Executives at Moody's Investors Service and Standard & Poor's Corp. say they are hesitant to rate bonds connected to New York State's multibillion-dollar transportation program until they finish evaluating a court case challenging the sale of these securities.

Officials at the two major credit-rating companies made these assessments last week, as the state interviewed potential underwriters for a $200 million slice of the $4 billion, four-year transportation bonding program. The plan is designed to finance the rebuilding of state and local roads and bridges.

In recent weeks, state officials have said that they plan to issue the bonds despite a lawsuit challenging the constitutionality of the securities.

"These bonds are legal and constitutional, and have been for the past 20 years," said Ralph Vecchio, general counsel for the state Thruway Authority.

The Thruway Authority will issue the bonds on behalf of the state using a financing technique opposed in a lawsuit by taxpayer activist Robert L. Schulz.

But to sell the securities, the state and the Thruway Authority will need bond ratings.

And, according to officials at Moody's and Standard & Poor's, the outcome of the Schulz suit may be more difficult to predict from a credit standpoint than state officials care to admit.

Catherine Fleischmann, an assistant vice president at Moody's, said the rating agency faces a "dilemma" because it is difficult to evaluate what the courts might ultimately rule on the case, and how the decision might translate into bond-holder risk.

The case is likely to be decided by the state's court of appeals, the state's highest court.

To be sure, some executives at the Moody's have publicly said that the securities are legal and can be rated immediately.

But other rating agency officials are not sure if they should assess the bonds without further review, forcing Moody's to reconsider an earlier statement that it was prepared to rate the securities if given the opportunity, Fleischmann said.

"This is the first time since the 1970s that the courts will be looking at substantive issues surrounding the sale of appropriated backed debt," Fleischmann said.

Ernest Perez, a director at Standard & Poor's Corp., said that the Schulz suit is "a major concern" in rating the bonds. He said Standard & Poor's has not decided whether to rate the securities before a court of appeals rules on the case. "We may need a court ruling to come down first," Perez said.

Under the transportation financing plan, the administration of Gov. Mario M. Cuomo will issue the bonds through the Thruway Authority and evade a clause in the state constitution requiring voter approval for the sale of all state debt.

Officials and many legal authorities say this technique, in which the state will lease transportation projects to the authority, is perfectly legal, based on court precedent established during the past 20 years.

The state has issued the lion's share of its debt using this technique, also known as the sale of appropriated debt. Unlike state general obligation bonds, the legislature is not obligated to appropriate or pay debt service on these securities.

But legal experts say Schulz's case against the state and the Thruway Authority is important because in May he won the legal right or standing to sue the state over its borrowing practices. The Court of Appeals has rejected most of his other cases for failing to meet this legal threshold.

Although the state has not asked either Moody's or Standard & Poor's to rate the pending transportation issue, Thruway Authority director Frederick P. Clark said the authority will issue the securities "fairly soon." The authority is scheduled to announce bond underwriters sometime this week, according to the agency's request for proposals.

The authority's general counsel Vecchio said legal experts have already advised the state that it can issue the securities despite Schulz's challenge to the bonding plan.

On July 27, state supreme court Judge Edward O. Spain ruled in favor of the state, upholding the constitutionality of the bonding technique. After the ruling, officials from the state budget division called the decision a clear-cut victory for the state and said they would proceed with the bond sale in September or October.

Officials also said the state was prepared to issue the first leg of its program before the Court of Appeals settled the issue to provide financing for the state's Consolidated Highway Improvement Program. Under the program, the state reimburses local governments for road and bridge improvements. Claudia Hutton, a spokeswoman for the state budget division did not return a telephone call regarding the case.

But Schulz in a telephone interview called the state's bond-sale preparations "incredulous."

"The state's low credit rating is due to this kind of back-door borrowing," Schulz said, referring to the Thruway bond deal. "We finally have a case, and they know we will be heading for the Court of Appeals.

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