CHICAGO An Illinois authority will sell about $21.4 million of debt restructuring revenue bonds today for East St. Louis in a deal that will culminate a financial bailout of the beleaguered city.

The bonds will be issued by the Illinois Development Finance Authority under the Illinois Distressed Cities Act, which allows financially troubled cities to seek help from the state.

City and state officials said the bond issue marks a turning point for East St. Louis, a city on the eastern shore of the Mississippi River that has been hit by economic hard times, a shrinking population, debt scandal, and mismanagement of its finances.

"We think this places East St. Louis on a level playing field with other municipalities," said Gordon Bush, East St. Louis" mayor since 1991.

The bond issue will allow the city to consolidate its outstanding debt while lowering its overall annual debt service requirements by about $1 million a year. according to Earl Lazerson, chairman of the East St. Louis Financial Advisory Authority. The Distressed Cities Act of 1990 authorized the formation of the authority to oversee the city's finances.

"This is a major and historic step forward for the city," Lazerson said. "It's indicative of the city's resolve to get the past behind it and get on with the job of revitalization."

Proceeds from the bond issue will refund about $11 million of outstanding general obligation debt that the city issued in 1985 and 1988. The remainder of the issue will pay off city creditors and fund a debt service reserve fund.

The bond issue was made possible after a debt restructuring plan was devised that included settlements to reduce the approximately $85 million of city debts owed to federal and state agencies, pension funds, and litigants. The plan was made possible by revenues that East St. Louis began to receive from a privately owned riverboat casino that opened in June 1993.

The casino revenues, however, caught the attention of the Internal Revenue Service, which resurrected a $14.5 million claim against the city last year. The claim stemmed from illegal arbitrage that the city allegedly earned on $223.7 million of bonds that were issued in 1985. The bonds were warehoused temporarily in an unlicensed offshore shell bank by Matthews & Wright, a now defunct municipal bond firm. The bonds were not sold to investors for cash until October 1986.

The IRS contended that the bonds, which were issued to finance the construction of a port that was never built, violated arbitrage rebate restrictions. In 1991, the agency threatened to tax bondholders' interest earnings if the city did not make the arbitrage rebate payment. In March, the city and the IRS reached an agreement to pay $1.4 million in two installments by next Monday.

Carole Brown, a vice president at Mesirow Financial Inc., the senior manager for the refunding, said the IRS, as well as some of the other East St. Louis creditors, will be paid on the 31 st, which has been scheduled for the bond closing.

Brown said while insurance for the issue was considered, the bonds will be sold unenhanced because insurers needed more time to review the deal, which had to close by Oct. 31 to meet agreements with the creditors.

The bonds are rated A-minus by Standard & Poor's Corp. based on Illinois' moral obligation pledge. The pledge requires the governor to request an appropriation from the state General Assembly should the debt service reserve fund be depleted, Brown said.

Debt service on the bonds will be paid through an intercept mechanism that will send East St. Louis' share of state-collected sales and income taxes, as well as revenues from the riverboat casino, to the bond trustee, according to Brown. If the revenues are insufficient, revenues from the city's utility tax would be intercepted to meet debt service requirements.

If revenues are still insufficient and the debt service reserve fund, which will contain $2.1 million of bond proceeds, is tapped, Brown said the Illinois Development Finance Authority would contact the governor to activate the moral obligation pledge process.

If debt service requirements are satisfied, any excess moneys will be sent to the city.

East St. Louis has also placed its GO pledge on the bonds. However, Brown said it would be up to the city and its oversight authority to determine when or if the city would be forced to raise taxes to meet debt service requirements.

Kim Fowler, a staff attorney for Gov. Jim Edgar, said the administration "fully expects the city to pay off the bonds with its own revenues," but is prepared to invoke its moral obligation pledge if necessary.

Joe O'Keefe, a director at Standard & Poor's, said besides Illinois' moral obligation pledge, the rating agency looked at the city and its commitment to work with the oversight authority "and turn around its financial performance."

The 1990 Distressed Cities Act allows for continued involvement by the East St. Louis Financial Advisory Authority beyond the bond issue, including approval of the city's budgets, payments, and contracts for 10 years of balanced operations.

Bruce Patterson, the authority's executive director, said that the city's budget for fiscal 1994, which ends Dec. 31, is expected to be balanced. That would mark the city's first balanced operations since the authority was formed in 1990, giving the authority nine more years to oversee the city's finances.

LaMar D. Gentry, East St. Louis city manager, said the city is working to diversify its revenues so as not to rely on the $750,000 to $1 million a month it receives from the riverboat casino. That would be important, particularly if Missouri voters agree Nov, 81o expand riverboat gaming in that state.

A preliminary structure for the issue shows $3.4 million of serial bonds maturing from 1995 to 1999 and $18 million of term bonds carrying maturities in 2004, 2009 and 2013. Gardner, Rich & Co. is the other underwriter on the bond deal.

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