SAN FRANCISCO — The California State Public Works Board abruptly removed more than half a billion dollars from last week’s lease-revenue bond sale after two state lawmakers issued a last-minute letter warning of legal challenges to a project that was slated to receive bond funding.

The project — a brand new death row complex at the San Quentin prison in Marin County — is entangled in litigation over the governor’s line-item veto powers, Assemblyman Jared Huffman, D-San Rafael, and Sen. Mark Leno, D-San Francisco, warned in their letter to the state’s Pooled Money Investment Board, chaired by Treasurer Bill Lockyer.

“The state decided not to finance construction of the new condemned inmate complex at San Quentin with proceeds from the sale,” Lockyer spokesman Tom Dresslar wrote Thursday in an e-mail. “Legal questions arose Wednesday about whether the San Quentin facility could be funded with the bonds. The state did not have enough time to address those issues, and decided to drop the project from sale.”

The action reduced the total size of the lease-revenue bond sale by $596.7 million, to $743.3 million, Dresslar said. As a related consequence, the treasurer’s office chose not to sell $250 million in taxable Build America Bonds as part of the deal.

The San Quentin prison is in both Huffman’s and Leno’s districts.

Both have sought to derail plans to build what they call a “Cadillac Death Row” at the 157-year old prison complex.

But their legal argument stems from a state constitutional dispute over the governor’s line-item veto power. Senate President pro tempore Darrell Steinberg, D-Sacramento, filed suit to challenge Republican Gov. Arnold Schwarzenegger’s July line-item vetoes, arguing that he had no right to issue them because what was presented to him were not “appropriations,” but rather revised reductions in previously enacted appropriations.

San Quentin factors into that because Schwarzenegger used a line-item veto to cut out legislative language attaching strings to the funding of the new death row complex, Leno and Huffman said.

“The bonds cannot be lawfully issued until the litigation contesting the governor’s constitutional authority over vetoed budget language governing the CIC (condemned inmate complex) is resolved,” their letter said.

“We are extremely confident the court will uphold, as they have in previous cases, the line-item veto authority and then the project will go forward,” said H.D. Palmer, spokesman for Schwarzenegger’s Finance Department. “This should not be interpreted as a case of not ever but simply be interpreted as a case of not right now.”

Wells Fargo Securities ran the books on the deal. Jefferies & Co. and Wells Fargo had been slated to co-manage the taxable BABs, according to the preliminary official statement.

The bonds are rated BBB-minus by Fitch Ratings and A-minus by Standard & Poor’s. Moody’s Investors Service rates the Series 2009I Baa2 and Series 2009J, for a California State University project, A1. The deal received $447.2 million in retail orders, and priced to yield between 2.65% and 6.625%.

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