MONTGOMERY, Ala. (AP) - State officials decided Wednesday to ask a federal judge to determine if Alabama is required to refinance $300 million in bonds approved in 1998 for school construction.
State officials said refinancing the bonds during the current financial crisis would be difficult, and it would violate a state law that prohibits refinancing bond issues unless the transaction saves the state 3 percent off the cost of repaying the debt.
The Alabama Public School and College Authority voted Wednesday to ask a federal judge to give the state guidance on how to deal with a requirement in a contract with JPMorgan Chase Bank to refinance $300 million in bonds. The authority consists of Gov. Bob Riley, state Finance Director Jim Main and state schools Superintendent Joe Morgan.
The bonds were part of a $550 million bond issue approved by the Legislature in 1998 during the administration of former Gov. Fob James. The money was later used by former Gov. Don Siegelman to fund school construction projects and eliminate the need for portable classrooms.
The contract, called a "swaption" with J.P. Morgan Chase Bank, was entered with the Siegelman administration in 2002 and amended in January 2003, shortly before Siegelman left office. The contract called for the bonds to initially be financed at a fixed rate. But Main said that the contract calls for them to be refinanced at a variable rate, and that doing so won't save the state 3 percent.
The state initially received a cash payment of more than $2.2 million for entering into the contract.
Main said Wednesday he and other state officials have "exhausted all possibilities" in trying to find a way to get around the requirement to refinance the bonds.
"People are very skittish about buying bonds right now," Main said of the current financial crisis.
Main said the state is not having any problem paying for the bond issue, just with the question of refinancing.
University of Alabama financial management professor Robert Brooks said these types of contracts are generally not good deals for the state.
"It's very difficult to understand the rational reasons to do these types of transactions," said Brooks, who worked as a consultant to help state officials solve the problem.
"Transactions of this nature increase the risk to organizations like the state of Alabama."
Main said the Legislature passed a bill in 2001 that prohibits the state from refinancing bond issues unless the refinancing saves the state 3 percent. He said the purpose of that legislation was to prevent administrations from frivolously refinancing bond issues just to make money for attorneys and others involved in the process.
Riley said state officials have been working on the problem for months.
"We would like for the court to tell us what to do," Riley said.
The state could terminate the contract with JPMorgan Chase Bank and pay a penalty of $20 to $25 million, but the state can't afford that, Main said.
(Copyright 2008 by The Associated Press. All Rights Reserved.)
