New York State Comptroller Edward V. Regan said yesterday that he believes the state court of appeals will reverse a lower court's decision declaring the state's $531 million deficit note sale unconstitutional.
However, Mr. Regan said the state may not be able to successfully defend future lawsuits challenging its fiscal policies and bonding program because plaintiffs will become more "sophisticated at the process."
Mr. Regan spoke in New York City at the 7th annual public finance conference of Empire State Report, a monthly magazine covering government finances and politics in the state.
The comptroller said state officials face a growing number of taxpayer lawsuits resembling the one filed in April by Robert L. Schulz, president of the All-County Taxpayers Association. The case is slated to be heard June 5 by the Appellate Division of the State Supreme Court.
State Supreme Court Judge Lawrence E. Kahn of Albany County last month ruled in favor of Mr. Schulz, declaring that the state's $531 million deficit note sale in late March as unconstitutional because voters did not approve the sale and the notes were sold before the fiscal 1993 budget was passed. The state's fiscal year began on April 1.
Mr. Schulz, a Glen Falls, N.Y., resident, is also suing the state on other financing matters, including its use of the Local Government Assistance Corp.'s bonding authority to reduce the state's reliance on the annual spring borrowing. Mr. Schulz lost that court battle last month.
Mr. Regan predicted an increasing number of similar taxpayer lawsuits against the state. "With each lawsuit, the plaintiffs get more sophisticated and the judges more sympathetic," Mr. Regan said. "The next [lawsuit], and the next one after that, could serve as a legal challenge" the state could lose.
The court of appeals will ultimately overturn Judge Khan's position because the state has legal precedence to issue deficit notes dating back to the 1970s, Mr. Regan said.
But he said the court victory may be hollow, in that the suit has severely damaged the state's reputation in the municipal credit markets.
The $531 million of notes "are frozen" in investors' hands, he said. The market for the securities is illiquid, and a recent $15 million trade of the state's deficit notes could not be completed because buyers demanded a yield premium to compensate for the investment risk.
Mr. Regan also said that Judge Kahn's decision led the state to pay much higher yields in its most recent spring borrowing than had been previously estimated.
The lawsuit "represents a multi-million dollar loss to investors and state securities," Mr. Regan said. "And as investors demand higher yields, the state and taxpayers lose millions of dollars."