DALLAS - Texas' two largest university systems say they will not roll over $108 million of tax-exempt commercial paper that begins maturing next month unless the Texas Supreme Court rules this month on the constitutionality of the state's higher education funding system.

However, the state's lead lawyer in the landmark case said yesterday that he believes the universities can sell commercial paper even before a ruling because a May 1 injunction blocking such transactions was stayed when Texas appealed the case to the high court.

"That injunction has no force," said Jay Aguilar, special assistant attorney general in charge of the case. "It has no effect until such time the [Texas] Supreme Court agrees with it."

He said bond lawyers are wary that justices could rule and later impose the injunction, which some say could raise questions about securities sold after May 1. As a result of lawyers' concern, spokesmen for the Texas A&M and University of Texas systems said the universities could defease the debt as the paper begins to mature in July.

The University of Texas system, for its part, could use a liquidity agreement with Morgan Guaranty Trust Co. of New York to take out the notes. Either way, officials said the finances of the university systems will not be affected and the security of investors will not be jeopardized.

"If it's determined we don't have a decision at that time, we will take the paper out. We will defease it." said Pam Clayton, finance officer for the University of Texas system, which has $58.2 million in outstanding paper.

So far, indications are that unless the court rules by next Wednesday, none of the universities affected by the case, commonly known as LULAC vs. Richards, will sell long or short-term obligations until after Labor Day.

That is because the court, which issues its opinions every Wednesday morning, has just one more scheduled release of rulings before it begins a two-month summer recess. Observers say the court rarely publishes rulings until it returns after Sept. 1.

The court heard oral arguments last October, but has yet to rule. At issue is a Brownsville district judge's ruling last year that the Texas funding system for higher education discriminates against South Texas, which is predominantly Hispanic. The state has appealed the ruling, which could change the way universities are funded.

Responding to a request from bond counsel, Aguilar said that he will shortly petition the court to provide a clarification so that debt sales can proceed. Whether the court will respond is uncertain.

Like Aguilar, the Texas' top bond lawyer believes the commercial paper rollover should not be affected. However, Sheela Rai, assistant attorney general and chief of the state's public finance section, said her office has not taken a formal position yet.

"We have not issued a formal opinion because we have not been confronted with that issue," Rai said.

Richard C. Porter, a partner at McCall, Parkhurst & Horton, the Dallas bond counsel to both systems, said that while he believes the chances are slim the high court would take action affecting university obligations sold after May 1. the possibility must be considered.

"We don't feel comfortable having our opinion covering any obligation sold after the injunction, absent some action by the court," Porter said yesterday.

As they wait for a ruling, university officials said they are making plans for a defeasance of the outstanding paper if it becomes necessary. The University of Texas will be the first affected, with $4.6 million of paper due July 12. Clayton said funds to retire the borrowing have been escrowed.

In August, the other $53.6 million will mature in six series through Aug. 26. Clayton said that about 60% of that total has been issued for the Southwestern Medical Center, a university research hospital in Dallas. Clayton said the hospital has a strong cash position and, like the university system, would not be financially impaired if a cash defeasance is necessary.

The Texas A&M system has more time. Greg Anderson, director of treasury services for the system, said that $50 million of commercial paper sold April 28 in advance of the injunction comes due in three months. The first $10 million is due Oct. 4. and the remaining $40 million matures three days later.

"We anticipate there will be a [court] decision by then," he said.

The commercial paper programs are not the only borrowings affected. The Texas State University system has been authorized to sell three series of refunding bonds totaling $36.8 million, but will not do so until the injunction is lifted. Under current market conditions, the transactions could generate average present value savings in the 6% range.

But bond counsel has also advised that until the court rules on the constitutionality of the higher education funding case, the bonds will not be sold.

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