ATLANTA - A sate circuit court judge Friday prohibited the state's School Building Authority of West Virginia from issuing about $3340 million of revenue bonds until a lawsuit challenging the legality of the appropriation-backed issue is resolved.

The lawsuit was initially filed June 14 in the state Supreme Court by two taxpayers, William S.E. Winkler and Diane Hickle. The charging that because the authority backs its debt with appropriations from the state Legislature. the bonds are general obligation debt and require voter approval.

After the West Virginia high court ruled that it lacked original jurisdiction in the case, the plaintiffs refiled in the Kanawha County Circuit Court, where Judge Paul Zakaib approved the injunction request Friday. Zakaib issued a written order on the injunction yesterday, and set a July 2 hearing date on the case.

The school building authority had planned to sell the bonds last week through an underwriting syndicate led by Donaldson, Lufkin & Jenrette Securities Corp., but decided the day after the lawsuit was first filed to hold off.

The authority also decided to delay issuance because of legal objections to the sale raised by West Virginia attorney general Darrell V. McGraw Jr. in addition to questions of state constitutional law similar to those raised by the Winkler suit, the attorney general said he is troubled by the absence ot'contracts between the authority, its lead manager, bond counsel, and issuer's counsel.

Executive Director Clacy Williams said the authority would

strongly defend" its ability to sell bonds. "We intend to oppose the lawsuit all the way to the state Supreme Court if necessary," he said.

Williams said the authority is also seeking to resolve its differences with the attorney general.

In a statement released Friday, Gov. Gaston Capterton also spoke out against the lawsuit.

"We regret that these prolonged litigation delays jeopardize the jobs of thousands of construction workers making good prevailing wages," Caperton said. "We are intent on preserving West Virginia's financial integrity in the bond market. We will work with the court system and the Legislature to further this education program."

Williams said that the authority's right to sell appropriation-backed bonds without voter approval was settled in a 1984 state Supreme Court ruling, West Virginia Resource Recovery v. Gill.

In the Gill case, the court rejected charges that a bond sale planned by the West Virginia Resource Recovery-solid Waste Disposal Authority would violate the state constitution. The court held that the waste authority did not need to seek voter approval for the issue because it only relied on money actually approved by the Legislature to back debt service, and had not pledged appropriations expected from future legislative sessions.

James Lee, the Charleston, W.Va., attorney who represents Winkler and Hickle, said that Recovery. Gill does not apply because Article 12 of West Virginia's constitution requires the Legislature to make future appropriations to fund capital improvements for schools.

"In our view, the Legislature has no choice but to cover the debt until it is paid off," Lee said.

As planned last week, the borrowing had been sized at $338.1 million, comprising about $190 million of new-money bonds and about $150 million of refunding debt, according to Vincent Collins, a partner at Steptoe & Johnson, bond counsel to the authority.

The refunding portion had been expected to generate between $5 million and $8 million in present value savings, Collins said.

But much of this savings could be lost, he said, if the deal is delayed beyond Aug. 15 and the school building authority is unable to take advantage of expiring U.S. Treasury Department regulations.

These regulations allow issuers to offset the negative arbitrage on a restricted investment fund, such as an escrow on refunded bonds, with positive arbitrage on unrestricted funds, such as a debt service serve.

Richard Whitney, a senior vice president of public finance at Donaldson Lufkin, said that his firm "is on the sidelines, waiting for this issue to be resolved. "

The building authority had planned to insure a portion of the issue through the Municipal Bond Investors Assurance Corp. and AMBAC Indemnity Corp.

Since the school authority was created in 1989, it has sold $305.2 million of bonds in four issues, with Donaldson Lufkin serving as lead manager on all of them. Proceeds have helped build 26 schools and renovate 470 others.

Williams said that delay of the bond issue would not halt any ongoing building projects.

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