WASHINGTON - The Supreme Court declined yesterday to review a lower court ruling that greatly increases the number of Californians eligible to participate in the state's veterans' mortgage bond program.

The U.S. high court's action came after Gov. Pete Wilson and other state officials this spring challenged a California Supreme Court decision that invalidated a state residency requirement for participation in the so-called Cal-Vet program, which uses tax-exempt bonds to provide home and farm loans to veterans.

Yesterday's decision means that about 650,000 veterans who previously did not qualify for the program now can seek Cal-Vet benefits. That larger pool in turn could eventually prompt more bond sales, but pressure for additional bond sales in the near term is unlikely.

"We expect we have sufficient [excess] funds to meet any demand in the short term," Benjamin Hacker. director of the California Department of Veterans Affairs, said yesterday.

Market participants doubted there would be a tremendous upswing in housing loan demand for the program, given that interest rates on conventional loans already are very low. Hacker agreed with that assessment, adding that the state's economic slowdown also has dampened loan demand.

The U.S. Supreme Court gave no explanation for its refusal to review the lower court ruling. Consequently, the California high court's ruling, though left intact, does not set a national precedent. However, the U.S. Supreme Court over the past 20 years has invalidated a number of residency requirements established by states as a condition of eligibility for a variety of state benefits.

In yesterday's case, Wilson v. Del Monte, the court was asked to overturn the California court's determination that a residency requirement for the veterans' mortgage bond program is unconstitutional because it violated the equal protection rights of military veterans. The 14th Amendment to the Constitution generally prevents states from treating some citizens better than others.

Under the Cal-Vet loan program, veterans who were California natives or who were residents at the time of their entry into military service could get loans, financed with tax-exempt bonds. to purchase farms or homes.

According to Wilson's brief in the case, the state since 1943 has issued more than $7.4 billion of veterans' general obligation bonds. In addition, the state since 1974 has issued more than $1.5 billion of veterans' revenue bonds to help fund the program.

In seeking high court review, Wilson said that "since the enactment of the federal Mortgage Subsidy Bond Tax Act of 1980, Congress has enacted ever-increasing restrictions on the uses of tax-exempt housing bonds, including state cellings or volume caps."

As a result, the state has had a difficult time funding the housing programs adequately, Wilson argued, adding that the state's current annual celling for general obligation veterans' bonds is $340 million. That celling was established under the 1986 tax act but is separate from the unified volume cap affecting priviate-activity bonds statewide.

By contrast, revenue bonds sold for the Cal-Vet program are subject to the statewide unified volume cap. Unlike the GO bonds, the Cal-Vet revenue bonds are subject to the authority to issue tax-exempt mortgage revenue bonds, which was eliminated by Congress June 30. Accordingly, Congress would have to restore that authority before the department could sell tax-exempt revenue bonds.

By invalidating the residency requirement, the California Supreme Court in its Feb. 24 ruling made more than 650,000 "non-California" veterans now living in the state eligible to participate, Wilson said. Because of the federal volume cap on GO bond issuance, only about 2,700 loans can be made annually, he added.

Despite such constraints, Hacker said he believed the Cal-Vet program should be able to meet future demand, "based on current projections" that incorporate the more lenient residency qualifications.

In seeking high court relief from the California ruling, Wilson acknowledged that the Supreme Court has generally frowned on state residency requirements in recent years.

For example, in a 1980 case, Zobel v. Williams, the court struck down an Alaska program providing an annual distribution of a portion of the state's oil revenues to its citizens. The state gave citizens one share of the distribution for every year they lived in the state, a structure the court found unconstitutional.

But Wilson said the justices should distinguish the Cal-Vet program from such cases, arguing the California program is different because there is no requirement for residence of a particular duration or at a certain time.

Wilson also said California is not alone in providing such benefits to veterans. He said Alaska, Mississippi, Oregon, Texas, and Wisconsin have similar programs with similar residency requirements. Moreover, he said, almost all states have other economic and social programs with varying types of residency requirements.

Because of the widespread nature of such programs, the Supreme Court ought to clearly outline the boundaries of state supervisory powers to administer such programs, Wilson urged in his unsuccessful bid for high court review. Wilson also argued that although state powers under the Constitution's 10th Amendment generally must yield to claims made under the 14th Amendment, states nonetheless retain significant autonomy, and residency requirements such as those at issue in the veterans' loan program are within a state's power to make.

The 10th Amendment provides that powers not given to the federal government or denied to the states are retained by the states.

"We believe that the 10th Amendment is alive and vital, if not fully well that its plain language clearly reflects the important principles of federalism upon which our government is founded, and that these principles should be considered seriously" before state residency requirements are struck down, Wilson said in his brief.

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