Comptroller Elizabeth Holtzman of New York City yesterday released a report that calls for reducing the city's heavy debt service burden now to avoid slashing vital services in the near future.

The 22-page report says that by fiscal 1995 the city will see a 127% increase in debt service costs, reaching $3.25 billion from $1.43 billion in fiscal 1986. The city's fiscal year begins on July 1.

"Accumulated debt service from years past is strangling the city," Ms. Holtzman said in a statement. "The urden has gotten so great that it is contributing to the massive budget gaps that the city is laboring under.

"The city has to cut the size of the capital budget and use the remaining monies as efficiently and effectively as possible," she said.

Mayor David N. Dinkins has already pared $2.9 billion in capital spending from the city's 10-year, $67 billion capital plan covering fiscal years 1992 through 2001. Roughly $37 billion of the plan is financed with city GO bonds and another $10 billion with Municipal Water Authority revenue bonds.

The report did not specify how much more was needed to be cut from the capital plan.

Ms. Holtzman joins a chorus of fiscal monitors calling for a reduction in the city's capital program to reduce debt service costs and help avoid budget gaps.

Philip R. Michael, director of the city's Office of Management and Budget, responded for the administration. "We did cut the $2.9 billion, and we are continually examining opportunities to shrink" the capital budget, he said.

"We recognize it as one of the fastest-growing areas of our budget and it is causing problems for us," Mr. Michael continued. "We are trying to bring all our costs down. This one is very hard to turn around because of the many past capital commitments and the heavy pressure to do renovations on our infrastructure."

The comptroller's report notes that city debt service costs on bonds and notes make up one of the fastest-growing areas of city spending. In fiscal 1986, debt service was 7.2% of total expenditures. In fiscal 1992, debt service is projected to eat up 8.9% of total expenditures. And by fiscal 1995, such costs will be 10.2% of the city's total expenditures.

Several factors are pushing up debt service costs. For one, the city has assumed the yoke of financing more and more of its capital needs to comply with mandates and consent decrees while the state and the federal government have reduced their capital commitments, the report says.

In the city's 10-year capital plan prepared in 1988, the city expected to receive $7.1 billion of federal and state funds. In the recently revised 10-year capital plan, the city expects to receive $1.76 billion, the report notes. Federal and state funds were 12.4% of the 1988 plan but make up only 2.6% of the 1992 capital plan.

Debt service costs have also jumped because the increased volume of city bonds has swamped the market and because of investor concerns over city finances. The city expects to sell between $3.5 billion and $4 billion of bonds in fiscal 1992.

Other areas of city spending are projected to increase over the next four fiscal years, but not at the rate of debt service costs. By fiscal 1995, for example, spending on police will increase by 37% from fiscal 1986. During the same period, education spending is projected to increase by 61% and overall city spending by 62%.

To pare debt service costs, the comptroller recommends repealing the state's Wicks Law, which prohibits hiring a general contractor on building construction costing over $50,000. The law, according to studies mentioned in the report, actually increases the cost of projects.

The comptroller also proposed that city agencies include capital costs in their budgets and provide a better accounting of how capital money is used. And Ms. Holtzman said new procurement rules should be strictly enforced.

Reducing the city's capital program to lower debt service costs is time sensitive, the report says. It recommends that cuts be made now to reduce debt service costs by fiscal 1995.

The comptroller noted that the city already has some of the tools needed to lighten the debt service load by using zero coupon and variable-rate debt instruments.

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