Rensselaer County, N.Y., officials are still considering a sale and leaseback of a county-owned nursing home despite warnings from the state comptrollers office that the deal could violate state finance law, sources with knowledge of the proposed transaction say.

County officials have proposed a sale and leaseback of the Van Rensselaer Manor nursing home to help cover a projected $3 million deficit in its 1992 fiscal year and a possible accumulated 1993 deficit of $9 million.

The plan, however, runs counter to the interpretation of municipal finance law by officials in the municipal affairs division of the state comptroller's office. Officials there say the general municipal law does not give municipalities the authority to use installment purchase contracts, such as the lease and sale back of a county-owned building, to cover budget shortfalls.

A spokeswoman for the state comptroller's office said she has no knowledge of discussions between the municipal affairs division and the county.

On Friday, a Rensselaer official and a source close to the transaction confirmed that the comptroller's office had warned against the deal, but said it is still being considered. The deal could produce $8 million for the financially strapped county to help cover budget problems and make improvements to the nursing home, county officials said.

"We're still studying the matter," said Jack Madden, assistant to Rensselaer County Executive John L. Buono. "The attorneys are reviewing the regulations. "

Earlier this month the comptroller's office published a set of draft regulations specifying the use of certificates of participation, or securities that are issued to investors after the sale and leaseback transaction. These rules, however, did not give authority for the use of these securities to cover budget shortfalls.

In addition, the comptroller's office has sharply criticized officials of Troy, N.Y., who used the sale and leaseback of city-owned buildings to help address budget problems. The comptroller's office maintains that installment purchase transactions to address budget needs violate the state's general municipal law under Section 109-B.

This section, adopted by the state Legislature in 1991, gave municipalities the ability to finance capital improvement projects on a lease purchase basis.

Despite objections, some bond market attorneys say the Troy deal and the proposed Rensselaer transaction are legal. For example, in Troy, the city's industrial development authority issued lease revenue bonds, not COPS. As a result, Troy's bond counsel, Joel H. Moser, said the transaction does not violate 109-B, which he said deals with the issuance of COPS.

A source with knowledge of the Rensselaer transaction said that despite being warned by the comptroller's office on the use of COPS for budget needs, officials there will also structure a deal using lease revenue bonds.

The use of the sale and leaseback transaction is attractive because municipalities could circumvent state legislative approval, which is required for the issuance of general obligation deficit bonds. A source with knowledge of the Rensselaer transaction confirmed that the county does not want the public exposure that accompanies deficit bond sales.

However, the technique is also more costly, and the comptroller's office fears that scores of New York State municipalities facing tough economic times and tight budgets may use the sale and leaseback technique.

Michael L. Johnston, vice president of Mid-Atlantic ratings for Moody's Investors Service, said the legal interpretation of the comptroller's office concerning the use of installment purchase agreement would play a role in any action that Moody's may take against Rensselaer County or other municipalities that use this technique.

Moody's rates the county's GO debt A, while Standard & Poor's Corp. rates it A-plus.

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