BELMONT INTEREST TO COST LAUSD.

Byline: Beth Barrett Staff Writer

The IRS audit of the funding scheme for the Belmont Learning Center has led investors to dump the securities, squeezing Los Angeles Unified School District's tight budget as it faces paying $1.7 million or more a year in extra interest, officials said Monday.

Jittery investors have already returned $44.6 million of the $81 million in outstanding Belmont certificates of participation to the marketing agent, Merrill Lynch, and interest costs could go even higher if confidence further erodes.

LAUSD resorted to using COPs, which are paid out of the general fund budget for operations, because their efforts to pay for the nation's costliest high school with Proposition BB bond money was rejected by the citizens oversight committee.

Superintendent Roy Romer said the IRS owes the district a speedy resolution to questions about whether the tax-free COPs meet legal requirements to avoid further financial damage to the district's operating budget.

Romer repeated his assertions that there's nothing wrong with the securities, saying the inquiry amounts to a ``tempest in a teapot'' that's unfairly penalizing the district in the market.

``The IRS should close this up quickly,'' Romer said. ``It will cost us until it's closed up. There's no factual basis. It's hurting us and our ability to educate people.''

Romer said he has no intention of dipping into the general fund to retire the securities, or about $55 million beyond the $26 million that remains in the Belmont fund.

IRS spokeswoman Deborah Guajardo said she could not comment on the matter.

IRS memos obtained by the Daily News describe a broad range of documents requested for the examination.

The district was never supposed to be in this position, issuing the COPs as an ostensibly cheap way to finance Belmont when the bond issue failed to materialize, as it awaited never-forthcoming state funding.

The project was abandoned in scandal after LAUSD Inspector General Don Mullinax found a long series of possible law violations in building the school on a shallow oil field leaking potentially explosive and toxic gases. No barrier had been installed under the high school to protect classrooms and students from methane and hydrogen sulfide gases, although Romer is trying to revive the project if it can be made safe.

District Attorney Steve Cooley has opened an investigation into possible criminal violations.

The IRS audit has called into question the district's financing plan.

``Welcome to the legacy of Belmont,'' said board member Caprice Young.

Young, who heads the board's Business, Finance, Audit and Technology Committee, said buying down the principal might be the wisest, if a painful, course of action.

``It could mean some deeper cuts or retiming some investments,'' she said.

Romer said he doesn't want to touch the general fund, believing that once the tax audit is concluded, the securities will rebound on the market.

LAUSD Chief Financial Officer Joseph Zeronian also said dipping into the general fund would be a last recourse.

Zeronian said he would recommend that the district borrow funds to continue to cover the Belmont securities' debt payments instead - unless the interest rates stay unreasonably high over an extended period of time.

Still, the general fund will likely be tapped for about $32,000 more per week to pay for the interest on the securities than it was before the news of the audit broke. That's because Merrill Lynch is likely to market them today at near, or at, taxable securities rates in an effort to move them, he said.

``The kids always get it,'' Zeronian said of the estimated $1.7 million annual hit the general fund could take.

Merrill Lynch's legal counsel did not return phone calls Monday seeking comment.

Zeronian said the situation is frustrating because the IRS hasn't specifically accused the district of any wrongdoing, and that the district on its own has found no evidence of problems.

``We have a situation where we haven't been told what the problem is and yet we have a potential liability in the million of dollars,'' Zeronian said. ``There's a Constitution; you're supposed to confront your accuser. Here we don't know the problem, and it costs us a lot of money. That troubles me.''