OREANDA-NEWS. A recent ruling on lease-leaseback construction financings could slow construction procurement for some school district but will not have an impact on ratings for California schools, Fitch Ratings says.

The Fifth Appellate District's ruling on Davis v. Fresno Unified School District (Fresno USD) questions the use of the structure as a means of avoiding competitive bidding but continues to allow lease-leaseback arrangements for legitimate financing purposes. The ruling addresses a narrow category of school construction leases that are distinct from the lease revenue bonds and certificates of participation commonly utilized by California schools and other municipal borrowers.

Under leases addressed by the Fresno USD ruling, a school district leases land it owns to a construction firm at no cost, and the property is leased back to the district in return for ongoing payments that fund the cost of new construction. In the case of lease revenue bonds and certificates of participation, leases are typically executed between a municipality and a special purpose entity controlled by the municipality to provide a legal basis for the payment of debt service without voter approval. The California Supreme Court reviewed these latter local government lease financings in the landmark Rider v. City of San Diego case in 1998, confirming their validity for municipal borrowing. The appellate court's ruling does not address these traditional financings.

Davis v. Fresno USD will create a management challenge for districts that have entered into lease-leaseback contracts without a legitimate financing purpose, but most school districts will be unaffected, as will holders of any bonds sold to finance traditional long-term leasing activities. The appellate ruling will continue to permit California schools to engage in lease-leaseback financings for construction but emphasizes the requirement that it be in connection with a long-term financing.