DALLAS - Embroiled in an arbitrage payment flap with the Internal Revenue Service, the Oklahoma City school district was forced to delay its $90 million bond sale last week after, investment banking firms failed to bid on the competitive issue, industry sources said.

"No one is going to take a chance on a deal like that," an industry source said. "The market is tell" them to fix their problems with the IRS."

On Thursday, the Oklahoma City school district board had planned to award the bid for its proposed $90 million general obligation bond issue to pay for capital improvements and equipment. But the board delayed the issue to an unspecified date until the market could be assured that action was being taken to resolve the IRS dispute, a district spokesman said.

Spokesman L.D. Barney said the district is proposing a settlement with the IRS following an opinion last week by the Oklahoma attorney general's office that the district can legally pay the arbitrage rebate and avoid jeopardizing the tax-exempt status of bond issues. The terms of the settlement were not disclosed.

In late October, the board refused to pay the IRS more than $1 million in arbitrage profits, penalties, and interest for its participation in cash management programs in 1990-91 and 1992-93.

During those years, the district sold a total of $47 million of tax-exempt tax anticipation and revenue notes, and the IRS has now determine they are taxable arbitrage bonds because the district appeared to have exaggerated budget deficits.

In its refusal to settle with the IRS, the district maintained such payment would violate the Oklahoma Constitution by using taxpayer funds in a way that did not serve a public purpose.

However, on Thursday, the state attorney general's office issued an opinion saying the district has the legal authority to pay. The opinion, dated Dec. 2 and written by Douglas Price, an assistant attorney general, points out that the district signed a contract to pay the rebate if the IRS determined that previously issued notes were arbitrage bonds.

"It cannot be doubted that the school district has bound itself by contract to pay the rebate should such be assessed," the opinion says. "Therefore, there is nothing voluntary about the payment."

In addition, Price indicated that paying the rebate could be in the public interest because failure to pay could result in bonds sold in the cash management program being taxed.

"A determination that the district's obligations are taxable would impair marketability of such issues and could possibly affect the market's perception of future offerings," the opinion says.

"In my opinion, maintenance of tax-free status reflects a clear benefit to the district, and therefore the district did not violate the constitution by agreeing to a contractual provision providing for payment of an arbitrage rebate," Price wrote.

Considering the developments, Barney said the board will consider when to move forward with the bond issue during its scheduled meeting tonight.

Meantime, the district's financial adviser, Stifel, Nicolaus & Co., said in a statement that "we feel that the uncertainty in the market will be resolved ... now that the Attorney General has indicated that it's legal for the school district to pay the rebate to the IRS."

Industry sources said they would like to see the issue fully resolved before it goes out to bid again.

"You are at the end of the year when the market is deteriorating, and there is a question whether an issue is tax-exempt or taxable," one source said. "People don't need that now. It's a matter of timing."

Whatever the problems with the IRS, the issue has strong credit ratings. "The lack of bids is the market reacting to the uncertainty of the potential IRS liability," said Steve Levine, a vice president at Moody's Investors Service.

But, Levine said, "It's still a strong credit. We don't have any credit concerns."

Moody's rates the bonds Aa and Standard & Poor's Corp. rates the bonds A-plus.

Susan Ulinski, an associate director at Standard & Poor's, said, "From a credit perspective, there is nothing that would put the A-plus rating in jeopardy."

Another issue also is being resolved in connection with the IRS settlement. The school district's general counsel is negotiating an indemnity agreement with Stifel. Although the details have not been released, industry observers have said that Stifel would indemnify the district in case it receives an unfavorable court ruling and is forced to pay damages for settling with the IRS.

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