Troy, N.Y., wants to refund a costly and controversial lease revenue bond issue with less expensive general obligation bonds -- a move that officials say will reduce debt service costs and improve the city's sagging credit rating.

The refunding plan, recently announced by city manager David M. Grandeau, will reduce the city's debt service costs by about $8 million over the remaining life of the $35 million April 1992 lease issue.

But equally important, city officials say, the refunding would improve the city's tarnished reputation in the municipal bond market following its issuance of 30-year lease revenue bonds that were used to help plug a budget gap.

New York State law requires that localities obtain state legislative approval before issuing general obligation deficit bonds. Troy received an opinion from its former bond counsel saying that the city could issue lease revenue bonds, instead of GOs, without the state legislature's knowledge.

The move ignited criticism from municipal bond lawyers as well as then state Comptroller Edward V. Regan, who blasted the deal as "an elaborate and purposeful circumvention of state law and policy." Regan also said the issue was too expensive.

The cost of the lease issue, coupled with the city's financial problems, caused Moody's Investors Service to downgrade $3.5 million of the city's uninsured debt to Ba from Baa. Moody's cited "severe, ongoing deterioration in the city's finances" for its decision. The city's budget gap for fiscal 1994, which ends Dec. 31, is projected at $14 million.

Grandeau, who was appointed city manager last month, said the refinancing is a major step in helping the city achieve a balanced budget in 1994 and beyond.

Grandeau said the city has also laid off one-quarter of its non-uniform employees and has squeezed other concessions out of the city's workforce to help close a budget gap of about $10 million for fiscal 1995. He has also proposed a 16% increase in city property taxes.

In an effort to get Troy's budget back on track, the state legislature this summer passed an act authorizing two deficit financings and the creation of a financial oversight board. The city has a debt limit of $68 million, including the city's $47 million in outstanding debt.

Grandeau presented to the oversight board yesterday his plan to balance the city's fiscal 1995 budget.

The board reviewed a $2.8 million bond anticipation note issue to liquidate the 1993 deficit, a $1.4 million capital projects issue for fiscal 1994, and a $10 million BAN issue to help close the 1994 gap. Fleet Securities has been chosen to underwrite the $2.8 million issue. The city will sell the issues in November.

Troy's bond counsel, Kenneth Bond, a partner at the firm of Sullivan, Donovan, Bond & Bonner, said the debt limit imposed by the state may improve Troy's bond rating. Meanwhile, Bond said the city's quality of life will suffer.

For example, after the city's deficit financings are completed, Troy will have a little more than $6 million left to improve its aging infrastructure. By comparison, Binghamton, N.Y., a city similar in size to Troy, has a state-mandated debt limit of $90 million, and $79 million of bonding available for infrastructure needs, Bond said.

Troy "won't be able to function with only $6 million of debt for public works improvements," he said. "It's going to hurt if they can't function normally."

Still, Steve Nelli, director of the lease group at Standard & Poor's Corp., which does not rate Troy debt, said the state's intervention in Troy's finances will "force them to get their fiscal house in order."

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