OAKLAND -- A court hearing on the Richmond Unified School District case was postponed Friday amid signs that the California Legislature this week may pass a bill enabling the school district to settle the suit and pay off its defaulted certificates of participation.
The legislation, sponsored by state Assemblyman Tom Bates, is designed to give the beleaguered school district a new lease on life by eradicating its $29 million of debt to the state. Under a highly unusual arrangement, it then proposes authorizing the district to refinance the defaulted $9.8 million lease issue at stake in the lawsuit. That issue went into default a year ago.
"It's time to put the problems of the school district behind us," said Rachel Richman, press assistant to Mr. Bates. She said the bill so far has not encountered any opposition in the Legislature, where it is due to be taken up on the floor of both houses before the scheduled Aug. 31 adjournment. She put the odds of the bill passing at close to 90%.
News of the possible breakthrough in the Legislature prompted some uncharacteristic light-heartedness last week among the attorneys involved in the lawsuit. Only days earlier, they had appeared headed toward a dramatic clash over the state's contention that the 1988 lease issue was illegal and unconstitutional. All sides in the case readily agreed to postpone Friday's scheduled hearing until Sept. 11, pending action on the bill.
"There's a question now whether there will ever be a hearing. Surprisingly enough, this looks like it will be the solution," said Michael Hersher, the deputy general counsel handling the case for the state education department.
He pointed out that the legislation lets the state off the hook, in a way, as well as the school district by enabling the state to abandon its controversial stance in the lawsuit. At the same time, the state's loans to the district would be paid off in full through the sale of surplus school property.
Mr. Hersher maintained that issuing lease securities, as Richmond did, to finance operating deficits is a bad idea. But, he added, "If we're going to regulate COPs issues, let's regulate them prospectively and not freak out investors in $8 billion worth of COPs" by making a court case out of it.
"There's no reason to publicly renege on a past obligation," he said.
Ronald Ryland of Sheppard, Mullin, Richter & Hampton, the lead attorney for the issue's trustee, U.S. Trust Co. of New York, was similarly optimistic.
"There may never be a hearing. The bill should facilitate a resolution" of the case, he said.
The attorneys said the school district most likely would pay off the defaulted certificates in full, covering interest, penalties, and court costs, through the refinancing authorized under the bill.
But all sides agreed that beyond the remaining legislative hurdles, the success of the legislation and the refinancing depends on whether the rating agencies and investors will be receptive to a new bond issue by a school district that has been seen as a renegade.
The legislation attempts to take the district's poor credit standing into account by establishing a guarantee of repayment through a state aid intercept provision. The provision would require the state controller to withhold state aid, which constitutes 90% of the district's budget, to make payments on the new bond issue if the district ever attempted again to walk away from its obligation, Ms. Richman said.
In addition, the legislation recognizes the infamy the bond market now associates with Richmond's name by changing it to the "West Contra Costa County" school district for purposes of the refinancing and other legal matters, Mr. Hersher said.
Financial advisers have told the district that the name change, the fail-safe payment mechanism, and the financial fresh start provided by the legislation may enable it to get a good rating -- perhaps as high as an A -- on the refinanced issue, Mr. Hersher said.
"Their name will die with the old issue," he said. "And if we get the district back in a solvent cash position under new management, it probably will be perceived as a better risk than five years ago, especially because they really can't go bankrupt again."