WASHINGTON -- A California Debt Advisory Commission report, due to be released next month, will recommend that issuers invite public scrutiny of planned lease offerings and voluntarily schedule referendums on controversial lease issues.
Drafts of the report, which contains the first guidelines by the nation's largest leasing state, already have provoked controversy in the leasing industry, which views leasing's general exemption from constitutional debt restrictions and voter approval requirements as a bankable asset.
"If you put the same restrictions on leasing as you have on debt, then you will lose all of the advantages that leasing has to offer, and will just make it that much more difficult for governments to obtain the equipment that they need and to provide the services required by their constituents," said Robert C. Chambers, president of U.S. Municipal Leasing, a San Francisco-based affiliate of the Ford Financial Services group.
Chambers, who had not seen the draft guidelines, said that even though they would not be legally binding, they are likely to "take on the force of quasi-legal requirements" and complicate life for the state's leasing industry.
Other lease dealers agreed that the debt advisory commission's recommendations will have to be taken seriously. The commission, a financial watchdog agency, is chaired by state Treasurer Kathleen Brown and includes Gov. Pete Wilson and the state's top financial officers, including Finance Department Director Thomas W. Hayes and Controller Gray Davis.
But one dealer, Donald Hawkins, president of Public Leasing Corp. in Irvine, Calif., said the guidelines, while venturing into new territory, "ultimately could be good for the industry" by helping to single out potentially troublesome lease issues.
"Too often, lease issues can become political footballs," Hawkins said. "I don't think the intention is to cause every lease transaction to go to referendum -- only where there is a question of voter resistance."
Commission officials said the report's call for regular public hearings and occasional referendums on major lease issues stems from growing restiveness in California about real and perceived abuses of municipal lease transactions. That includes concerns raised in March by the referendum that Brevard County, Fla., held on whether to continue paying its outstanding lease obligation.
"It's the issuer's responsibility to make sure the leasing they're doing will not make the kind of public uproar that occurred in Brevard County," said Steve Juarez, executive director of the commission.
Juarez said the report was also written with an eye on the conclusions of a grand jury in Santa Barbara County, Calif., last year, which saw a "potential for abuse" in leasing and called for a local ban on certificates of participation used for capital projects and voter approval of all other certificate issues.
"We want public agencies to consider the role of the public in the decision to use leasing, even if they decide not to hold a vote," Juarez said. "For too long, public agencies have not even acknowledged it is a consideration."
The overall goal of the report, Juarez said, is to "have a more open process and promote greater public understanding of what leases are and how they impact the budgets" of the state's hard pressed municipalities.
"We would like to think that had this type of process been in place, we might have been able to avoid some of the problems that were incurred" in leasing controversies in recent years, Juarez said.
While Hawkins agreed that an advisory vote before the issuance of the Brevard certificates in 1989 might have helped prevent this year's market-shaking incident, Chambers took issue with that suggestion.
"The Brevard County board of commissioners had the authority to make the decision [to issue the certificates], and once the board makes that decision, it should be binding on the people," Chambers said. The insertion of a voter referendum into the decision-making process, even though advisory, casts a shadow on the legality of the issue and undermines the validity of the lease in the eyes of investors, he said.
Another nettlesome issue raised by the guidelines, Chambers said, is who is to decide if a lease issue is controversial enough to warrant a referendum. Juarez said the draft report leaves that decision to the individual municipalities sponsoring the lease issues.
But Chambers said vocal leasing opponents could use the referendum option as a means of getting their foot in the door to stop lease issues. "If one person objects enough, will he have the power to force a referendum?" he asked.
Any decision by a municipality not to hold a referendum in the face of token opposition also could be second-guessed later on, Chambers said, particularly if an issue's opponents gather strength, as they did in Brevard County.
Juarez said the potential for controversy over the report's public participation guidelines is well known to the commission. When staff initially drafted the report in March, they included even stronger language specifying instances in which advisory or voluntary referendums on controversial lease offerings should be held, he said.
But the commission softened those recommendations after receiving a barrage of objections from the underwriters, lease dealers, and bond attorneys around the state who were consulted about the stronger language, he said.
"It really touched a nerve," Juarez said. "It was controversial with just about everybody we talked with. In one meeting of our technical advisory committee, we spent an hour and a half talking about th is one issue."
As a result, the report now makes only one across-the-board recommendation that issuers hold public hearings on major capital lease financings paid out of the municipality's general fund. That requirement can be accomplished within the context of hearings on the issuer's overall capital budget, said Steve Shea of the commission.
The report's language calling for referendums on controversial lease issues also was pared. The report now only recommends that votes be held if circumstances seem to dictate it, such as when a substantial minority opposes the lease issue or when taxes would have to be raised to support it, Shea and Juarez said.
Juarez noted that even when referendums are held, leases would still hold an advantage over general obligation bonds within California because they would require only the approval of a simple majority of voters, rather than the majority required for approval of debt under the state constitution.
The commission's decisions to allow each municipality to decide whether to hold a referendum, and not to recommend any changes in state law or local ordinances governing leases, for the most part placated critics who were consulted about the original draft report, Shea said.
"We didn't want to overreact or create a backlash," said Shea, who said that the original draft "kind of got people riled up."
"In deference to the industry, they operate in a very restrictive public finance climate in California, with all kinds of constitutional provisions that limit debt financing," Shea said. "Leasing is like a safety valve that allows financings to occur that otherwise would not be possible."
While generally calling for broader public involvement in leasing decisions, the report will acknowledge some instances in which public agencies may be better off not consulting the electorate, Juarez said. This most often would happen if the agency is operating under a mandate -- such as a court order to build prison facilities -- that that has little popular backing.
"In those instances, it may not be a good idea to bring the lease issue to the public, if that's the only means by which the agency can finance the facility," Juarez said.
The latest draft of the report seeks to "incorporate the public input requirement without severely hampering the flexibility associated with COPs," he said.
Juarez said he expects the report's recommendations to have an impact well beyond California. "We're such a big player in the lease market. Many issues we'll touch upon will be issues elsewhere, and the lion's share of the document will affect issuers across the board," he said.