All municipal leases are structured in one of two major ways. Some resemble long-term debt - like leases in Indiana and firm leases in California. In both cases, the lessee commits itself to a long term obligation. In Indiana, investors have the right to take possession of the lease-financed project in the event of nonpayment. In California, the holders of defaulted COPs or lease bonds usually have the right to relet, but not sell, the property.

Non-appropriation out leases are used in most states. These are year-to-year promises to pay which back long-term COPS or lease bonds. Here, the lessee annually makes a conscious decision to pay for the specific project. This sets up a natural tension between investor and lessee, and is one reason why leasing is the most heavily insured major market sector.

Essentiality has always been a key factor in analyzing leases. But voter support has become the "wild card" in lease financing. The taxpayer rights movement appears more wide-spread now than it was in 1979, when Proposition 13 passed in California. Thus, projects which are politically unpopular are now more in danger of default. The new (1981) office building for Brevard County, Florida, is a prime example. It is called the "palace in a cow pasture" by residents who feel the facility is too lavish, and who object to its out-of-the-way location.

In 1991, the Brevard protest movement reached a peak when hundreds of citizens carried protests signs, picketed the building, and packed a meeting of the county board. At that time, the board voted 3 to 2 to continue paying rent for another year. Now, due to voter petition, a referendum is scheduled for March, 1993. While that vote is non-binding on the board, it does increase pressure on them to non-appropriate and vacate the county building. The Brevard County building shows how public sentiment can threaten the security of a particular project.

On November 3, voters will decide tax initiatives in 11 different states, Practically all are constitutional amendments and will limit the taxing ability of local and/or state governments. The "Bruce Amendment" in Colorado is one of the most far-reaching of these tax initiatives. It would cap not only the revenue, but also the spending of both state and local government. This increases default risk - certainly at the local level. Of all types of tax-exempts outstanding in the state, COPs and lease- backed bonds are certainly the most vulnerable. That is because lease rentals are payable, not from pledged revenues or taxes, but are a line item in general funds which must also cover other government operations .

California Pooled Leases

California lease pools need more investor scrutiny. Not only does California have more lease pools than any other state, but it also has a wider variety of pool strucutres than any other state. These pools can be dedicated, modified blind, or be sold as a composite issue. Security depends on structure. Sometimes there is a strong , and well-known lessee. In other cases, there are several small lessees, and the "weak-link" approach applies.

Two pieces of legislation which dramatically altered pooling activity in California and elsewhere were enacted less than one year apart. These are the Mello-Roos Local Bond Pooling Act of 1985 (passed in California), and the Federal Tax Reform Act of 1986. The Tax Reform Act restricted the use of blind pools, while the Mello-Roos Act authorized joint power authorities (JPAs) to incur debt to acquire, construct, or renovate all types of land and facilities, and to cover design, planning and issuance costs. The Act also allows JPAs to issue housing, special assessment, tax allocation, and for participation in a pool, a local agency need not be a direct party to the joint powers agreement, but can be an agency or subdivision of a member.

With debt issuance and project financing powers this wide, it is little wonder why Mello-Roos JPA pools are so widely used. An analyst looking into this subject will encounter dozens of acronyms - such as ABAG (Association of Bay Area Governments) and CSAC (County Supervisor's Association of California). But given the size of the pooled lease in California, it is a worthwhile study to make.

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