The Appellate Division of the New York State Supreme Court announced Friday that it will expedite the appeals of two cases that challenge the constitutionality of the state's latest deficit note issue and the sale of debt by the Local Government Assistance Corp.

The appeals stem from lawsuits filed by taxpayer activist Robert L. Schulz, who has sued the state over many of its revenue-raising tactics. On Friday, the court heard oral arguments from Mr. Schulz, who is appealing a state Supreme Court ruling that the corporation, which was established to limit the state's spring borrowing and speed up aid to localities, does not violate the constitution.

The state is also appealing a Supreme Court decision that its latest sale of deficit notes is unconstitutional because the securities were sold before the passage of the state budget.

On Friday, the five-judge appellate panel heard the state's defense of the assistance corporation and the issuance of deficit notes. The state relied on the legal precedent established through the Wein cases of the 1970s. These court decisions essentially provided the state with the authority to appropriate debt and bypass voter approval. Mr. Schulz has argued that this practice shows an obvious disregard for the New York Constitution, which stipulates that voters must approve the sale of debt by the state.

With an expedited appeal, the panel will rule on the cases in the next week to 10 days. Both New York, which is represented by its attorney general's office, and Mr. Schulz vow to take the cases to the state's highest court, the Court of Appeals, if necessary, Mr. Schulz said that if he cannot win in New York courts, he will attempt to bring the case before the U.S. Supreme Court.

The cases brought a strong response from New York Comptroller Edward V. Regan, who agrees with Mr. Schulz in principle, a spokesman said. However, Mr. Regan does not dispute the legality of either the deficit note issuance or the corporation, the official said.

The spokesman also said Mr. Regan supports the use of the corporation to supplant its annual spring borrowing.

"LGAC will allow us to eliminate the state's spring borrowing in 1994," said the spokesman. "If we had our druthers, we would rather the state cut its budget than issue the notes. But as far as we are concerned, the deficit notes are legal."

Ironically, Mr. Schulz has named Mr. Regan as a defendant in his lawsuits because the comptroller serves on the board of directors of the Local Government Assistance Corp., and his office operates as the issuing agent when the state sells debt.

In a statement released on Friday, Mr. Regan said he expected the state to eventually win a "Pyrrhic victory" in the deficit note case as well as in the suits against the corporation. He said the victory will allow the state to continue "on their present reckless fiscal course."

He also said that the notes are "illiquid" in secondary market trading and that the securities are "temporarily worthless."

Traders specializing in short-term securities yesterday said that Mr. Regan's description of the deficit notes as "temporarily worthless" was an overstatement.

"That is a totally incorrect assessment," one trader said. "The notes have a bid and an offered side, although for the most part there are very few, if any, of the bonds moving around the market."

Traders, however, said Mr. Regan is on target when he describes market trading of the notes as illiquid.

One trader, who asked not to be named, said bids for the securities "are all over the place," ranging from 3.85% to 5.50% in yield. "The notes are not really trading because people are waiting for the courts to rule," said the trader, who added that in a normal market, these one-year securities should trade at 2.80% to 2.85%. Participants said they expect that once the case is resolved, the notes will trade as normal.

"The worst-case scenario for the notes would be that they would trade like a zero coupon bond and pay principal only at maturity," said a trading desk manager.

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