CHICAGO -- The Chicago School Finance Authority gave preliminary approval yesterday for the competitive sale of up to $250 million of general obligation refunding bonds.

William McCarthy, a managing director at Merrill Lynch & Co., the authority's financial adviser, said the authority should garner a present value savings of more than 5%, or $40 million, over the life of the 18-year bonds by going to the market now. He added that the exact savings will not be known until bids are received.

Mr. McCarthy said market conditions are favorable for the authority to do a refunding now. The authority has done three previous refundings, the last being a $305 million issue in 1986.

The authority was created by the Illinois General Assembly in 1980 to provide financial assistance and oversight to the Chicago Board of Education, which in late 1979 was estimated to have an operating deficit of $460 million.

In 1980, the authority issued $573 million of GO bonds to pay off the deficit and provide working cash for the board, according to authority documents. In 1984, the authority issued another $114 million of bonds for school construction and renovation.

Wayne McCoy, a partner of Schiff Hardin & Waite, the authority's bond counsel, said no specific deadline for returning bids has been set yet, but it probably will be in late November or early December, with closing on the issue to take place in mid-December.

After analyzing the bids, Merrill Lynch will recommend an aunderwriting team for final approval by the authority before the bonds are issued, Mr. McCoy said.

Merrill Lynch will be precluded from bidding on the issue because it is the finance authority's financial adviser, Mr. McCoy explained. He added Dean Witter Reynolds Inc. also will not be able to bid on the issue because a member of the authority's board, Joyce Moran, is employed by the firm's parent company, Sears, Roebuck and Co.

Mr. McCarthy said it is possible the new issue could be insured, but no decision has been made on that yet.

The authority's $487.1 million of outstanding GO bonds are rated A by Moody's Investor's Service and AA by Standard & Poor's Corp. The bonds are backed by an unlimited property tax the authority can levy on Chicago property.

The two rating agencies differ on how the authority's creditworthiness is related to that of the Chicago Board of Education, a weaker credit with projected revenue shortfalls of as much as $640 million by 1994. The board's $75 million of outstanding GO debt is rated Baa by Moody's and BBB by Standard & Poor's Corp.

Todd Whitestone, a senior vice president at Standard & Poor's Corp., said the rating agency does not make any linkage between the two credits because the authority has its own unlimited property tax levy that is distinct and separate from the board's revenue sources.

Moody's, however, takes into consideration the status of the board when rating the authority, according to Paul Devine, a vice president and Great Lakes Region manager at the firm.

"The two are inextricably linked," Mr. Devine said. "The credit of the board of education is integral to the credit of the School Finance Authority."

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