OAKLAND -- California officials and market participants hailed the overall strength of lease financings during a state hearing here Thursday, but lingering concerns may prompt new legislation and guidelines.

The California Debt Advisory Commission held the four-hour hearing to examine the growing reliance on lease-backed certificates of participation. In 1991, local and state agencies sold $5.1 billion of COPs, a 70% increase over the previous year.

"COPs have become big business in California," state Treasurer Kathleen Brown told an estimated 100 participants at the hearing. She said new legislation hindering COP issuance "would be quite damaging" to government finances, but added that some lease financing issues need to be addressed.

Concerned started building over California lease financings last year, partly because of a highly publicized default by the Richmond Unified School District on $9.8 million of certificates sold to pay operating costs at the fiscally troubled district. Political attention grew after local grand juries in Santa Barbara and Nevada counties released reports examining problems in certificate issuance.

Ms. Brown said the state should attempt to prevent "future Richmonds," either through legislation or guidelines developed by the debt commission for local governments. These guidelines would help local officials distinguish between "good COPs and bad COPs," she said.

The hearing produced no final consensus. Steve Juarez, executive director of the commission, said the advisory group would meet June 29 to discuss possible guidelines and any new legislation.

Issues discussed at the hearing that may be examined include public accountability; thresholds for COP issuance; ability of issuers to pay debt service; cost effectiveness of COP issuance; and clarification of budget covenants in lease financings.

Several market participants testified against any new state legislation which would affect COPs.

Richard I. Hiscocks, a partner of Orrick, Herrington & Sutcliffe in San Francisco, said new legislation is "not needed," adding that "the leasing law in California is great and has been great for 50 years."

Lawyer Stan Wolcott, president of the California Association of Bond Lawyers, said his organization opposes more legislation.

"It's extremely unwise, given the depressed state of the economy, to do anything which make COPs harder to issue," he said.

Several speakers, including school officials, said the Richmond default was an isolated situation. They stressed that virtually no other schools have issued certificates to pay operating costs, such as phone bills.

The state has said the certificates issued by Richmond are invalid due to lack of voter approval. The state initiated litigation questioning whether it must pay certain district costs after it took over the district.

Nearly all 18 speakers stressed the safety and strength of California's leasing market, but several also pointed to possible corrections and problems.

Henry Gardner, city manager of Oakland, which pays 5% of its general fund toward debt service on certificates, said he would favor thresholds on amounts of COP debt if they were developed on a "rational basis."

A spokesman for a grand jury in Nevada County raised the question of public accountability in lease financing when he spoke of a local nonprofit that issues certificates for the county. The local grand jury investigated the situation because members of the nonprofit Nevada County Building Co. are not appointed by elected representatives. They are self-appointed civic leaders, Arthur Katz, grand jury spokesman, told the debt commission.

He called the nonprofit a "shell, a dummy group," and said the practice of lease financing in Nevada County "bypasses the public."

"We question some of the things regarding COPs we have seen happen in our county," said Mr. Katz. "Voters may be well-served by state intervention. We would support an enforceable body of rules and guidelines from the state."

But Kent Taylor, a county administrator for Santa Barbara County -- where a grand jury concluded that COPs should be banned for capital improvements and subject to voter approval -- questioned whether local citizens should be involved in micro-management of such business affairs.

"COPs aren't the most exciting thing to the public," he said. "Is this the type of grand policy decisions the voters should vote on, and are the voters informed enough to make smart business decisions?"

Mr. Taylor said increased public involvement, especially imposition of any voting approval requirements for certificates, would "slow down" their issuance.

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.