CHICAGO -- An Ohio judge has cleared the way for state officials to issue $68 million of bonds for school improvements, despite an ongoing legal battle over education funding.

The $68 million of bonds will be the first ever issued to finance a long-standing state program for capital improvements to primary and secondary schools.

The fate of the bonds was thrown into question when Judge Linton Lewis Jr. of the Perry County Court of Common Pleas ruled July 1 that the state's school funding scheme is unconstitutional. Some bond attorneys construed language in the opinion to invalidate any bonds issued by the state or local school districts while the state appeals.

"When the court found for the defendants, it effectively shut down our ability to issue bonds" under the recently enacted Ohio Classroom Facilities Act, said Jim Summers, director of investments for the Ohio treasurer's office.

In a stay issued last month, Lewis made clear that he did not intend to bar government officials from issuing debt in the years it could take before the case is resolved.

"Nothing in said conclusions of law ... shall suggest any invalidity or basis for asserting invalidity of state or school district bonds," Lewis wrote in an amended entry to his decision.

Armed with the ruling, Ohio officials are going ahead with the $68 million school bond issue on Jan. 10.

The ruling may also make it easier for Gov. George Voinovich to keep a promise made during his recent reelection campaign to issue $1 billion of debt over 10 years for renovation and construction of schools. However, it's unclear when Voinovich will take steps to implement his bond program.

The state is not allowed to issue general obligation debt without a vote of the people, so Ohio's citizens would have to approve a constitutional amendment before the governor could proceed. Voinovich aides did not return phone calls to discuss the administration's plan of action.

Summers said officials were far more concerned about the small upcoming issue than Voinovich's $1 billion proposal when they asked for the stay.

The $68 million of bonds to be issued next month will finance a long-standing program through which the state grants money to local school districts that issue debt for capital improvements.

Though the program has been around since the 1950s, this is the first time the state will finance it with bond proceeds.

"The school districts have been [competing for] $10 million a year from the state, and it's never been funded by bond proceeds," said Summers. "But $10 million wasn't even keeping pace with districts' needs, so we thought about structuring something where the state could use the $10 million on debt service instead."

Because the state cannot issue GO debt without a referendum, the bonds will be sold as special obligations of the state, according to John Lee, a managing director at Kemper Securities Inc., the senior manager for the deal. Debt service will be paid out of the general revenue fund under a lease agreement between the Ohio treasurer and the state Board of Education, he said.

At first, Ohio officials planned to secure the bonds with state lottery revenues, but they have backed away from that plan. The lease arrangement is similar to the mechanism under which the Ohio Public Facilities Commission and the Ohio Building Authority issue bonds.

"It was initially structured as a lottery credit," said Summers. "We went back and re-did it because we felt it would be cleaner to make it like the credits the market has seen in the past. It's just an easier analysis for the market."

Timothy Long, a senior vice president with financial adviser Miller & Schroeder, said that the state can probably maximize its interest rate on the bonds "by not labeling them lottery revenue bonds."

Some credit analysts and citizen activists in other states have questioned the wisdom of paying for education with gaming revenues. But Long maintained that "public reaction wasn't at all a part of" the reversal.

Ohio will use lottery proceeds to replenish the general revenue fund after debt service is paid for fiscal years 1996 and 1997. In subsequent bienniums, Summers said the state could choose to reimburse the general fund with proceeds from other programs.

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