CHICAGO -- A proposed $740 million bond issue to help Northwest Airlines expand its operations in Minnesota is moving closer to reality, state officials said this week.

A final decision on whether to issue the bonds -- $350 million by the state, $390 million by the Metropolitan Airports Commission -- is expected in mid-October after state and airport commission researchers have determined whether Northwest is financially sound enough to make the lease payments that would back the bonds, officials said.

Up to $175 million would carry the state's general obligation pledge as additional security. Art Grisi, a senior vice president at Standard & Poor's Corp., said it would mark the first time a state had lent its GO pledge to enhance revenue bonds to fund capital constructions for a major airline.

Legislation approved just before the General Assembly adjourned in May directed the state Finance Commission to study the feasibility of issuing up to $350 million of bonds to fund construction of an airplane maintenance facility in Duluth and an engine repair facility in Hibbing.

It also directed the airport commission -- owner and operator of Minneapolis/St. Paul International Airport -- to consider issuing up to $390 million of bonds and lending the proceeds to Northwest.

Both Mr. Grisi of Standard & Poor's and Daniel Aschenbach, an assistant vice president at Moody's Investors Service, said the main question that needs to be answered is whether Northwest will be able to make long-term lease payments.

John Gunyou, state finance commissioner, said consultants hired both by the state and the airports commission are studying that question now, and results should be available early next month.

According to the legislation, issuance of the state bonds would require the approval of Gov. Carlson, after receiving a recommendation by the legislature's Fiscal Planning and Policy Commission. Issuance of the airports commission bonds would require the approval of the governor, the airports commission, and the legislature's fiscal commission.

House Minority Leader Terry Dempsey, an Independent-Republican from New Ulm, Minn., and a member of the fiscal commission, said he expected both deals to be approved.

"The potential for job growth and improving the business climate in a somewhat depressed area of the state is a major plus," he said.

Sen. Gene Merriam, a member of the Democratic-Farmer-Labor Party who serves on the fiscal commission, also said he expected the deals to be approved, but added that he is opposed to them.

"I don't think the benefits are commensurate with the risks," he said. "I think there's greater than a remote chance that Northwest will not be able to pay back those bonds. There's too much volatility in the airlines industry."

The package was part of a deal to keep Northwest from building the facilities out-of-state. Christy De-Joy, a spokeswoman for Northwest, said the airline considered offers from 40 other states before deciding on the Minnesota package.

Greg Frank, press secretary to Gov. Arne Carlson, said the governor was in favor of the new facilities because they would be a boon to the Northern Minnesota economy, creating up to 2,000 jobs paying more than $40,000 a year.

"It would have a great impact on the economy," he said. "It's a good deal for the state if the results of our research into Northwest's finances are favorable."

According to Mr. Gunyou, the financing structure of the bonds issued by the state would be:

* approximately $65 million of revenue bonds payable solely from Northwest lease payments on the Duluth maintenance facility. These bonds would have a first priority on the lease payments and a first mortgage on the maintenance facility.

* up to $125 million of bonds secured by a second martgage and subordinate pledge of the lease payments with a backup security of the state's GO pledge.

* $12.6 million of bonds secured by a third mortgage and subordinate pledge of the lease payments with the backup security of St. Louis County's GO pledge.

* $47.6 million of bonds issued in at least two series secured by the city of Duluth. For one series, debt service would be provided from a tax increment finance district Duluth would create at the site of the maintenance facility. The second series would be backed by utility taxes levied by Duluth. Lease payments from Northwest would not be used to pay the bonds.

* approximately $35 million of revenue bonds payable solely from Northwest lease payments on the engine repair facility in Hibbing. The bonds would have a first priority on the lease payments and a first mortgage payment interest in the engine repair facility.

* up to $50 million of bonds secured by subordinate lease payments on the facility with a backup security of the state's GO pledge.

* $15 million of bonds secured by the lease payments on the facility with a backup security on the facility County's GO pledge.

Mr. Gunyou said about $200 million of the bonds -- those backed by the state's and St. Louis County's GO pledges -- would be sold on a competitive basis.

He said the state tentatively selected earlier this week Merrill Lynch & Co. as the sole underwriter for the $65 million and $35 million issues backed soley by Northwest lease payments. The state also selected a local consortium, led by Piper, Jaffray & Hopwood Inc., to underwrite the $47.6 million of revenue bonds backed by the Duluth utility revenues and the TIF district.

The other members of the local consortium are : Dain Bosworth Inc.; Dougherty, Dawkins, Strand & Bigelow Inc.; FBS Investment Services Inc.; Miller & Schroeder Financial Inc.; and Norwest investment Services Inc.

The Metropolitan Airports Commission bond issues would be more straightforward. Of the $390 million of bonds, $270 million would be lease-revenue bonds with the added security of the commission's GO pledge. Northwest would deed to the commission a training facility it owns in the Twin Cities area and make lease payments on it to the commission. The commission has unlimited property taxing powers in the seven-county metropolitan region.

The remaining $120 million of bonds would be backed solely by lease payments from Northwest on the training facility, according to Kathleen Aho, senior vice president at Springsted Inc., the commission's financial adviser.

The $270 million of bonds with the Go pledge would be offered by a syndicate of six Minnesota firms, led by Dain Bosworth. The other firms are: Dougherty, Dawkins; FBS investment Services; Miller & Schroeder; Norwest; and Piper, Jaffray.

Morgan Stanley & Co. would be the lead manger on the $120 million of bonds backed solely be lease payments, Ms. Aho said.

The airports commission currently has $154 million of outstanding GO debt, rated triple-A by both Moody's Investors Service and Standard & Poor's Corp. The state's $1.6 billion of outstanding GO debt is rated Aa by Moody's, AA-plus by Standard & Poor's Corp., and AA-plus by Fitch Investors Service.

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