CHICAGO - State courts increasingly are ruling against creative tax-exempt financing techniques that are designed to help issuers avoid state constitutional debt restrictions, a law professor told bond lawyers meeting here yesterday.

"The lesson of the recent cases is that things are getting tougher for creative financings," Clayton P. Gillette, a faculty member of the University of Virginia School of Law, said in a keynote speech at a National Association of Bond Lawyers meeting.

"The courts are looking more carefully at these arrangements and are demonstrating a proclivity to strike down debt-avoidance techniques."

Gillette said he was referring to financings such as those involving lease purchase arrangements or so-called "nonappropriation clauses," in which the issuer tries to avoid any risk or responsibilities for the project or for debt service simply by failing to continue to appropriate funds.

Until recently, Gillette said, state courts generally went along with the idea that these kinds of financings did not constitute debt and were, therefore, not subject to state debt limits or voter referendum requirements.

But now, he said, the courts increasingly are looking behind the formal legal structure of the financings to their practical economic effect on the issuer.

The courts generally are concluding that such financings constitute debt if, as a practical matter, the issuer is not likely to stop appropriations because it has an interest in the project and wants to continue to protect that interest.

State courts are finding that, regardless of the structure of the financing, if the risk that the project will fail or will no longer be needed falls on the constituents of the government issuer rather than the bondholder, then the obligations' constitute debt. Gillette said.

These issues have developed, in part, because of the widely publicized controversies over the lease financings done by the Richmond Unified School District in California and Brevard County, Fla., he said.

The Richmond school district defaulted in 1991 on a $9.8 million certificate of participation issue, leading to a dispute about the district's risks and responsibilities to bondholders.

In Brevard County, residents last February narrowly rejected a referendum in which they were asked to vote on whether to continue appropriations for a $23.9, million COP issue that was used to finance a controversial government operations center.

Gillette said that the two cases have not turned out as badly for the bond community as feared because California may take action to protect investors in the Richmond case and the Brevard County voters agreed to continue appropriations.

However, he said, "there has been a wake-up call as a result of these events to the bond community about the use of certificates of participation and about the uses of nonappropriation clauses."

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