CHICAGO - An Ohio pension fund this week decided to develop a formula to determine how much it will discount cities' accrued liabilities to the fund, delaying a proposed bond deal by Columbus, Ohio.

Columbus officials are planning to issue up to $26 million of general obligation bonds to pay off the city's liability to the fund, and other cities across the state are considering bond issues for the same purpose.

But the Ohio Police and Firemen's Disability and Pension Fund Board agreed this week to establish a "discount rate" that cities can use to determine the extent to which their loan from the state fund would be discounted if they were to prepay it with bond proceeds.

Although Columbus's transaction is being temporarily delayed, it appears to be moving forward despite tax law concerns that have been raised by federal regulatory officials and bond lawyers familiar with the deal.

The pension fund board this week formed a three-member committee that is charged with meeting with Ohio Municipal League officials to come up with "a single discount rate that would apply to every city," according to Ted Hall, the fund's assistant director of investments.

Columbus officials said they have asked the board to discount the approximately $40 million the city owes the fund between now and 2035. In return for the discount, the City Council has authorized the issuance of up to $26 million of GO bonds to come up with a lump sum payment to the fund.

An Ohio law enacted this year allows Columbus and other municipalities in the state to issue GO debt to pay off their accrued liability to the fund. The municipalities owe a total of 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 established and assigned an amount of liability to each municipality, giving each until 2035 to pay off the loans.

Hall said the board is in favor of discounting the liability in order to collect the money the fund is owed in a lump-sum payment. He said that while the board has not received a specific proposal from Columbus, it decided to come up with a basic discount rate "that is beneficial to us and fair to the cities."

"We need to get a single rate instead of negotiating with each city," he said. "We'll get a single rate and make it available to all."

The board is "anxious" to come up with a rate, and the special committee may have a recommended rate by the board's next meeting in late August, Hall said.

Joe Houston, Columbus' deputy auditor, said yesterday that he hoped the board will make a decision soon.

"We'd like to get the money while [interest] rates are still good," he said.

The city has named Banc One Capital Corp. the lead underwriter for the bond issue.

Under the transaction proposed for Columbus, the city would issue tax-exempt refunding bonds to refinance the loan from the state and pay off the pension liabilities that had been fixed for personnel in the pension program as of 1967.

Once the city's loan is paid, the bond proceeds would be treated as spent and would be invested 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 of the state loan reduced in return for upfront payments.

But federal officials have said these transactions 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.

Congress amended the tax laws in the Tax Reform Act of 1986 to ensure that bonds would be taxable arbitrage bonds if their proceeds were used to acquire an annuity contract or other "investment-type property" that had a yield above the bond yield. The tax law changes were made, in part, to stop state and local issuers from using tax-exempt bonds to acquire annuity contracts or similar investments to fund pension liabilities.

The transaction proposed for Columbus could be viewed as a refunding of what is, in substance, an annuity contract, the federal officials said. The loan that the state made to the municipalities looks like an annuity contract, they said, because the state lent the municipalities a sum of money that, invested at a taxable rate over time, would yield enough money to pay off their pension liabilities.

The Columbus transaction also could be viewed as a financing of an unusual and nonroutine prepayment that would be considered "investment-type property" under arbitrage rules, the federal officials said.

Lawyers from Bricker & Eckler in Columbus had approached the IRS in 1990 for a ruling on the proposed transaction for Columbus. The IRS told them it could not consider the ruling request because the transaction was not permitted under state law at that time.

The state Legislature has since authorized the transaction, but the lawyers from Bricker & Eckler and from Arter & Hadden, the firm in Ohio that is serving as special tax counsel and underwriter's counsel in the Columbus deal, have decided they no longer need an IRS ruling. They contend the transaction would not violate any tax laws.

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