SAN FRANCISCO - Another activist group has filed a lawsuit challenging legislation adopted last year to authorize $7.4 billion in lease-revenue bonds to finance prison construction in California.

On the surface, the suit filed this week by the group Californians United for a Responsible Budget is similar to one filed last year by Taxpayers for Improving Public Safety. Both lawsuits argue that the lease-revenue bond approvals violate the state constitution's prohibition against entering into long-term debt without voter approval.

Like TiPS, CURB is a liberal advocacy group that wants to substantially reduce the state's prison population. TiPS filed suit in August 2007, but the trial court dismissed its case and denied its request for a preliminary injunction barring the state from issuing the bonds. The plaintiffs have appealed, and that process is underway.

CURB's lead attorney, Thomas Nolan, said his group's lawsuit has important substantive differences from that filed by TiPS.

"This is a reverse validation action," he said, contrasting it to the other suit, which he described as a general taxpayer action.

Lease-revenue bonds link a property lease with the repayment schedule for tax-exempt bonds. Nolan says they clearly violate the state constitution's prohibition against incurring more than $300,000 in long-term debt without voter approval.

Nolan said the CURB suit also challenges the interim financing plan for the first $3.5 billion phase of the prison construction program, approved in March by the State Public Works Board.

Because, in Nolan's view, bonds are disguised as lease payments and therefore can't be issued until projects are complete and lease payments can be made, the interim financings stretch out beyond the one-year constitutional debt limit.

"We think those interim financing agreements are subject to voter approval requirements," he said.

Nolan said CURB's lawsuit, filed in Superior Court in Sacramento, also makes new arguments that the use of lease revenue bonds is an illegal waste of government resources compared to using voter-approved general obligation bonds, at a present value cost of $1.5 billion, according to an expert witness for CURB.

H.D. Palmer, spokesman for California Department of Finance, said both lawsuits will fail against legal precedents dating to 1942 that support lease-revenue bonds.

"There is more than a half a century of case law in the state going all the way up to the state Supreme Court that has affirmed the validity of lease-revenue bonds for projects like this," he said. "We fully expect we will prevail in this suit."

The CURB lawsuit has a potential impact beyond the bonds authorized in last year's legislation. Lawmakers this year are considering bills to authorize up to $12 billion in lease-revenue debt for prison hospitals and for courthouses.

And the state routinely uses lease-revenue bonds for many purposes. Its most recent lease-revenue bond issue, a $62 million deal in April, financed a crime evidence lab, a state office building renovation, a community college technology lab, and a building at a state-run school for deaf students.

"Our focus is on prison financings," Nolan said. "We think prisons are different from other areas where lease-revenue bonds are usually used."

It's possible to sublease an office building if the state doesn't need it, he said. "For prisons there's not really a ready market."


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