WASHINGTON - Although the California attorney general claims the Richmond Unified School District's defaulted lease deal was illegal, an internal memorandum shows it was endorsed by a state education department attorney shortly after it was issued in 1988.
The memo goes to the heart of a pending court case in which Attorney General Daniel E. Lungren is defending the state for its role in the default of the $9.8 million certificates of participation issue last year. The state now maintains that the May 1988 issue was illegal and unconstitutional because about two-thirds of the proceeds were used to finance the school district's deficits, rather than capital projects as prescribed by law.
But the July 1988 memo, penned by the education department's assistant general counsel Roger D. Wolfertz, examines the Richmond offering and its legal underpinnings and concludes that "nothing in the Education Code or any other law prohibits this kind of deficit financing."
Mr. Wolfertz has been listed as one of several department attorneys defending the state and the district against an investor lawsuit over the default, filed in April by the issue's trustee, U.S. Trust Co. of New York, before the California Superior Court of Contra Costa County.
But he said yesterday that he is no longer working on the case. The memo, he said, was "simply an opinion from me to a manager in the department" who had inquired about the Richmond issue. It was never "legally binding," he said, and is now "probably obsolete."
"We're way past that letter now," he said. "There have been deeper inquiries into the issue and some refinements of positions, and now people are talking about new theories." The attorney general's office did not respond to inquiries about the matter.
Other attorneys agreed with Mr. Wolfertz that, because the memo was written after the certificates were issued and is not a formal bond opinion, it does not provide a legal basis for the financing. But they said its existence has "strategic importance" and lends "moral weight" to the trustee, who is expected to cite it in a court hearing scheduled for Aug. 7.
"From a technical standpoint, no statue says that if you get this type of opinion you're home free," said a bond attorney, who asked not to be identified. "But it shows that the state itself has taken different positions" on the key question in the case, he said.
Among those disagreeing with the attorney general on the legality of the Richmond financing are the state treasurer's office and most of the state's bond attorneys, who believe the opinion originally rendered on the issue by Brown & Wood of San Francisco was not out of line, this attorney said.
"Obviously, well-respected attorneys are disagreeing on how this should turn out," he said. "So it's not surprising there are memos in the file that contradict the attorney general."
The emergence of the memo nevertheless rankled bond dealers in the state.
"I think it's outrageous that thee state of California would reverse its position on the question of legality of debt for an issuer," said an investment banker who asked not to be identified. "How can issuers and investors have any confidence in the state of California if they change their minds so capriciously on what constitutes legal debt?"
Adding to the conflict and confusion last week was the revelation of a second internal legal memorandum. This one, written in May 1990 by the state legislative counsel, Bion M. Gregory, focuses on whether Richmond had properly used the proceeds of its 1988 financing.
In his memo to Sen. Daniel E. Boatwright, Mr. Gregory concludes that the Richmond issue was not governed by Section 39363 of the state's education code, which specifies how proceeds from the sale and lease of surplus school property can be used. But that same section of the education code had been cited by Mr. Wolfertz in his 1988 memo as providing some legal basis for the issue.
Michael E. Hersher, the education department deputy general counsel who first posited that the Richmond issue was unconstitutional earlier this year, contended that the law is not so much ambiguous as it is silent on such deficit financings.
"The bond industry moved into what they perceived was a void in the law a couple of years ago," he said, "but the fact is, the statue did not specifically authorize" the Richmond issue.
Rather than get an opinion from the education department after the fact to be sure they were on solid ground, Mr. Hersher said, the attorneys on the deal should have gone through a court validation proceeding or even sought an opinion from the attorney general.
"Any time you have a transaction that's more creative than anything approved in the past, you should be a validation action or get the [attorney general's] opinion," he said. "There's no legal obligation to do so, but that would certainly have given greater confidence in the issue."
The bond attorney agreed that the only real protection from the serious charges now being leveled against the financing would have been a court validation proceeding "Anything else might make you feel warm inside, but it won't do you much good in the courts," he said.