LOS ANGELES -- California officials this week approved a study to analyze the legality and effectiveness of a pooled bond financing mechanism that can entail charging borrowers a higher interest rate than the one paid on the bonds.

The California Debt Advisory Commission voted unanimously Monday to evaluate bonds issued under the Marks-Roos Local Bond Pooling Act of 1985 because of questions from local issuers and past controversy surrounding this type of debt.

"We've been dilly-dallying around this issue long enough," said Steve Juarez, executive director of the debt commission. "We need to take a more comprehensive look at this financing tool."

Marks-Roos pooled bonds allow local agencies to join together to fund infrastructure projects or to purchase the debt obligations of other local agencies. The pooled financings benefit borrowers by allowing governments to reduce costs normally associated with financing a number of projects.

But the debt commission said it found both "problems and perceived abuses" in Marks-Roos bond deals. These include potentially higher interest costs, increased complexity for issuers, and a tendency to oversize issues to take advantage of a yield spread on loans made to other borrowers.

For example, controversy arose in late 1989 when a handful of smaller communities, each with only a few thousand residents, began selling multimillion-dollar bond issues to fund pools for future growth-related projects.

A bill passed in 1990 attempted to curb some of the transactions by prohibiting a local financing authority from purchasing the bonds of a local agency at a price that would result in a higher interest rate on the bonds.

That legislation included two exceptions for interest-rate differentials -- the interest rate on loans from the pool can be higher if the current market yield for the targeted project is higher than the rate of the pooled bonds. An interest-rate spread can be used if bonds that carry a higher interest rate than the pool are being refinanced.

But even with the corrective legislation, the commission, in a background report, found "some problems continue to exist, including what appears to be a very liberal interpretation [by some underwriters, bond counsel, and local officials] as to what costs can be reimbursed when a public financing authority purchases the debt obligations of other local agencies."

David E. Hartley, a partner of San Francisco-based Stone & Youngberg and head of the debt commission's technical advisory committee, said it is essential that local governments have as much information as possible.

"Our notion is that the great volume of Marks-Roos has been extremely beneficial," Mr. Hartley said. "But there have been twists added that need to be evaluated."

State Treasurer Kathleen Brown, who chairs the debt commission, favored the in-house study, which is expected to be completed next summer. Ms. Brown said there is a need to put "the klieg lights of public policy" on Mark-Roos bonds, adding "it is incumbent on the state level to give the best guidance possible."

Marks-Roos bonds volume for the last five years totaled about $4.5 billion, the commission said.

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