poor's vice president, noted that "the continuing appropriations authority [cited by the controller] is a real positive sign. We need to study it a little bit, but if we can conclude that they have an ongoing opinion that the Public Works Board leases will not be subject to the appropriations process, we can feel much better."

"To the extent we have assurances that this will never come up again, the issue could resolve quite favorably," he added.

One test for the state, said Mr. Thiemann and agency Vice President Sally Rutherford, is whether it will be able to use its new-found legal authority beyond tomorrow's deadline to make debt service payments that are coming due Oct. 1 on another nine state lease issues.

"To the extent the budget impasse is not resolved, those are the issues" the agency will watch, Mr. Thiemann said.

George Valverde, a state Department of Finance official who plays a role in paying the state's Public Works Board bond issues, said the new legal authorities asserted by the controller should enable him to avert any crisis over lease payments in the future.

"We've set the precedent" by making the payments without a budget, and that "should provide a certain amount of comfort to the bondholders," he said. "We can guarantee payment in the figure" using the same mechanism, he added.

The unusual opinion asserting the controller's "continuing appropriations" authority to pay the bonds was not the only legal precedent the state had to forge.

State lawyers also had to delve into largely uncharted territory by determining that state Finance Director Thomas W. Hayes could authorize the lease payments for the Public Works Board bonds in part by certifying that they had not yet been made by the Legislature.

Relying on these authorities, the state should not require the permanent authority to make the lease payments that would have been established by emergency legislation the Legislature considered last week, Mr. Valverde said.

That legislation was shelved by the Legislature yesterday as lawmakers continued to struggle toward adopting a final budget agreement.

Gov. Pete Wilson received a $57.5 billion spending plan approved by both houses over the weekend, but he promised a veto unless the Assembly also passed key measures to cut health and welfare, education, and local government aid. The Senate already has approved such so-called "trailer" legislation.

Several Sacramento sources were cautiously optimistic the Assembly would pass the necessary legislation, even if it took a protracted debate extending past the Legislature's scheduled midnight adjournment last night into the wee hours of the morning.

The final hitch revolved around the Assembly's rejection Sunday of a key education bill containing a provision sought by Gov. Wilson allowing the suspension of Proposition 98, a voter-approved measure which guarantees a percentage of state funding for schools. If the provision is removed, Gov. Wilson has said he will veto the budget.

"Eventually, the Assembly will have to given in," said David Takashima, legislative analyst for Assemblyman Steve Peace, D-San Diego, who chairs the Assembly's Banking, Finance and Bonded Indebtedness Committee. "It's a bitter pill, but we can't do much" else.

Jim Lewis, spokesman for Assembly Speaker Willie Brown, D-San Francisco, said he was "optimistic the governor will pass the package we send him."

A spokesman for the governor said yesterday she was hopeful the Assembly would meet Gov. Wilson's demands and a budget would be in place today.

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