WASHINGTON -- The California attorney general's portrayal of the Richmond Unified School District's 1988 lease deal as "tainted" and unconstitutional is an unfounded rationalization of the district's illegal decision to walk away from the issue last year, the trustee charged yesterday.
In a brief filed with the California Superior Court of Contra Costa County, U.S. Trust Co. of New York described as "thin" and "outrageous" the arguments made by Attorney General Daniel E. Lungren.
He had asked the court to rule that the $9.8 million certificates of participation deal violated both the state's constitution and its education code because and proceeds were used largely to close an operating deficit, rather than fund capital projects.
The trustee's brief, written by D. Ronald Ryland of Sheppard, Mullin, Richter & Hampton, cites an internal memorandum written by state education department attorney Roger D. Wolfertz shortly after the certificates were issued. The memo concluded that no state law prohibited such a deficit financing.
"Now, four years later, that same lawyer and a platoon of other lawyers belatedly argue that the transaction at bar is illegal, unconstitutional, and near immoral," mostly on the grounds that it was not good public policy, he said. "Certainly, issues of constitutional law and of contract should not be subject to the vagaries of perceived public policy," Mr. Ryland said.
"The defendants stand this transaction on its head when they imply that it was somehow dirty" he said, adding that the state's argument would "taint" many lease transactions in California other than Richmond's.
"Whether, in hindsight, it was a good or bad idea for the district to incur this lease obligation, the district has no more right to escape its obligations than does an 18-year-old with his first credit card; indeed, one would hope that educators and other public officials would set a good example," he said.
The trustee's attorney pointed out that the Richmond issue was approved by the district's school board and was overseen by the state. The state education department also had ample opportunity to stop the transaction, he said.
"Very simply, the district promised to budget the lease payments [and] should be kept to that promise," he said. "To do otherwise would be to act contrary to law and to place a cloud over billions of dollars of certificate of participation financings," Mr. Ryland said.
He also asked why the state did not simply instruct the district to put the proceeds into a maintenance fund, rather than penalize the certificate holders, if the issue's proceeds were meant for capital projects.
The brief charges that the state has been acting to protect its own interests by insisting on full repayment of the $29 million of loans it has supplied the district. Instead, the state should "cut the district some slack" and enable it to start repaying its other obligations, Mr. Ryland said.
The brief contradicts the state's assertion that the issue was not constitutional because such deficit financings were not explicitly authorized by law or addressed in any rulings in 50 years of California court decisions that condone lease securities as an exception to the constitutional debt limit.
None of the past cases restrict what a public agency can do with the proceeds it receives from a lease issue, the brief says, also asserting that the constitutional question is not "colored by the presence or absence of a statute."
In any case, Mr. Ryland argued, the statutory basis for the Richmond transaction was not the education code, but bond-validating statutes passed by the state legislature and signed into law in September 1988.
The brief also attempts to throw out evidence proffered by the state that conservative bond counsel within the state would not have opined on the Richmond transaction. The attorney general had cited a brochure written in 1991 by Orrick, Herrington & Sutcliffe stating that deficit financings like Richmond's are "inappropriate."
But the trustee pointed out that Orrick Herrington has itself opined on an issue similar to Richmond's. In September 1991, the firm was counsel on a $3.52 million certificates issue by Torrance, Calif., in which the city used the proceeds from a leaseback deal identical to Richmond's for self-insurance and the payment of a claim against the city.
"In short, the state's own expert's actions. . . support the transaction at bar," the trustee said.