ORLANDO -- The leasing industry will have a negative public image as long as it continues to support controversial lease financings used to replace proposed bond issues that have been rejected by voters, a major lease dealer warned last week.

"The question for our industry is whether we will pursue these deals which I think create an extremely poor public perception of the industry," said David Smith, president of Bell Atlantic Tricon Government Finance Inc. in Bloomington, Minn. at the Association for Governmental Leasing and Finance's first "Ethics in Leasing" session.

"I would not use leasing as a bailout" for a failed general obligation bond referendum, no matter bow good the lease issue is from a credit standpoint, and even if the issue is used for a worthy cause such as a court-ordered prison to alleviate overcrowding, Smith said.

Regardless of the merits of such lease issues, they are almost destined to receive bad publicity and be the target of taxpayer lawsuits that will make the industry regret the financings in the end, he said.

"You will see headlines like ~Leasing Used to Sidestep Local Taxpayers' and ~City Uses Lease to Finance Taj Mahal,'" Smith said. "The stories will focus on the bad deal, regardless of the facts."

Despite Smith's warning, an informal poll of the 50 or so lease dealers attending his 20-minute session revealed that an overwhelming majority would participate in a lease deal that replaces a defeated GO issue, as long as the project had strong merit. Only one local government official said she would not go ahead with a lease deal in light of voters' disapproval.

Virtually all the lease dealers said they would not participate in such deals, however, if they knew ahead of time that they would generate bad publicity or a taxpayer lawsuit.

Smith urged the dealers to "exercise good business judgment" and avoid ethical questions raised by going against the public's will.

But many of the lease dealers disagreed with Smith's assessment, arguing that lease financings fill a crucial role, especially if they are used to build facilities mandated by federal or state law. It is often those very projects that the public refuses to finance with bonds or new taxes, making leasing the only real option, they said.

"In Minnesota, we've had trouble getting GO bonds approved for jails. It puts you between the devil and a hard place," said Jack Yost, executive vice president of Dougherty Dawkins Strand & Bigelow in Minneapolis and chairman of the leasing association. The difficulty getting voter approval of financings for federally mandated prison projects has led the state to establish a mechanism for lease-financing such projects because "you simply have to have jails," Yost said.

One lease dealer at the ethics session contended that even if such financings engender bad press and a hostile public reaction, in the end the reals' participants will be vindicated as long as the projects are good.

"In time, the press will go away and the deal will be shown to benefit the public. The question is whether you're willing to take the political heat," he said.

Robert Chambers, president of U.S. Municipal and Corporate Financing in San Francisco, said "the issues are not black and white," adding that some dealers will shy away from controversial but necessary issues simply because they do not want the public exposure.

Steve Nelli, director of Standard & Poor's Corp., said he entirely agreed with Smith that leases previously rejected by the voters as bond issues should not be done at all. In a recent Creditweek Municipal article, Nelli said that such financings are "inappropriate," have "speculative-grade quality," and raise "major credit concerns."

Nikolai Sklaroff, assistant vice president of Moody's Investors Service, questioned a suggestion by Smith that lease dealers could avoid trouble by using leasing as a first option and avoiding a public vote altogether. if a project has the potential for controversy, Sklaroff said, the reason for financing it should be aired thoroughly before the public.

Both Sklaroff and Nelli said they agreed with a draft report by the California Debt Advisory Commission, which calls on state and local governments to solicit public opinion and even hold advisory public referendums before entering into large or controversial lease financings.

The California report, with its extensive recommendations on good leasing practices, was not discussed at the ethics session or any other conference forum. California deputy treasurer Hal Geiogue had called on the association at a San Francisco conference six months ago to consider embracing the report.

Yost said the association's members are still largely unfamiliar with the report, and the association generally does not see its role as one of endorsing such reports. But the association may devote a session to it at its next conference, he said.

Nelli questioned why the leasing association devoted only a short session in a two-day conference to the important ethical questions now confronting the industry.

"Here we are just a few miles from Brevard County," Fla., Nelli said. "But there's not been a single session on the implications of the incident."

Brevard County created a ruckus in the bond market this spring by holding a public referendum on whether to continue making payment on its $24 million office building lease issue. Several speakers mentioned the Brevard incident in passing, and noted that it has not had much permanent impact on the lease market.

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