New York City finance officials are looking at ways to generate muchneeded budget savings through a refunding of the city's debt.
Budget officials, who are currently reviewing a series of refunding proposals from municipal bond firms, say there is nothing unusual about their review. The city regularly examines the refunding plans that its bond underwriters submit.
"I'm always looking at options, but I'm not looking to do a refunding," said Abraham Lackman, director of Mayor Rudolph Giuliani's Office of Management and Budget.
But other city officials say a refunding of some kind is high on city hall's list of options to end fiscal 1995 with a balanced budget. The city's fiscal year began July 1.
In November, city Comptroller Alan G. Hevesi issued a report showing that Giuliani's fiscal 1995 budget could fall out of balance by as much as $500 million in fiscal 1995.
Hevesi's report detailed the risks that could push the 1995 budget out of balance. Many fiscal monitors say the city's budget problems are so difficult that it will probably need to sell refunding bonds to produce $150 million to $200 million in budget savings.
In a telephone interview, Hevesi said he has heard "rumblings" that the mayor's finance staff is considering a bond refinancing to help plug the potential $500 million hole.
Giuliani would announce a potential refunding proposal in January, when he releases his next budget modification. The so-called "January plan" would update the city's fiscal 1995 budget and outline the city's fiscal 1996 plan.
"Nobody has formally made the request" for a refunding, Hevesi said. Hevesi said he is "skeptical about the use of refundings to solve budget problems," but has no details on how seriously Giuliani is considering such a move.
Fiscal monitors like Hevesi and Wall Street bond raters have criticized the use of refunding to produce budget savings. Refundings are designed to lower debt service payments by replacing older, higheryielding debt with bonds sold under current market conditions when interest rates are lower.
But municipalities, like New York City, rarely take the most fiscally prudent course in refinancing debt. The city, for example, has used refundings to restructure its debt-service payments.
This refunding technique allows the city to produce large budget savings by pushing debt service costs into the future and collecting savings during the initial maturities of the refunding issue.
Although the refundings provide short-term relief, city bond raters and fiscal monitors have sharply criticized the practice. Such issues, they argue, force future generations of taxpayers to pay higher debt-service costs. Bondholders are affected because the refundings increase the city's structural, or long-term, budget deficit.
In July, under Giuliani, the city refunded $750 million in general obligation debt to produce $225 million in budget savings for fiscal 1995. The deal produced present-value savings, but it also increased debt-service costs in the future.
Giuliani's predecessor, David N. Dinkins, also used refundings to help balance budgets. last year, the New York State Financial Control Board sharply criticized the Dinkins Administration for the practice.
For his part, Giuliani received kudos for not including a similar transaction in his October modification of the fiscal 1995 budget, which closed a $1.1 billion gap largely through reduced spending.
At the time, Wall Street bond raters, including Richard Larkin of Standard & Poor's Corp., praised the October action for its absence of gimmicks.
Standard & Poor's rates city debt A-minus with a negative outlook. When asked about the city's current refunding plans, Larkin said, "No one has mentioned anything," but "it would pique our interest."