ATLANTA -- A West Virginia circuit court judge last Friday ruled in favor of a lawsuit that challenged the state School Building Authority's issuance of bonds without voter approval.
Unless overturned by a higher court, the ruling will prevent the authority from moving forward with a planned sale of $338 million in new-money and refunding debt on hold since mid-June.
Authority director Clacy Williams said yesterday that the authority had filed an appeal of the ruling to the state's Supreme Court. The authority expects a response to the request today.
"It's our feeling that the legal groundwork for our bonds is well established and that a review of that groundwork will lead the Supreme Court to overturn the decision reached Friday," Williams said.
In his 12-page ruling, Kanawha Circuit Judge Paul Zakaib found that the state Legislature "devised a financing scheme that circumvented the provisions of the West Virginia Constitution and imposed upon the citizens of West Virginia, without voter approval, a debt, the payment of which will carry over well into the 21st century."
The lawsuit was initially filed June 14 in the state Supreme 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 state 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 Zakaib approved the injunction request.
In opposing the lawsuit, the school authority's lawyers have argued that its right to sell appropriation-backed bonds without voter approval was settled in a 1984 state Supreme Court ruling. In that decision, the court rejected charges that a bond sale planned by the state's solid waste authority would violate the state constitution.
In the 1984 case. West Virginia Resource Recovery v. Gill, the state high court held that the waste authority need not seek voter approval for a bond issue because it relied only on money actually approved by the Legislature to back debt service, and had not pledged appropriations expected from future legislative sessions.
Zakaib rebutted this claim, writing: "their reliance on the Gill case-...does not take into consideration that in the Gill case, unlike the [current] case, there was a long-term contract for the purchase of services such as electricity over a period of years which does not violate the constitutional and statutory provisions prohibiting the incurrence of indebtedness when the agreements specify that period installments will be made as the service is furnished."
The judge also found that the Gill case was not applicable because the Waste Disposal Authority bond issue was a "self-liquidating" project, with debt service ultimately derived from revenue generated by the authority's sale of steam.
In the school authority case, "there are no revenues whatsoever from which to pay the bonds," Zakaib wrote.
The School Building Authority had planned to sell its bond issue through an underwriting syndicate led by Donaldson, Lufkin & Jenrette Securities Corp., but held off after the lawsuit was first filed.
The borrowing had been sized at $338.1 million -- about $190 million of new-money bonds and about $150 million of refunding debt. The refunding portion had been expected to generate between $5 million and $8 million in present value savings, according to Williams, the authority director.
But much of this savings could be lost, Williams said, if the deal is delayed beyond Aug. 15 and the authority is unable to take advantage of expiring U.S. Treasury Department arbitrage regulations.
For the deal to be sold using these regulations, the court would have to hand down a ruling favorable to the authority by about July 25, Williams said. If this does not happen, he said, the authority stands to forego about $4 million from the anticipated savings.
"At that point, we would be looking at a very different deal with a refunding portion in the $80 million to $90 million range, rather than the $150 million," he said.