SAN FRANCISCO - A California state appeals court has upheld a lower court decision supporting the state's ability to issue lease-revenue bonds.

The issue in question revolves around 2007 legislation authorizing more than $7 billion of lease-revenue bonds to add thousands of beds to the state's crowded prison system.

A pro-prisoner activist group, Taxpayers for Improving Public Safety, or TiPS, filed suit in response, seeking an injunction to bar the sale of the lease-revenue bonds.

The group argued that the lease-revenue bonds would violate the state constitution's debt limit, because they are not voter-approved.

State officials argued that such lease-based financings are well grounded in legal precedents that go back as far as 1942.

The trial court denied TiPS' request for a preliminary injunction and dismissed the case.

Last week, the Third District Court of Appeal upheld the lower court's decision.

But the case isn't over, according to Matt Gray, TiPS founder and lobbyist. The next step is to seek a California Supreme Court hearing. "We're appealing it all the way as far as we can," he said.

TiPS' legal arguments echoed those made by conservative groups that successfully challenged the state government's efforts earlier this decade to issue pension obligation bonds.

State legislation authorizing up to $960 million of POBs was struck down by trial court and appeals court judges who determined that the bonds violated the state constitutional requirement that voters approve debt greater than $300,000. The state walked away from the case rather than appeal to the California high court.

In its suit, TiPS made many of the same arguments, saying the lease-revenue bonds - in which a facility lease is structured to match debt service schedules for tax-exempt bonds issued to build the facility - violate the debt limit.

The appeals court disagreed, in a 3-to-0 decision authored by Justice Harry Hull, who also authored the 2007 ruling rejecting the pension bond plan.

"The act provides for the construction of prison facilities financed by bonds to be repaid from the state's general fund," Hull wrote. "Those bonds may be structured in such a way that future periodic payments are contingent on future use or availability of the facilities. Hence, the state has not undertaken an obligation that offends the pay-as-you-go principle underlying the state debt limit."

Unlike pension obligation bonds, California state agencies have a long history of issuing lease-revenue bonds, and of legal precedent supporting them.

The Offner-Dean precedents, named after 1942 and 1950 cases addressing the subject, authorized long-term lease financings, as long as annual payments are contingent on the government being able to occupy the leased property.

"This contingency exception has been applied to uphold multiyear contracts, such as leases, where the governmental entity agrees to pay sums in succeeding periods in exchange for property, goods, or services to be provided during those periods," Hull wrote in last week's ruling.

The state Supreme Court is not obligated to grant a petition for review.

Gray said he believes TiPS should prevail on the debt limit argument, saying, "The California state constitution is so clear only an attorney could misunderstand it."

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