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California Debt Delayed One Day

ALAMEDA, Calif. — A lawsuit filed Tuesday by opponents of California’s plans to sell 11 state office buildings for one-time revenue resulted in a one-day delay to the state’s plans to sell $12 billion of notes and bonds this week.

California had planned institutional pricing Wednesday for $10 billion of revenue anticipation notes, but delayed the pricing by one day in order to incorporate disclosure of the lawsuit into offering documents.

The Ran pricing delay had a domino effect on plans to price $2 billion of taxable general obligation bonds Thursday. That deal, primarily Build America Bonds, now will price Friday.

The Tuesday pricing date for $1.75 billion of tax-exempt GO bonds remains unchanged, said Tom Dresslar, spokesman for state Treasurer Bill Lockyer.

The one-day delay in selling notes is driven strictly by legal disclosure requirements, according to Dresslar. Preliminary pricing guidelines remain 1.25% for notes maturing in May 2011, and 1.5% for notes maturing in June, he said.

Short-term debt has not taken the beating long-term tax-exempts have endured recently. The triple-A one-year scale climbed just seven basis points since Nov. 1, according to Municipal Market Data, as the triple-A yield curve increased 76 basis points, while 20-year yields rose 67 basis points and the 10-year scale increased 50 basis points.

Dresslar said the lawsuit, even if successful, has no impact on the state’s ability to repay the Rans next May and June when they mature.

Standard & Poor’s agreed with that assessment Wednesday, issuing a bulletin saying that the lawsuit’s potential $1.2 billion budget impact has no affect on its SP-1 rating of the notes, which also carry ratings of MIG-1 from Moody’s Investors Service and F2 from Fitch Ratings.

The lawsuit itself challenges a deal California announced in October to sell 11 state office buildings to a private firm, while entering into long-term leases to occupy the buildings.

The state announced the $2.3 billion transaction with an investor group called California First, LLC, concluding a proposal process launched in 2009, when Gov. Arnold Schwarzenegger first suggested the sale-leaseback to help balance the state budget.

After redeeming or defeasing a variety of lease-revenue bonds backed by the real estate, the deal will put $1.2 billion of cash into the state’s general fund.

Critics call the deal shortsighted. The Legislative Analyst’s Office estimated this month that, over the next 20 years, it will end up costing California $646 billion more than the status quo in ­present-value terms.

Lockyer this week directed his representative on the State Public Works Board to vote no Monday when the board voted to accept the early retirement of the outstanding lease-revenue debt in connection with the deal. Controller John Chiang’s representative also voted “no,” but those votes served primarily as statements of philosophy, since Schwarzenegger appointees have a majority on the public works board.

The lawsuit, filed Tuesday in Superior Court in San Francisco, named Jerry Epstein and Redmond Doms as plaintiffs. Their lawyer is Joseph Cotchett, a well-known class-action attorney. Epstein and Doms both served on the board of the Los Angeles State Building Authority, which oversees two of the state-owned buildings to be sold. The Schwarzenegger administration removed them from their positions this year after they questioned the deal.

Their lawsuit argues that the sale process illegally bypassed the Judicial Council of California, which has, according to the suit, statutory authority over appellate court facilities such as those housed in two of the buildings to be sold. It asks for an injunction to block the sale, which is expected to close in December.

The lawsuit disclosures were added to the official statement, which states that the Schwarzenegger administration “strongly believes that the legislation authorizing the sale and lease back of the 11 state properties is legal and that the proper procedures were followed.”

California had taken $5.89 billion in retail orders for the tax-exempt Rans Monday and Tuesday. Those investors were given the opportunity to ­withdraw their orders, but the state also extended the retail order period through ­Wednesday.

The state sells Rans during most years to manage its cash flow, but this year it is selling more than it ever has, and selling them later than usual because of the 100-day delay in adopting a budget, which was not approved until October.

Michael Scarchilli contributed to this story.

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