WASHINGTON - Three grand juries in California have concluded in the last year that leasing is an abuse of power by public officials, demonstrating a "pattern of public concern" that could lead to a backlash against the state's $30 billion leasing industry, a draft report says.

"To the extent that individuals or groups have braved the impervious jargon of leasing for a closer look, they invariably have been concerned that this form of financing permits government agencies to circumvent constitutional and statutory restrictions on indebtedness," the report says.

To avoid such harsh steps as a ban on capital leasing recommended by one of the grand juries, the California Debt Advisory Commission's draft "Guidelines for Leases and Certificates of Participation" says the state's hundreds of issuers should adopt rigorous self-controls. These include voluntary public referendums and limits on lease debt.

To that end, the draft contains 25 detailed guidelines covering everything from large capital projects to small vendor financings.

But the final draft guidelines, representing the first-ever comprehensive industry review by the largest leasing state, stop short of recommending legislative action to restrict leasing. The report says that leasing practices have been "well managed to date" and generally reflect the "professionalism" and "discipline" of the financial markets.

Despite an increasingly negative public perception, "the number of troubled financings have been relatively few, especially considering the volume of leasing activity" in California, the report says.

The draft was prepared in the last year by the commission's staff and has not yet been formally approved by the commission. But commission chairwoman and state Treasurer Kathleen Brown has taken a personal interest in it, said Steve Juarez, the commission's executive director.

Besides Brown, the commission includes Gov. Pete Wilson and other top financial officers of the state.

The report says that the emergence in the last decade of tax-exempt leasing as the top long-term debt instrument of local agencies in California "represents nothing short of a revolution in public finance." The report's introduction characterizes the leasing revolution as a "quiet" one, "largely unnoticed outside of the public finance industry."

But later on, the report says that leasing has "begun to attract a bit of public attention," as evidenced by 1992 and 1993 grandjury investigations into the leasing practices of three of the state's counties.

Despite some "unique circumstances" provoking the investigations, they "collectively demonstrate a pattern of public concern," the report says. The report adds that the commission "routinely fields inquiries on tax-exempt leasing from grand juries and taxpayer grgups throughout California."

"The channelling of so much public borrowing through the lease structure - completely outside of the legal parameters governing indebtedness - begs the question of whether tax-exempt leasing is subject to adequate controls," it says.

"These guidelines are, in large part, directed toward these concerns and represent the first formal recognition on the part of state policymakers of the significance of lease financing in California today."

The report describes the results of the grandjury investigations, including one in Santa Barbara County last year that focused on a series of certificates of participation issues by the county that tripled the county's lease obligations in two years.

The Santa Barbara jury apparently concluded, as did the other grandjuries, that there was no evidence of criminal wrongdoing. But it nevertheleas recommended some major restrictions on the county's leasing, including a ban on certificates issues for capital projects.

A report by a grand jury last year in rural Nevada County found the county's decisions to issue two certificates offerings in 1991, to fund solid waste and library facilities, were "not sufficiently democratic," the draft report says.

The jury arrived at that conclusion even though the solid waste facilities were mandated by state law and the library project had fallen only 1 % short of achieving the two-thirds voter approval needed to finance the project with general obligation bonds.

Public opposition to leasing runs so strong in Nevada County, the draft report says, that it forced the county building authority at one point to refuse to execute a certificates issue for wastewater facilities that had been approved by the county board of supervisors.

A final report by a grand jury in Santa Cruz County this year, by contrast, recognized a role for tax-exempt leasing in financing state-mandated projects, but questioned the use of leasing for discretionary projects such as land acquisition for parks.

The Santa Cruz grand jury said the public should play a greater role in lease financing decisions and recommended establishing a public oversight committee. That recommendation is echoed in the commission's draft report for all issuers in the state.

"Public controversies over leasing in California have not been confined to grand jury inquiries," the draft report says. Public dissatisfaction in El Dorado County in 1990 with a lease revenue bond financing for county buildings led to adoption of an initiative requiring approval by a majority of voters for future lease financings by the county's joint powers authority, it says.

In light of such incidents, the draft report contains a recommendation that California issuers consider scheduling advisory referendums on lease issues that have substantial public opposition. Such votes particularly should be considered if the financings are not needed to comply with federal or state mandates or to provide an essential public service, it says.

"Public agencies voluntarily need to exercise control over their leasing practices or face increased pressure for additional regulation," the report concludes.Selected Lease GuidelinesBy The California Debt Advisory CommissionSolicit Public Opinion on This would accompany more formalTax-exempt Leasing Proposals procedures for integrating largeThrough Public Hearings on capital leases into an agency'sthe Capital Budget. annual capital budget process.Establish a Citizens The goal would be to cultivate aOversight Committee on core group of citizens whoPublic Finance. understand the intricacies of leasing and can view it with "broad-minded civic interest."Consider an Advisory Vote Advisory votes are recommendedfor Controversial Projects. when projects are both controversial and discretionary, and a "no" vote will not threaten the public health and safety.Determine the Validity of a The necessity of the project,Proposed Project. rather than the expediency of its financing, should justify the funding decision.Establish a Maximum General This would generally limit leaseFund Lease Burden. payments to between 3% and 8% of general fund revenues.Do Not Fund Operating This would prevent another debtExpenses with Long-Term financing like the RichmondLease Obligation. Unified School District's which resulted in default. However, the guidelines say debt financings can be used to retire existing debts and to restructure an agency's budget.Consider Earmarking Lease In most cases, earmarking generaland COP Repayment Sources. fund revenues for lease repayments does not constitute a legal pledge to repay.Do Not Rely Upon Volatile The guidelines particularlyRepayment Sources. caution against relying on fines and forfeiture revenues, or developer impact fees and sewer and water connection fees, which are subject to cyclical downturns.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.