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Inquiries Could Raise Cost of Belmont Debt

Schools: District attorney, IRS probes have soured investors. L.A. Unified could wind up paying millions more on borrowed money each year.

July 14, 2001|MARTHA GROVES | TIMES EDUCATION WRITER

The Los Angeles Unified School District could end up paying millions of additional dollars in interest payments on Belmont Learning Complex debt because dual inquiries into the school's funding have given investors cold feet.

The Los Angeles County district attorney's office is investigating whether environmental laws were broken by school district officials in constructing the $175-million school, which sits uncompleted and abandoned near downtown.

Separately, the Internal Revenue Service is looking into whether the Belmont debt meets the legal requirements to be tax-exempt, as the school district has claimed.

About a week ago, Charles Schwab Investment Management, an arm of the San Francisco brokerage firm, sold back $45 million of the $81 million in remaining Belmont loans to Merrill Lynch, the marketing agent for the debt.

The Schwab unit did so after its officials were questioned by the district attorney's Belmont task force.

"It appears that the interrogation is the reason that Charles Schwab has tendered the securities," said Joseph P. Zeronian, the school district's chief financial officer. "We don't understand why investors would be asked questions on this."

Joseph Scott, a spokesman for the district attorney's office, said only that "Charles Schwab is not a target [of the investigation]."

As marketing agent for the debt, Merrill Lynch has temporarily agreed to hold it while trying to find new buyers. On Tuesday, the firm plans to raise the debt's interest rate to 3.8%, 1.3 percentage points above what the school district has been paying.

At that higher rate, the district would pay an additional $1 million or so in interest annually. It is now paying $2.025 million a year.

If no other investors come forward and Merrill Lynch no longer wishes to carry the debt, Commerzbank would assume the debt. The interest rate would then increase to about 4.5% for 90 days and then to 9%. In that event, the difference from what the district has been paying would amount to "several million dollars" annually, Zeronian said.

The school district sought $91.4 million in financing in December 1997 to cover a portion of the Belmont project. It has since paid off about $10 million.

Zeronian said Merrill Lynch has already found a buyer for about $10 million of the debt.

"The irony to me is that the district has an AA or AA- credit rating from the major rating firms," Zeronian said. "That paper is secured not by Belmont but by several other schools we've used as collateral. It's a very secure piece of paper."

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