WASHINGTON - California Treasurer Kathleen Brown is concerned that the state attorney general's stance in the Richmond Unified School District case raises a danger that the courts will strike down other lease financing in California as well as Richmond's defaulted issue, state officials say.
Despite warnings from the treasurer's office, Attorney General Daniel H. Lungren forged ahead with his argument Tuesday before the Contra Costa County Superior Court that Richmond's 1988 certificates of participation issue was unconstitutional because it was not approved by voters.
The $9.8 million issue, which went into default a year ago, was designed in large part to finance operating deficits by leasing property the district owned to certificate holders, who then leased it back to the district. The investor lawsuit over the default was filed in April.
In recent weeks, Ms. Brown has described the Richmond issue as "junk bonds," and a spokesman said she does not believe that long-term financing of short-term operational costs "is a good idea or good business."
"But that's quite different from saying that the transaction is illegal," he said, adding that "we have argued extensively with the attorney general on this, ad we just don't see eye to eye."
"Even though they intend to confine the issue to the particular facts of the Richmond case, they are creating an opportunity for the court to render a much broader decision that would consider all such sale and leaseback transactions unconstitutional," he said.
The attorney general, with support from the state education department, contends the Richmond issue did not fall with the "lease exception" to the constitutional debt limit widely recognized by California courts, because the proceeds did not finance capital projects or purchases.
The argument undercuts not only the Richmond issue, but other lease issues in the state in which the proceeds were not used to build, acquire, or improve government assets, the treasurer's spokesman said. "The attorney general wants to see a genuine, tangible asset from each lease transaction," he said.
At least one other outstanding issue in the state is nearly identical to Richmond's because it financed operating deficits - an Oakland Unified School District certificates of participation issue, the spokesman said.
While that issue is directly threatened by the Richmond litigation, dozens of other lease offerings may also be affected. Many of them fall into a "gray area" in which they financed neither capital projects nor operating deficits, but were used for various intangible expenses, according to the rating agencies.
Moody's Investors Service said last week that various state and local entities have used, or are considering using, lease issues to finance workers' compensation funds, legal judgments, self-insurance, and pension funds. The agency said that it has begun declining to rate such transactions in light of the Richmond suit.
Sally Rutherford, vice president of Standard & Poor's Corp., says her agency has also come across such leasing plans, "It has not been a common practice, but it has not been uncommon, either," she said.
One example is the Foothill Deanza Community College. In 1989 the college generated cash to pay unfunded medical liabilities through the leaseback of its performing arts center, analysts said.
The attorney general, following the argument used in its Richmond brief, most likely would take the position that the community college issue was for operational expenses and was unconstitutional, the treasurer's spokesman said.
Yet from a public finance officer's perspective, such a financing may be legitimate, he said. In fact, the California Debt Advisory Commission is writing guidelines for local lease issuers that would permit leasing to finance pension and insurance funds as well as court judgments, another state finance official said.
"For an unusual expense like a court judgment, leasing may be the only realistic option to deal with it," that official said.
Despite any lingering reservations at the treasurer's office and elsewhere, the case is now in the hands of the attorney general and the courts.
"A lot of issuers see lease financings as a valuable financing tool," said Jeffrey Thiemann, assistant vice president of Standard & Poor's. "But when you're talking about the legality of things, you always have to take the attorney general's opinions quite seriously," he said.