The financially strapped city government got some good news earlier this week, when Merrill Lynch, Pierce, Fenner and Smith, the nation's largest underwriter of municipal debt, said Cambridge remains relatively fiscally healthy.

The Merrill Lynch report on 49 Massachusetts cities and towns said investors might be wise to consider bonds issued by Cambridge.

It also stated that "we are particularly confident in the administrative capacity of Cambridge's city management" to deal with revenue losses caused by Proposition 1/2.

Cambridge city manager James L. Sullivan said last night that the main impact of the report--which warned investors away from Boston, Lynn, Lowell and several other Bay State cities and towns--will be "in terms of investor confidence in the community."

The Merrill Lynch report comes only weeks after Moodys Investors Services suspended bond ratings for 44 cities and towns in this state, including Cambridge.

The Merrill Lynch analysts looked at the percentage of municipal budget devoted to "essential services"--police and fire protection, sanitation, debt service, retirement pay, and assessments to support the Massachussetts Bay Transportation Authority.

Boston had the highest percentage--44.3--of budget devoted to essential services. In Cambridge, only 26.7 per cent of the budget was spent on such services last year.

The Merrill Lynch analysts predicted that cities and towns who spend 25 to 35 per cent of their budgets on essential services would "not have any great difficulty" in meeting interest payments on their debts in fiscal year 1982.

Meanwhile, Cambridge Mayor Francis H. Duehay '55 journeyed to Beacon Hill yesterday to ask the state legislature for a series of bills designed to give Cambridge new taxation authority.

One of the bills would allow the city to levy property taxes on Harvard and other area universities.

Sullivan said yesterday he expects no action on the legislation until May.