The New York State comptroller's office this week issued a stinging criticism of Troy, N.Y.'s $35 million lease revenue bond deal, stating that the transaction "does not comport with state law" and is too expensive.

In a nine-page report released Monday, the comptroller's division of municipal affairs termed the Troy Industrial Development Authority's bond deal an "elaborate and purposeful circumvention of state law and policy." The report also says the transaction "is not in the best interest of the taxpayers of Troy."

But the report did not specifically state that the Troy deal is illegal.

The transaction, which closed April 1, involved the sale and lease-back of city properties to finance capital improvements and plug a budget deficit. Troy city officials and the city's bond counsel continue to defend the issue, which has gained statewide notoriety for its controversial use of sale and lease-back proceeds to plug a $4 million gap in Troy's fiscal 1992 budget ending Dec. 31.

Joel Moser, Troy's bond counsel and a partner at the New York City law firm of Moser & Moser, called the report "internally inconsistent." He denounced its finding that the deal "does not comport with state law" because, he said, nowhere in the document does it say that the deal is illegal.

"The report is a paper tiger on the law" Moser said in a telephone interview. "It raises legal issues, but it does not address the legal issues."

Moser also disagreed with the report's finding that the deal is too expensive. For example, the report says the city should have issued general obligation bonds instead of more expensive lease revenue bonds.

The lease securities are a more complicated credit than plain-vanilla GOs. As a result, they are sold at a higher interest rate. The 30-year portion of the Troy offering sold at an interest rate of 8%, while The Bond Buyer's 20-Bond Index of general obligation yields for that week was calculated at 6.73%.

Moser countered that the Troy deal made economic sense because GOs must comply with a New York State law known as "the 50% rule."

This law forces municipalities to pay more debt service during the early years of a bond issue. By selling GOs, Troy would have been forced to increase property taxes or make sweeping cuts in services in order to pay for these initial debt service costs, Moser said.

In response to Moser's assertions that the report does not fully address the legality of the Troy deal, Cynthia Munk, spokeswoman for the state comptroller, said the office cannot determine the legality of an action. "The office can only interpret the law," she said, noting that the office functions solely as the state's chief auditor.

But bond lawyers warned the report may be used as evidence by individuals suing Troy or other municipalities that employ this bonding technique to cover budget deficits. At the moment, Troy faces a lawsuit in the state Supreme Court from Linda Mandel, a local attorney, who says the deal is in violation of state law.

The report followed an eight-month inquiry into the deal underwritten by Prudential Securities Inc., a New York-based investment bank. The deal involved the simultaneous selling of property from the city to a previously established local development corporation and to the Troy Industrial Development Authority.

The Troy authority ultimately sold the bonds to three investment funds in what was described at the time as a private placement.

The comptroller's office immediately launched its inquiry following newspaper reports on the complex nature of the deal. Specifically, officials in the office said the deal had run afoul of their interpretation of section 109-B of the state's general municipal law.

This section, added in July 1991, gives municipalities the ability to finance capital improvement projects on a lease-purchase basis by issuing lease revenue bonds or certificates of participation.

The law, however, does not expressly allow municipalities to cover operating deficits using this financing technique. According to the report, "Installment purchase contracts entered into by a local government unit ... were never intended to be used to finance operating deficits."

The comptroller's office also took issue with the city's avoidance of general practices in the municipal finance arena. The report said the city dodged an "almost universal practice" among local governments of consulting with the comptroller's office and receiving state legislative approval before issuing deficit bonds.

Troy officials, for their part, said by employing the sale and lease-back technique, they could legally issue the securities and bypass the politically embarrassing experience of asking the state Legislature for deficit bonding approval. In broad terms, lease transactions do not need legislative approval.

Moser, Troy's bond counsel, said the city chose to avoid state legislative approval precisely because Troy could not risk a rejection from lawmakers in Albany. He said the city has issued an official report response that says the transaction is legal.

Moser also termed recent denunciations of the bond sale by Comptroller Edward V. Regan as well as the contents of the report as an attempt "to punish" the city for not consulting with the comptroller's office about the lease deal.

Statements from Regan on the Troy deal have already persuaded several municipalities, including Rensselaer County and Suffolk County, not to complete proposed sale and lease-back transactions to finance deficits.

"In the end everybody pets what they wanted," Moser said. "The city doesn't have their bonds declared illegal and the comptroller says, Don't do any more of these deals.'"

In yet two more legal denunciations, the comptroller's office said the development authority is not authorized to finance improvements to most government buildings or cover a budget deficit, and that the city failed to receive state approval before leasing and improving park facilities.

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