CHICAGO - The deferment of an Iowa Supreme Court decision on a lawsuit casts uncertainty over the December debt service payment on $40 million of bonds issued to finance construction of Prairie Meadows racetrack in Polk County, according to a Moody's Municipal Credit Report released yesterday.

The suit filed against Polk County claims that the lease purchase agreement between the county and the Racing Association of Central Iowa, which owns the racetrack, violates a state law. According to the suit, the law prohibits a government unit from pledging its taxing powers to pay debt service on revenue bonds issued to benefit a private entity .

Polk County officials say a decision from the high court, which had been expected last month, is now expected to be issued Oct. 21. In June 1991, Polk County District Court ruled against the lawsuit filed by antigambling activist Paul Stanfield, who brought his appeal to the state Supreme Court.

"Due to the delay in the decision, it is uncertain now whether, and or how, the county and [the racing association] will be able to make the Dec. 1 debt service payment on time and in full," said Ann Lowenthal, vice president and manager of the Plains regional group at Moody's.

Polk County has a lease purchase agreement with the association to provide the difference between the $4 million annual debt service on the bonds and track revenues derived from a 6% wager tax.

Polk County issued $40 million of sports facility bonds in 1984 to build the racetrack and remarketed the bonds under the lease purchase agreement in 1987. The county is actively seeking to refinance the debt by exercising a provision in the bond indenture that would allow an early payment of the bonds.

In its report, Moody's said the $2.3 million December debt service payment may be affected by the racing association's bankruptcy proceedings. The association, which filed for bankruptcy last November, must obtain authorization from bankruptcy court before making any payments. including the December debt service payment.

In addition, a second lawsuit is pending before the state Supreme Court. Moody's said any decision in the Stanfield case may resolve the second suit that challenges the notice of public hearing on the lease purchase agreement.

In Marc, a Polk County District Court judge ruled that the county failed to give proper notice before its board of supervisors approved the agreement in 1986. The court also enjoined the county from making further lease payments.

Though the case, filed against the county by a Des Moines attorney, is under appeal, the county is prohibited from making lease payments because it failed to post bond.

James Koolhof, the county's manager, said he is hopeful that the Supreme Court will release a decision on the Stanfield case this month. He said a favorable decision may expedite a decision on the second suit. If the suits are resolved in a timely manner, he continued, the racing association should be able to make the debt service payment on time and in full.

He said the racing association has already forwarded $658,360 to the bond trustee for the payment. He expects another $20,000 to be forwarded this month.

After the legal issues are resolved, Koolhof added, the county expects to refund the racetrack bonds with capital loan notes secured by the county's general obligation pledge.

Koolhof has said a calamity clause provision in the bond indenture for the sports facility bonds would allow the county to issue the notes. The county would then turn over the proceeds to the racing association, which would pay off holders of the revenue bonds.

The first step toward exercising that provision took place Nov. 26, 1991, when the county board voted not to provide a subsidy of up to $5.5 million for the 1992 racing season. The racing association filed for bankruptcy the next day.

If the county succeeds in exercising the calamity clause provision, the outstanding revenue bonds could be redeemed before the Dec. 1, 1997, optional call date, according to Koolhof.

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