As part of a last-minute fiscal 1992 budget agreement cobbled together Sunday evening, New York City officials said they would refund and defease $1 billion of the city's outstanding credit-enhanced general obligation bonds to reduce debt service costs by $100 million and create enhancement capacity for its new issues.

The refunding, which would take place this fiscal year, hinges on bond insurers and providers of letters of credit signing on to the program and contractually agreeing to provide -- up to an agreed-upon apacity level -- credit enhancement on new city bond issues, said Mark Page, counsel and deputy director of the city's Office of Management and Budget.

To date, no credit enhancers have signed on, but negotiations continue, Mr. Page acknowledged. He said the outline for such a refunding plan had been presented to city officials earlier this year by Morgan Guaranty Trust Company of New York.

Mr. Page said that by defeasing $1 billion of outstanding bonds with credit enhancement, the city would reduce the exposure credit enhancers of New York City securities currently experience. New capacity means the city can use bond insurance to reduce its borrowing costs on new issues.

Mr. Page said the refunding would provide the city with a $100 million present value saving that would translate into a like amount of budget relief in fiscal 1992, which began yesterday, by reducting debt costs and providing more money to the operating budget. While he did not identify the maturities to be defeased, he noted that city officials would probably look to refund bonds sold with credit enhancement in the late 1980s.

The insurance industry was mostly nonplussed by the proposed refunding.

Neil Budnick, senior vice president at Municipal Bond Investors Assurance Corp., said the firm has entered into forward contractual commitments to insure bonds for a defined period, but it is "not that typical."

"We don't want to give an indefinite [time] commitment," Mr. Budnick said, "and it's usually done for a specific deal, so we know all the parameters of the issue."

Mr. Budnick declined to comment on the New York City proposal, saying MBIA does not address specific transactions.

A spokesman at Financial Guarantly Insurance Co. confirmed that FGIC plans to participate in the city's program. "We have been in conversations" with the city, he said. "We are prepared to go ahead with the proposed refunding and the commitment to credit enhance future issues by the city."

A spokeswoman at AMBAC said the firm had not been contacted by the city concerning the refunding. "We haven't seen anything yet," she said. "If we have capacity, we are more than happy to insure New York City."

A spokesman at Financial Security Assurance said the firm had received "a number of proposals," but declined to comment on the specifics of the refunding plan.

Credit enhancers would be compensated with premiums ranging from 50 basis points to 150 basis per par amount insured, Mr. Page said, adding that that price was about what the city paid on previous bond sales that used credit enhancement. Premiums for the general new issue market range from 25 to 70 basis points.

The city did not use bond insurance on its last two bond sales because, city officials claim, bond insurers have reached their capacity limits. The city is the largest tax-exempt issuer in the United States, and is expected to sell ove the next 10 fiscal years about $3 billion of GO bonds annually.

As a result of the proposed refunding, the city is now expected to sell $4 billion of GO in fiscal 1992, which began yesterday.

Another $5 million in debt service costs reductions would be achieved through other financings, including refunding the outstanding taxable debt sold for housing projects.

The refinancing plans were unveiled late Sunday night, the denouement of the city's budget negotiations. After six months of bickering and wrangling. Major David N. Dinkins, before a standing room only crowd in the Blue Room of City Hall, announced that a budget agreement had been reached with city council Speaker Peter J. Vallone and the city council.

The executive budget that was expected to be approved by the council yesterday evening totals $28.5 billion about %200 million less than what Mayor Dinkins had proposed in May.

The city council, which asserted its new budgeting powers granted last year unde the revised City Charter, won a major victory by forcing the administration to reduce the total size of its property tax increase from $776 million to $400 million.

To make up the remaining gap in revenues caused by slashing the property tax increases, the administration and the city council agreed to include $150 million in additional tax revenues that are expected in fiscal 1992. The council and the administration agreed to $200 million in spending cuts, but also restored $121 million in spending. And budget negotiators from both sides included the $125 million in debt service reductions from the refinancing of bonds.

Staff reporter Nicholas Boyle contributed to this article.

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