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Calif. District Goes to Court After Bond Deal Goes Sour

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A California school district is headed to the state supreme court in hopes of escaping the fallout from a six-year-old bond deal that went awry.

The 10,000-student Temecula Valley Unified district has petitioned the high court to overturn a lower court's ruling that denied repayment of more than $20 million to investors in bonds issued by the district.

The district invested the money in Executive Life Insurance Company and is now trapped in the swirl resulting from the state's takeover of that company in 1991. Executive Life's collapse was then considered the nation's largest insurance-company failure.

While neither school money nor school operations are at risk, those who bought the bonds will lose their investment unless the state supreme court agrees with the district's appeal. Most of the investors were mutual funds operated by large financial-service companies.

Taxing Cows, Not People

Temecula Valley's troubles date from a 1989 special bond issued under a California law that allows school districts and other localities to create "tax districts" within their borders that include only unoccupied land.

Lawmakers gave schools the power to create such unusual configurations as a way raise school-construction money without securing the two-thirds approval of voters required by a traditional bond issue, said John Mockler, a partner in Strategic Education Services, a California education-consulting and lobbying firm.

With no voters on the land, there is only the need to win approval of the landowner, he explained. "People can vote, but cows can't."

The landowners often are developers, and usually welcome such plans because the bond issue will pay for needed infrastructure.

The special districts are often called Mello-Roos districts after the law's sponsors, State Sens. Henry Mello and Mike Roos.

Under Temecula Valley's arrangement with the developer in its Mello-Roos district, the schools issued a $27.5 million bond to pay for roads, sewers, and other improvements on the undeveloped property, said Jeffrey Daar, the district's lawyer in the appeal.

In exchange, the district reportedly received about $1.1 million to help pay for school construction.

The deal soured only after the district invested most of the bond proceeds--about $24 million--with Executive Life.

Mr. Daar declined to comment on that decision, saying he is only handling the district's appeal. Other district officials could not be reached for comment last week.

Local newspapers have reported that financial experts hired by Temecula Valley recommended Executive Life's municipal "guaranteed investment contracts" as a safe investment.

The promise of security disintegrated, however, when the state took the company over in 1991, claiming it was on the brink of insolvency.

A settlement in Executive Life's collapse negotiated by all of its creditors would have paid Temecula Valley bond investors back much of their money

But the state court of appeals overturned the portion of the settlement that involved repayment to the four municipalities--Temecula Valley, two other California communities, and St. Paul, Minn. The court ruled that changes in state law made in 1989 invalidated the company's obligations to repay those who invested in the municipalities' bonds, Mr. Daar said.

Temecula Valley's appeal has the backing of Chuck Quackenbush, the state's insurance commissioner, but the court has not yet decided whether it will hear the case.

Temecula's troubles have reminded some observers in California of the bankruptcy of Orange County, where the failure of the county's investment fund has threatened $1 billion of school-district money. (See Education Week, 12/14/94.)

Legislation is pending in the California Senate that would give public-agency investments protection in a corporate or municipal bankruptcy, an aide to Mr. Mello said.

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