JERSEY CITY, N.J. - The Jersey City city council Friday approved a plan to sell $45 million in delinquent tax liens to First Boston Corp.,, in exchange for about $25 million in cash and $20 million in the form of a subordinated note.

The council approved the measure by a 5-to-1 margin, marking the final step in a months-long process of securing approvals needed to get the unique financing off the ground.

First Boston will raise the cash payment by selling $32 million in taxable bonds, backed by the tax liens. A portion of the proceeds will be used to establish a debt service reserve fund and pay fees related to the sale. The bonds will be rated by Fitch Investors Service, according to officials involved in the transaction.

City council members and Mayor Bret Schundler predicted that the program for dealing with the city's huge pile of delinquent tax liens would set a precedent for other New Jersey municipalities facing the same problem.

Shundler said it is unlikely Jersey City would have collected anything close to the $50 million he said would probably be generated for the city by the $45 million in bonds and notes over the next six years. Typically, he said, municipalities have trouble winning even the face value of delinquent tax liens, let alone a significant rate of return.

In January, Jersey City named First Boston the underwriter for the bond issue, which will be sold through a special purpose corporation established for that purpose. Early this month, however, state and city officials required that the plan be put out for competitive bids. First Boston, which had already spent about six months structuring the transaction, was the only bidder, city officials said.

The subordinated note does not begin paying the city until the taxable bonds are paid off using collections on the tax liens, which is expected in about three to five years, city officials said.

Shundler said about $10 million of the up-front $25 million cash payment from First Boston will be used to balance the current fiscal 1993 budget, which ends June 30. The remaining $15 million will be used as a one-shot in next year's budget.

The mayor said the cash infusion and improved outlook on future tax collections generated by the process will make possible dramatic cuts in property taxes over the next several years. Also helping the effort is the fact the plan greatly reduces the $41 million reserve fund the city is required to maintain for uncollected taxes.

Shundler, who has made a pledge to forego one-third of his annual salary if he is unable to cut taxes at least 5% per year, said he hopes to cut taxes by one-third over his four-year term.

W.R. Lazard is acting as the city's financial adviser on the lien sale. Sullivan, Donovan, Bond & Bonner is the city's bond counsel.

Jersey City is rated Baa by Moody's Investors Service, and BBB by Standard & Poor's Corp.

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