WASHINGTON -- The Virginia Supreme Court Decision that invalidated leasing has prompted GE Capital Finance Corp. to suspend the state's line of credit for its master equipment leasing program, while at least two counties in Virginia have canceled plans to issue over $300 million of lease-backed securities.
GE notified Virginia Treasurer Eddie N. Moore Jr. on May 7 that it could no longer continue the line of credit in light of the April 19 decision in Dykes vs. Northern Virginia Transportation District Commission, which found lease-backed debt issued without voter approval to be unconstitutional, Mr. Moore said in a recent letter to Virginia agencies and colleges.
Since its inception in 1987, the state's master leasing program had financed over $30 million of state equipment purchases through lines of credit with GE and Citicorp, said Arthur Bowen of the treasurer's office. The program will remain in limbo unless the court decided to rehear the case, he said.
State officials say they hope the court will decide whether to grant a pending petition for rehearing by next week. Besides extinguishing the master leasing program, a survey yesterday by Securities Data Co./Bond Buyer showed that the court ruling has stifled virtually all new public lease and certificates of participation offerings in Virginia.
By finding that lease securities constitute debt that must be approved by voters under the state constitution, the decision goes against the trend of rulings handed down by the courts of other states and has stirred up "a great deal of discussion in the municipal leasing industry," GE official Craig Medvec noted in a May 14 letter to the treasurer.
"Although the facts presented in the case are certainly distinguishable from our equipment lease transactions, the broad language of the Supreme Court" decision throws into question "the validity and enforceability of the Commonwealth's obligations," he said.
Meanwhile, the state court's decision has jeopardized plans for over $300 million of new financings by the icty of Roanoke and its surrounding county, Chesterfield, to renovate the Hotel Roanoke, operate a landfill and airport, and build a new jail, nursing homes, library, school, and police facilities, attorneys said in an amicus curiae brief before the court.
Most of the facilities were to be financed through the kind of leasebacked or appropriations-backed debt struck down by the court, the attorneys said. In addition, the county has $38 million of outstanding lease debt used to finance its courthouse, emergency police and fire communications, and other purchases -- the validity of which also has been thrown into question, they said.
Like numerous other petitioenrs, the Roanoke attorneys pleaded with the court to reverse its finding that the county's lease securities are the same as general obligation debt.
The county's official statement for the lease offerings clearly warned investors that it had no obligation to fund the annual lease payments and could terminate payment each year, the attorneys argued. The county has even exercised its right to cancel a major computer lease contract, they said, demonstrating that the financing did not constitute debt.
While the county's general credit rating was upgraded to triple-A asttus by Moody's Investors Service during the 1980's, when it was amassing considerable leasebacked debt, the court's decision invalidating the lease debt now threatens to jeopardize the county's overall rating and sharply increse its financing costs, the attorneys said.
The smaller county of Rockingham was no less hard-hit by the court's decision, according to its amicus brief. The county may have to cancel plans to complete the lease-purchase of a $17.8 million jail and court complex, which is needed to relieve overcrowding and comply with state regulations.