The California State Teachers Retirement System took its first step into the municipal credit enhancement arena last week, providing a $25 minion line of credit backing the Port of Long Beach's new commercial paper program.

The Long Beach deal is only the second municipal transaction backed by a pension fund, rating agency officials said. In June 1992, the Port of Portland sold a $50 million special revenue bond issue that was backed by a guarantee from the Oregon Public Employees Retirement System.

Canadian Imperial Bank of Commerce, the second-ranked letter of credit provider last year and the lead bank on the $250 million Long Beach project, worked closely with the fund to prepare for the deal and future transactions.

The fund "is a natural player in this market, and we suspect it and other public sector pension funds will become increasingly active in municipal transactions," said Jeffrey Heckman, managing director of U.S. public finance at the bank. "This is clearly an evolving trend and we're glad to be on its cutting edge."

The bank and the fund have struck up an informal partnership. "I hope this will be the source of other joint deals," Heckman said.

Officials at the fund were also optimistic. The Long beach deal "is an excellent example of CALSTRS' capability to enhance municipal credits, support the California economy, and provide fee income to the pension system," James Mosman, chief executive officer at the fund, said in a statement.

Last year, the $45 billion pension fund decided to make a foray into municipals and solicited short-term ratings from Moody's Investors Service and Standard & Poor's Corp. for a credit enhancement program.

After receiving the highest ratings of SP-1-plus and A-1-plus from Standard & Poor's in January and of P-1, MIG-1, and VMIG-1 from Moody's last December, the fund began looking for deals to back.

Fund officials have said they plan to back up to $1 billion of debt in the next five years, and some market sources said the fund may eventually back $3 billion to $5 billion. Currently, the fund is considering only instate deals, but it may eventually back out-of-state deals as well.

While the two port deals are the only municipal transactions to be backed by pension funds, a few other state entities, such as Texas' treasury department, have provided liquidity support on municipal deals. However, public pension funds, with almost a trillion dollars in assets, could have a much larger impact on the credit enhancement market, analysts said.

In the Long Beach deal, the teachers fund is a direct assignee, like all the other banks, and is responsible for backing 10% of the port's $250 million program. The program can expand to $350 million, and if it does, the fund's participation will increase accordingly.

Other banks backing the port are Industrial Bank of Japan, Banque Nationale de Paris, and National Westminster Bank.

The port will use the funds to finance infrastructure improvements and land purchases.

Although the teachers fund receives contributions from financially troubled California, a constitutional amendment passed last year insulates the fund from the state's budget problems, rating agency officials said.

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