Burgeoning debt-service costs will prevent New York City from atttaining a structurally balanced budget from fiscal 1994 to fiscal 1996 and force severe service reductions, tax increases, or both, according to a report by the New York State Financial Control Board.

The report released yesterday analyzes the city's four-year financial plan and predicts budget gaps of about $1 billion in fiscal years 1994 through 1996. This figure takes into account service reductions and productivity improvements proposed by the city. The control board also forescasts a $168 million gap for fiscal 1993, which began July 1.

The board said those gaps result largely from a flat stream of revenues, a rising level of debt service, and growing health insurance costs. The city is thus unable to produce a structurally balanced budget, or one in which revenues meet expenditures on a long-term basis without yearly tax increases or service reductions.

City budget officials countered yesterday, saying that structural balance as defined by the control board is unrealistic given the scope of services the city supplies and the region's poor economic climate.

"They think everything should be on automatic pilot, that budgets should run smoothly," said city budget Director Philip R. Michael. "We know we have to make mid-year adjustments, and that's a more realistic way of doing things."

The control board, established during the city's financial crisis in the mid-1970s, recommended in its regular report on the city's financial plan a number of actions to achieve structural balance.

The report says the city must reduce its capital program or produce a plan to eliminate services as its debt costs increase from 1993 to 1996. It also says the city relies too heavily on real estate taxes, which generally do not grow in line with property values and inflation. The report does not specify cuts that should be made.

In addition, the report terms the city's headcount reduction plan "not likely to be achieved," and questions the city's ability to create the gains in worker productivity needed to compensate growth in spending, such as debt service.

The control board devotes much of its criticism to the city's capital spending program.

The report says that "under the current plan, debt service will continue to outpace revenues and all other spending, creating the need for cuts in agency spending to continue well beyond the three years proposed by the plan."

But city budget officials, in their official reaction to the report, said the analysis was too political in that it dictates policy decisions better left for the administration of Mayor David N. Dinkins, sources said.

Mr. Michael, director of the city's Office of Management and Budget, said his office has cut $5.7 billion in capital commitment from 1992 through 1996, generating $250 million in debt service reductions that begin in the 1996 fiscal year. The city's capital budget is $3.5 billion in 1993, growing to $4 billion in 1996.

Mr. Michael said although debt service will rise from about 13% as a percentage of tax revenues this year to nearly 20% of that percentage in 1996, the city's capital spending needs are great. Mr. Michael also criticized the report's thrust. He said the city does not necessarily need to raise taxes or cut into vital services to cover 1994-1996 budget gaps.

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