ATLANTA -- The West Virginia Supreme Court late Thursday ruled that the state's School Building Authority cannot issue annual appropriation-backed bonds without voter approval.
However, the ruling does not apply retroactively to the authority's $301 million of outstanding debt or to future refunding bonds, the court ruled. Although the decision squashes the authority's plans for sale this summer of $190 million in new-money debt, the action permits the issuer to move forward with a refunding issue of about $150 million on hold since mid-June.
The ruling also appears to leave open the possibility that the authority could sell new-money bonds secured by a dedicated revenue source.
With the court decision, Standard & Poor's Corp. on Friday lifted a CreditWatch with negative implications placed this month on the authority's outstanding A-minus rated bonds. The outlook is now positive, said Steve Nelli, a director in the lease group at Standard & Poor's.
"Our action reflects that fact that they can still refund and are not prohibited from paying off old issues," Nell said. "From that standpoint, the court decision shouldn't impact bondholder security on existing bonds."
The authority's executive director, Clacy Williams, said that his board will meet Friday to consider selling the refunding bond issue. He said that, as now envisioned, a $150 million deal could achieve present value savings of about $4 million.
"I can't say that the ruling was exactly a victory, but at least we know now that the bonds we have out there are safe and sound, and that it [the ruling] does not block a refunding," Williams said.
In a statement, Gov. Gaston Caperton said,"By leaving past school bonds intact, the court has affirmed the progress we have made in building and renovating schools for thousands of students in numerous West Virginia communities."
Caperton said that he will meet with the state's legislative leadership on Wednesday to discuss the future of the authority, indicating that a special legislative session on the matter is being considered. If such a session is held, state officials say, lawmakers might consider earmarking a dedicated revenue source, such as sales tax levies, to back future bond issues from the authority.
The high court ruling affirms a decision by the Kanawha Circuit Court on July 9, which found in favor of a lawsuit challenging the School Building Authority's issuance of bonds without voter approval.
The lawsuit was initially filed June 14 in the state high court by two taxpayers, William S.E. Winkler and Diane Hickle. The plaintiffs sought to block further bond sales by the authority, charging that because it backs its debt with appropriations from the West Virginia Legislature, its borrowings are general obligations of the state and, as such, 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 Circuit Judge Paul Zakaib approved the injunction request.
In opposing the lawsuit, the school authority's lawyers have argued that its right to sell, without voter approval, bonds backed by annual appropriations was settled in a 1984 state Supreme Court ruling. In that decision, the court rejected charges that a bond sale planned by West Virginia's solid waste authority would violate the state constitution.
In a 40-page opinion, written by Associate Justice Thomas Miller, the Supreme Court rejected the contention that the Legislature had the option of not continuing appropriations on School Building Authority debt.
"To accept the premise that the Legislature is not bound to fund the bonds and would allow a default, thereby impairing the credit rating of the state, assumes a naivete on our part that we simply do not possess," Miller wrote.
Richard Whitney, a senior vice president at Donaldson, Lufkin, Jenrette Securities Corp., said that if approved by the authority, a refunding deal could be sold within the next two weeks. Earlier this year, Donaldson Lufkin was named to lead an underwriting syndicate for the authority's next bond issue.
Timing is important, Whitney noted, because to achieve maximum savings the deal must be completed by Aug. 15., when some existing U.S. Treasury Department regulations expire.
These regulations have allowed 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 reserve.