The New York State Financial Control Board for New York City yesterday warned that the administration of Mayor David N. Dinkins has failed to rein in the growth of its capital program and is undermining the city's ability to develop a balanced budget on a long-term basis.

The control board, in its report on the November revision of the city's financial plan, calls on the Dinkins administration to publicly establish debt service limits for the city's capital program and its related authorities.

Without these limits, the report says, the city will find it increasingly difficult to fill billion-dollar budget gaps after fiscal 1996. The report notes that the city is likely to end fiscal 1993 with a balanced budget, but estimates a $1.65 billion gap in fiscal 1994.

The control board's report is the second jab this week at the city's capital program, which is the largest in the country. On Monday, city Comptroller Elizabeth Holtzman in a letter to Dinkins called for a moratorium on lease financing transactions.

The letter cites a number of deals in which the city is in the process of, or is planning to, lease property to an outside entity as part of the financing technique. Among her examples, Holtzman cited a $2.7 billion program to repair and construct court facilities over the next 15 years.

Under the court program, the city would lease facilities to the New York State Dormitory Authority, which would issue the bonds. Holtzman termed the city's practice of entering into these deals as "ad hoc" and "not fiscally prudent." The Dinkins administration is expected to issue a formal response to the letter sometime today.

Allen J. Proctor, the control board's executive director, said the growth in New York City's capital program has placed the city's operational budget "in a hole."

The report says, for example, that debt service will grow 29% between fiscal 1994 and fiscal 1996, the largest percentage growth of any city program. To compensate for that growth, the city will reduce several other program areas, including funding for housing, health, and parks, the report says.

"Without capital cuts, what they're left with is either increasing taxes or laying off municipal workers." Proctor said. "It's a classic box."

Philip R. Michael, director of the city's office of Management and Budget, said the city last January took actions to control its capital spending through a reduction in bonding. As a result, he said, the city has managed to hold the line on its debt service costs through the life of its 10-year capital plan. Broadly, the city attempts to keep debt service at under 20% of tax revenues and 15% of overall revenues, one city finance official said.

Michael termed the report "very academic." In reference to its call for better management of the city's capital program, he said, "I don't understand what they are talking about."

At issue for the control board in its wide-ranging, 83-page document is the growth in the city's capital program amid an overall decline in city revenues and a spike in social service spending due to the stiff regional recession.

Since 1987, the city's general obligation bond issuance has almost tripled, growing from $2.1 billion that year to $6.3 billion in 1992, according to Securities Data Co. The report also says that while GO debt issuance has increased in recent years, so has the debt issued by state authorities, such as the New York City Municipal Water Authority. The authority issued $1.4 billion in revenue bonds in 1992, according to Securities Data.

And in the past two years, the city has faced additional pressures from its expanding capital program due to state mandates to repair schools and court houses, as well as to its plan to develop a separate capital program for the city Health and Hospitals Corp.

In 1988, for example, the state Legislature forced the city to finance school capital spending in 1990 through the sale of GO bonds. The legislation largely prohibits reductions in capital spending for schools, the report says.

In September, the city signed a memorandum of understanding with the Dormitory Authority to sell $2.7 billion in bonds for courthouse construction and repair in the five boroughs. At the same time, the city is attempting to establish the Health and Hospital Corp. as an autonomous bonding entity.

The report says the emergence of these bonding programs is "hampering the city's capacity to control the growth of capital commitments and to determine priorities among capital projects."

Proctor, in a follow-up interview, said the city should attempt to seek state legislation in order to weaken the court and the education capital spending mandates. As far as the hospitals corporation is concerned, Proctor said the city should not lose authority over the size of either the corporation's operating budget or capital spending plan.

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