ORLANDO -- Leasing activity continues to chug along at a good pace in the Southeast and has even picked up in some parts of the area despite controversy over the financing technique.

But officials say the political environment for leasing remains volatile in the region.

"The popularity of installment purchase financing has soared in my state as everywhere else in recent years," said Janice Burke, deputy director of the North Carolina Local Government Commission, which approves all the major local installment purchase financings in the state.

These lease-type financings are up by 54% in the last two years in North Carolina, and the commission has approved $779 million of such financings in the last three years largely because they are more flexible and cost effective than general obligation bonds, Burke said at a meeting of the Association for Governmental Leasing and Finance.

The leasing technique "has been very beneficial in our state" for small equipment purchases and real estate projects such as jails, schools, and municipal buildings, but the political environment nevertheless remains unpredictable, Burke said. "We never know which way the wind is going to blow."

The North Carolina legislature this year considered a bill to put a moratorium on further installment purchase financing, she said, and when that didn't pass, it approved a bill to study the issue.

The state's voters, like voters elsewhere in the region, also are showing some hostility toward the use of debt instruments without their approval, Burke said. An initiative this month to allow state governments to issue economic development bonds without voter approval "failed miserably," even though such bonds would not require a tax increase, she said.

Burke also reported encountering two incidents in her state in recent years similar to the situation in Brevard County, Fla., where the county board considered terminating payment on a $24 million county office building lease.

The Brevard board ultimately put the question of continuing lease payments to the voters in a referendum last March that shook the national lease market, even though it went narrowly in favor of the lease issue.

When the North Carolina commission learned that two of the state's municipalities were considering lease defaults on unpopular projects like Brevard's, the commission took the municipal authorities aside and persuaded them not to renege on their lease agreements, Burke said.

Florida officials report that leasing continues apace in their state despite the Brevard incident.

One local official, Robert Hunter, assistant superintendent of the Marion County Schools, said that his schools were even able to sell a certificate of participation issue with little interest rate penalty when the Brevard controversy was "in full swing" earlier this year.

But at the same time, Hunter said, his school board "had to face public concern with being left out of the process" much like the public consternation experienced by the Brevard board. "My county is very conservative. People feel their right was circumvented when we didn't hold a referendum," he said.

The school board's arguments for using COPs instead of general obligation bonds were not easy to get across to the largely "unsophisticated" voters, he said.

Henry Morgan, a partner with the Holland & Knight law firm in Lakeland, Fla., said "there may be some lingering effect" in Florida from the Brevard incident, though it had a "happy ending." Morgan noted that "after all the fussing and fighting," Brevard just this week sold a sales tax-backed revenue bond insured by Financial Guaranty Insurance Co.

In Virginia, state debt manager Arthur Bowen said leasing activity has intensified since the state's close brush two years ago with a state Supreme Court decision that found leasing to be debt that violates the state constitution.

The decision threw Virginia's $3 billion lease market in turmoil, but the court quickly reversed itself at the behest of state officials from the governor on down. Since then, the state's master lease program and extensive lease revenue bond activity have picked up and the state is now contemplating significant expansions, Bowen said.

The state is planning soon to double its jail lease issuances with another $300 million in financings, Bowen said. It is even considering issuing COPs for the first time to supplement its master lease line of credit for equipment purchases, he noted.

In view of its ample needs for mental health facilities, the state could issue a "flood" of lease financings for such projects in the near future, Bowen said.

But while Virginia leasing has survived since the 1991 court episode, officials remain mindful that the case could have gone the other way if, in an unusual development, the makeup of the Supreme Court had not changed between the original adverse decision and the court's reversal.

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