LOS ANGELES - Sonoma County, Calif., plans a $97.5 million pension obligation bond sale this week on a federally taxable basis amid signs that many other issuers are preparing similar deals.

Such financings -- which can help issuers extinguish their unfunded pension liability -- are getting a serious look because of a window of opportunity provided by low interest rates

Sonoma County hopes to save money by prepaying its pension obligation, on which it now pays an 8.25% assumed interest rate, and replacing it with bonds carrying a lower interest rate.

Arbitrage rules imposed by the federal Tax Reform Act of 1986 essentially prohibited such transactions on a tax-exempt basis, although a few issuers sold tax-exempt deals under transition rules. Los Angeles County, for example, sold almost $500 million of tax-exempt pension obligations seven years ago.

Since then, conventional wisdom has held that the financings make little sense without the benefit of tax-exempt interest rates.

But a powerful bond rally in recent months helped push some taxable rates close to what tax-exempts yielded a few years ago. That trend in turn piqued the interest of Donald Merz, the treasurer of Sonoma County.

"Off and on I've been thinking about [the concept]" ever since the Los Angeles County transaction, Merz said.

Sonoma County estimates that the pension obligation bond sale will save $20 million in retirement system payments without diminishing the retirement benefits provided to employees.

Initially the county expected to save about half that amount, but declining interest rates in recent months have pushed the anticipated overall rate on the taxable borrowing even lower, to roughly 6.75%, Merz said.

The Sonoma County transaction, scheduled for pricing Wednesday by Bank of America and co-senior manager CS First Boston, marks the first such federally taxable deal in California. Interest earnings are exempt from the state income tax.

Although other deals are expected in California, "Sonoma [County] is way ahead of everybody else timing-wise" in the state, said Richard Dixon of Idea Associates, the financial adviser on the deal. Dixon, the former chief administrative officer and tresurer of Los Angeles County, is discussing the approach with many other issuers.

But the concept also is gaining momentum elsewhere.

Two issuers in New York -- Nassau County and Suffolk County -- are scheduled to accept competitive bids today on taxable pension bonds. The deals feature bond insurance and are structured as general obligation bonds.

Columbus, Ohio, and other local entities in that state are considering using a new Ohio law that lets them issue GO debt to pay off their accrued liability to a state-run pension fund. Participants studying the deals believe they can structure them on a tax-exempt basis, but questions have been raised about whether the issues would rum afoul of federal tax law provisions.

Anthony J. Taddey, director of Bank of American's municipal securities group, said Sonoma County is contemplating "aggressive" bids from AMBAC Indemnity Corp. and Municipal Bond Investors Assurance Corp., but no decision had been made on bond insurance as of yesterday.

Participants in the Sonoma County transaction said the deal also is attracting good investor interest on a stand-alone basis, partly because of the nature of the security for the bonds.

Under the state's County Employees Retirement Law of 1937, Sonoma County's obligation with respect to the bonds is absolute, unconditional, and payable from any legally available funds.

The county last week also obtained a superior court validation ruling, which serves to ensure the legality of the transaction.

"The validation ruling affirms the county's position that the bonds have a first claim on all available funds of the county and are not subject to appropriation," Standard & Poor's Corp. said in a release.

Standard & Poor's rates the deal AA-minus, citing the direct-obligation nature of the bonds, a strong local economic base, good financial performance and planning, and a moderate debt burden.

Although some California counties are struggling, partly because of state aid cutbacks, Sonoma County's outlook is "stable" because of an expanding diversified economy and sound financial management, Standard & Poor's said.

Moody's Investors Service rates the pension bonds Al, reflecting "strong overall credit condition" of the county.

Principal employment sectors in Sonoma county -- the northernmost of the nine San Francisco Bay Area counties -- include agriculture, wine production, services, and retail. Unemployment in the county has historically been below state and national averages. The county's population numbers about 416,000.

Tentative maturities on the bonds call for serials ranging from 1994 to 2003, with a term bond due in 2013.

Taddey said the serials are drawing strong pre-sale retail interest. The term portion is drawing looks from "a very, very broad cross-section of institutions," Taddey said.

"This isn't that large of a deal," so underwriters expect to fine-tune the issue this afternoon to meet specific investor demand, Taddey said.

Merz said the county also is considering a swap -- on the shortest maturities out to about three years -- from a fixed to floating rate.

Bond analysts have noted that issuers could lose some of the savings from such transactions if the pension system's assumed interest rate is eventually lowered.

But, based on historical investment performance of the county's retirement system, Merz said officials were comfortable with the risk. He also expressed confidence that managers of the retirement system might generate returns on the invested bond proceeds that meet -- or even possibly exceed -- the current 8.25% assumed rate of return for the system

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