CHIGAGO -- An Ohio pension fund board set a discount rate yesterday on the amount of accrued liability that municipalities in the state owe the fund.

The long-awaited action by the Ohio Police and Fireman's Disability and Pension Fund gives the green light to Columbus and other cities to issue general obligation bonds to pay off their liabilities to the fund.

At its meeting yesterday, the pension board unanimously adopted a discount rate of 65 cents on each dollar that is owed to the fund, according to Ted Hall, the fund's assistant director of investments. Hall said the board also set Oct. 1, 1994 to reevaluate the discount rate.

Hall said the board authorized Henry Helling 3d, the fund's executive director, to enter into agreements allowing municipalities to make lump sum payments of their liability to the fund on a discounted basis.

Ohio municipalities owe about $400 million in principal to the fund, which the state established in 1966 for all local fire and police personnel. In 1967, the fund assigned an amount of liability to each municipality, and gave them until 2035 to pay off the loans.

Columbus has been asking the fund's board for a discount rates since a law that permits cities to issue GO debt to pay off their liability to the fund took effect in June. The law also allowed for an agreement between cities and the fund on discounting the amount of money owed by the cities. The law was intended to allow cities to save money on what the owe the fund, while allowing the fund to invest the money it is owed years before final payments are due.

Joe Houston, Columbus' deputy auditor, said yesterday the city is ready to move on issuing bonds to pay off its $41 million fund liability. In May, the Columbus City Council authorized the issuance of up to $26 million of GO bonds to make the lump sum payment to the pension fund.

Now that the city knows the discount rate, the council needs to authorize a higher level of bond issuance to accommodate the $26.9 million to $27.1 million, plus issuance costs, that Columbus needs to complete the deal, said Michelle Kelly-Underwood, executive assistant to the city's auditor. In addition to city council approval, Kelly-Underwood said that the city and the pension fund need to reach a final agreement on the discount rate.

Columbus hopes to issue the tax-exempt bonds by the end of the year, Kelly-Underwood said.

While Columbus will be the first Ohio city to issue bonds under the state law, tax law concerns over the bond issue have been raised by federal regulatory officials and bond lawyers familiar with the transaction.

The city plans to issue tax-exempt refunding bonds to refinance the loan from the state and pay off the pension liability. Once the city's loan is paid, bond proceeds would be treated as spent and invested by the fund on an unrestricted basis. The interest rate at which the money would be invested would have to be high enough to allow the fund to recoup the amount by which the state loan was reduced in return for upfront payments.

But federal officials have said this type of transaction could run afoul of tax law provisions that were adopted by Congress in 1986 to ensure that tax-exempt bond proceeds would not be directly or indirectly put into pension funds and invested on an unrestricted basis to earn huge profits.

Kelly-Underwood said Columbus is "comfortable" with the tax opinion rendered by attorneys working on the deal.

David Rogers, a partner at Arter & Hadden, the special tax counsel and underwriters' counsel on the deal, said yesterday that the transaction would not violate any tax laws.

"We believe that we are breaking no new ground, but applying the law to a unique set of facts," Rogers said.

The law firm is preparing a legal memorandum discussing the tax law issues in the deal, according to Dean Conley, a vice president at Banc One Capital Corp., the senior manager on the Columbus bond issue.

"We remain very comfortable with the legal analysis by Arter & Hadden, and the legal memo should assist us in moving forward with the deal," Conley said.

He said that with the discount rate in hand, Banc One will begin to devise a strategy for pricing the bonds and dealing with the rating agencies. Columbus GO bonds are rated AA-plus by Standard & Poor's Corp. and Aa1 by Moody's Investors Service.

Conley said other Ohio cities have expressed interest in following Columbus' lead in issuing bonds.

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