Troy, N.Y., will select underwriters and issue deficit bonds as part of a financial bailout plan designed to eliminate the city's structural deficit.

The deficit securities, comprising bonds and bond anticipation notes, will help wipe out deficits accumulated in fiscal 1993 and 1994 totaling $14 million.

With a below investment-grade rating of Ban from Moody's Investors Service, Troy is now seeking an underwriter to sell two deficit issues totaling $18.6 million.

Wall Street sources say the city is considering Fleet Securities Inc. and First Albany Corp. to underwrite the transactions. City officials did not return telephone calls.

John O'Brien, president of Fleet Securities Inc., confirmed that the firm had responded to a request for proposal from Troy but that it has received "no official word" on the city's plans. Calls to First Albany were not returned.

Troy's fiscal problems began in 1990. Facing continued deterioration in Troy's finances, the state legislature in June established a fiscal oversight board for the city.

The legislative act creating the board authorizes Troy to issue $14.37 million of serial bonds to liquidate a projected fiscal 1994 deficit, and $4.25 'million of serial bonds to liquidate the fiscal 1993 deficit.

Further, the state comptroller must determine the amount of the cumulative deficit before bonds or bond anticipation notes can be issued. The act creates a debt service fund and requires that the city earmark revenues to pay off the bonds on a quarterly basis.

City manager David M. Grandeau did not return phone calls to comment on the city's finances. According to published reports, Grandeau said the city will enact a balanced budget for fiscal 1995, which begins Jan. 1.

Nonetheless, Wall Street sources familiar with the city's credit say Troy's problems are far from over and that the city could face a $5 million budget gap in fiscal 1995. Sources say the city has no firm plans to deal with the fiscal 1995 problems, but may plug the gap by increasing property taxes or cutting back on city services.

"Nothing Troy does is going to be routine until the city gets a credit rating upgrade," said Kenneth Bond, Troy's bond counsel.

Bond, a partner at Sullivan, Donovan, Bond & Bonner in New York City, said the city has been borrowing short-term debt to cover its current budget gaps as it works on a long-term solution.

"The city can issue debt that would wipe out the 1993 and 1994 deficits," Bond said. "But the city also has to balance its 1995 budget, which is going to be very hard without raising revenues or cutting back expenses."

Fiscal 1994 would mark the fourth straight year that Troy, a fading industrial city of about 54,000 residents located in upstate New York, has produced a budget deficit. The city has a history of selling unrated lease revenue bonds and relying on one-shot revenue raisers to make ends meet.

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