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Decision Nears in Pension-Fund Loan Bailout Case

January 16, 1991

PHILADELPHIA (AP) _ A loan to cash-strapped Philadelphia would be a prudent investment for the city pension board, a financial consultant testified as a hearing aimed at stopping the deal wound up Wednesday.

The short-term notes the board has agreed to buy from the city ″would be repaid ... on time, in full,″ J. Chester Johnson testified in Common Pleas Court.

Johnson, president of Government Finance Associates Inc. of New York, was hired as a consultant to the city Board of Pensions and Retirement during negotiations over the notes.

His testimony came in the second day of a hearing in a lawsuit filed by the city police and fire unions, which are trying to block the use of pension-fund assets to help the city.

Judge Nicholas M. D’Alessandro promised to make a speedy decision.

Johnson said his company and other advisers closely examined the city’s financial condition before concluding the investment was sound.

The Fraternal Order of Police and the International Association of Fire Fighters have contended the notes are too risky an investment for the pension board.

Witnesses for the unions testified Tuesday that the agreement on which the pension board’s decision to invest was based lacked key information.

Barry Zern, a businessman and former pension fund manager, testified the terms of the note sale meant the city would have to pay an effective annual interest rate of 42 percent, not including consulting fees.

Johnson said the effective annual rate of interest for the 56-day loan would be 27.16 percent.

The pension board tentatively agreed last week to buy one-fourth of the $150 million note issue. The first $105 million is to be sold Friday. The other $45 million would be sold only if the city and state governments take steps toward solving the city’s long-term financial problems.

The state Public School Employees’ Retirement Board and a consortium of local banks have agreed tentatively to buy the remaining three-fourths.

The city has been struggling to meet payroll and other essential expenses since September, when a $375 million note issue failed on Wall Street.

The notes would keep the city solvent through winter but would not avert a $230.1 million shortfall in projected expenses of $2.2 billion by June 30.

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