New York State has won round one in its fight with a taxpayer activist over the legality of its borrowing practices.

State Supreme Court Judge Edward O. Spain yesterday dismissed a lawsuit filed by retired engineer Robert L. Schulz, challenging the constitutionality of New York's multibillion dollar transportation borrowing program.

The decision represents an important victory for the state, but Schulz said yesterday he will appeal the ruling to the state's appellate division.

"I haven't read the decision yet. Schulz, a Glens Falls, N.Y., resident, said in a telephone interview. "But [Wednesday] I will be appealing the case. "

Legal observers say the case, which will likely be heard eventually by the state's highest court, the Court of Appeals, will determine the legality of New York's reliance on so-called appropriated debt sold through the bonding authorities.

These securities, which are not approved through a voter referendum, represent the vast majority of the state's outstanding debt.

Spain yesterday agreed with the state's assessment that its use of appropriated debt is legal, and rejected Schulz's arguments that the bonding violates the state constitution's clause that requires voter approval for the sale of state debt.

The judge also in his decision lifted a temporary restraining order dated May 24 that prevented the state and its authorities from taking preliminary steps in preparation for upcoming bond sales.

In May, Schulz filed a lawsuit against the state. Gov. Mario M. Cuomo, state Comptroller H. Carl McCall, and various staff members and legislators challenging the constitutionality of about $6 billion in nonvoter-approved debt slated for sale during the next four years.

The bonds will be sold by the New York State Thruway Authority and the Metropolitan Transportation Authority to finance road, bridge. and mass transportation needs across the state.

The Thruway Authority plans to issue $4 billion in bonds in the fall, while the MTA has scheduled a $2 billion bond sale for after the new year.

Schulz, who is president of the All-County Taxpayers Association, said in his lawsuit that the financings would violate several sections of the state constitution, including the clause requiring voter approval for the sale of state debt.

Specifically, Schulz is challenging the constitutionality of Chapter 56 of the Laws of 1993, a bill that allows the state to dedicate a number of transportation taxes to pay debt service on bond sales to finance transportation projects in the state. The bonds will be sold without voter approval, and as a result, debt service will be paid through an annual appropriation by the state Legislature.

The state maintains that the bonding is legal, relying on a series of court decisions during the 1970s that it says provide the legal precedent to circumvent the constitution's voter approval clause.

The cases included a 1975 Court of Appeals decision, Wein v. the City of New York, which upheld the state's argument that bonds subject to legislative appropriation and sold by an authority are not debt of the state.

In his decision, Spain said the Wein case "is markedly similar to this case," and that "Chapter 56 was tailored carefully so as to adhere to the principles set forth in Wein."

Despite the victory, Cuomo said in a statement: "I'm glad we won, but this victory does not discredit everything this private citizen has tried to do. I agree with Mr. Schulz that we need to reduce backdoor borrowing. I plan to continue to press for changes to reform the way we issue debt. "

In March, the state passed the first part of a bill to create a new constitutional form of debt. With the new bonds, which will not need voter approval, the state says it will no longer issue appropriated debt. But Schulz has also criticized that proposal, which is supported by Cuomo and the state Legislature.

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