CHICAGO - The Ohio Legislature has sent Gov. George Voinovich a bill that would enable municipalities to issue bonds to pay off their $400 million of accrued liability to a state pension fund.

The Senate approved the bill earlier this month. The House passed it in March.

Proponents of the legislation expect the governor to sign it into law. In anticipation of that action, the Columbus City Council Monday night authorized the city to enter into an agreement with the Police and Firemen's Disability and Pension Fund to discount the city's approximately $40 million liability to the fund in exchange for a lumpsum payment.

Joe Houston, Columbus deputy auditor, said the council also authorized the issuance of up to $26 million of general obligation bonds to come up with a lump-sum payment to the fund. He said that while the pension board has to approve a discounted liability for the city based on the funds' actuarial assumptions, the final amount is expected to be under $26 million.

Columbus would probably be the first Ohio city to take advantage of the legislation, according to Dean Conley, a vice president at Bane One Capital Corp., which has been working with the city on the bond issue.

Columbus and other cities owe about $400 million in principal to the fund, which was established by the state in 1966 for all local fire and police personnel. In 1967, the fund assigned an amount of pension fund liability, covering retirement benefits for existing personnel, to each municipality, giving them until 2035 to pay it off.

The legislation would permit municipalities to issue GO bonds or special obligation bonds to pay off their liabilities to the fund, according to Richard Kane, a partner at Bricker & Eckler, Columbus' bond counsel.

In addition, the bill would allow municipalities and the pension board to work out an agreement that "may provide for a reduction in the amount of the accrued liability based on the value to the fund of receiving a single payment."

For municipalities, that means they would be able to negotiate a lump-sum payment with the pension board that is less than what they currently owe to the fund. In return, the pension fund would receive the negotiated payment years before the final payments to the fund are due and would be able to invest those funds.

Houston said Columbus' proposal for a lump-sum payment will be brought to the pension board at its meeting today.

"If the board approves it and the governor signs the bill, we're ready to go right to market." he said.

In March 1992, the pension board voted in favor of supporting the concepts contained in the legislation. Henry Helling 3d, the fund's executive director. did not return phone calls yesterday.

One hitch that has apparently disappeared is the need for an Internal Revenue Service ruling on whether the deal would be an arbitrage issue and therefore taxable. Kane has said that concern grew out of commentary in the Blue Book for the Tax Reform Act of 1986, which suggested that bonds issued to fund pension obligations would be considered arbitrage bonds and thus taxable.

In 1990, officials from Bricker & Eckler submitted to the IRS the idea of a bond issue to pay off the pension fund liability, but the submission was rejected for a ruling because no state law authorized the bond sale.

Kane said that with the aid of special tax counsel, the tax issue was reexamined and it was determined that an IRS letter ruling was no longer warranted.

David Rogers, a partner at Arter & Hadden, the underwriter's counsel and special tax counsel for the Columbus deal, said that a closer examination of the bond issue, as well as a clarification since 1990 of the refunding definition by the IRS, have led his firm to conclude the proposed bond issue by Columbus constitutes the refunding of a prior obligation.

Rogers said the IRS definition does not require the prior obligation to be a bond issue. but "general evidence of indebtedness" on the part of a government. As such, the Columbus bond issue can be sold on a tax-exempt basis without an IRS ruling, he said.

In addition, Rogers said that with the city's bonds fitting the definition of a current refunding, there is no longer a question of their being considered arbitrage bonds. He said the city would not use bond proceeds to purchase higher-yielding investments to pay off its obligation to the pension fund.

"We're prepared to give an opinion that these bonds are not arbitrage bonds and instead are a current refunding of an outstanding obligation that's been in existcnce for more than 20 years," Rogers said.

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