Troy, N.Y., which only two years ago sold its city hall to help plug a budget deficit, is planning yet another deficit bond issue. This time, officials say, the city will rely on more conventional financing methods, hoping to erase Troy's reputation as a municipality that cuts corners rather than budgets.

In 1992, the city gained notoriety in the municipal market by selling un-rated lease revenue bonds to help pay down a deficit of about $3 million. The $35 million deal, underwritten by Prudential Securities, involved the sale to an industrial development agency of city property, including the city hall. The city then leased back the property from the agency, which financed the transaction with the bond sale.

The state comptroller at the time, Edward V. Regan, said the deal was too expensive and that it circumvented state law. Regan said the city sold the issue without the legislative approval needed to sell deficit bonds in New York State.

Now city officials say they are planning once again to sell deficit bonds, about $15 million worth through Fleet Securities to plug an expected fiscal 1994 deficit of comparable proportions. The issue is scheduled for September.

Fiscal 1994 marks the fourth straight year that Troy, a fading industrial city of about 54,000 residents located in upstate New York, will finish the year with an operating budget deficit. The 1994 shortfall includes roughly $4 million left over from 1993 and represents a whopping 39% of the city's $38 million general fund budget.

But city officials, led by city manager James L. Caplinger, say the days of unrated lease deals, large budget gaps, and complaints from the comptroller's office are coming to an end.

Caplinger, who took the job in February, said the city has begun an evolution toward fiscal responsibility. The effort is bolstered by a state-mandated review board headed by state Comptroller H. Carl McCall and a city-sponsored plan to address Troy's persistent budget woes, he said.

The plan, Caplinger said, includes the September deficit bonding, union give-backs, cuts in all aspects of city government, and the creation of a personal income tax. If successful, Troy would emerge as one of three municipalities in the state that imposes an income tax on its residents, joining New York City and Yonkers.

Caplinger said if the city can persuade the state legislature to approve an income tax -- and dodge the political maelstrom that follows all tax increases -- the city will move decisively toward a structurally balanced budget in fiscal 1995, which begins Jan. 1.

"The people in this city had wanted a level of service higher than can be supported by the city's revenues," Caplinger said. "People just forgot how much this stuff costs."

But Caplinger's assessment is only half-shared by another power constituency: bond raters and investment bankers.

In February, Moody's Investors Service cut Troy's GO rating to Ba, which is considered below investment grade. Brad Gewehr, vice president and supervisor of Moody's Northeast regional group, said he applauds the steps taken by Caplinger to help restore fiscal balance. However, Gewehr said, the city has a long way to go.

"The key issue for me is that Troy faces a fundamental structural challenge, and many steps taken today simply ensure the city maintains its liquidity and meets its current obligations," he said.

Gewehr's fears are at least matched by many in the public finance community, who continue to view Troy's fiscal situation as untenable. For one thing, Caplinger, who has earned the respect of bond raters and other market players, is scheduled to leave the city in September to take a job as president of a university in Los Angeles.

In addition, politics in Troy have traditionally led the city to bypass structural changes in its budgets, such as the ones advocated by the current city manager.

Then in August, First Albany Corp., named by the city as its investment banker earlier in the year, chose not to underwrite a $4 million issue of budget notes and bond anticipation notes.

First Albany did not return telephone calls for comment, and Caplinger would not discuss the firm's decision. But market players, including Ronald H. Fielding, president of the Rochester Funds, a major investor of state-related issues, said First Albany made its decision following a tepid investor response for the paper.

Fielding confirmed that he was one of the investors who decided not to purchase the notes on the grounds that the city had not done enough to stem the flow of red ink. Fielding said he bought about $20 million of the 1992 lease revenue bonds as well as parts of a $5 million tax anticipation note issue sold by the city in May. But since that time, he said, he hasn't seen enough structural change in Troy's finances to merit another purchase of' city debt.

"They just can't keep going on issuing new notes to solve this problem," Fielding said.

Market players also fear that Troy will one day choose not to repay the 1992 lease revenue bonds, which are not general obligations of the city, but rather securities issued by its industrial development authority.

City officials dispute these fears. But sources in city government say those same officials opposed efforts by the state to validate the 1992 transaction. The state has not declared the deal to be legal, leaving open the possibility that the city could force bondholders into a restructuring of the debt load.

Caplinger says the city is considering legal action against Prudential and the city's former bond counsel, Moser & Moser, for their roles in the 1992 lease revenue bond deal. Moser & Moser provided the legal opinion on the transaction. Caplinger said the law firm and Prudential may have provided poor advice on how to structure the deal, or even in recommending its use.

A Prudential spokesman did not return telephone calls. Joel Moser, a Moser & Moser partner, could not be reached for comment.

Moser is a finance committee member for McCall's re-election campaign. McCall, a Democrat, is facing Republican Herbert London in this fall's comptroller race, but Caplinger doesn't fear any interference from McCall in his position as chairman of the Troy review board.

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