A high-ranking official working for New York State Comptroller H. Carl McCall says McCall downplayed the severity of New York City's budget problems last summer in a controversial letter to help the city maintain its bond rating.

The letter, signed by McCall but drafted with assistance from top officials in the administration of former Mayor David N. Dinkins, was designed to aid the city in negotiations with its bond raters.

At the time, Dinkins was locked in a fierce re-election campaign against Rudolph Giuliani, and Standard & Poor's Corp. was considering a reduction in its A-minus assessment of city general obligation bonds.

But George Roniger, McCall's director of financial planning who at the time was involved in discussions with the city, recently said he had misgivings about the letter's content, and specifically, its description of the city's fiscal situation.

Roniger made the comments in an Aug. 12 deposition given to lawyers representing three senior analysts fired last year by McCall, following a dispute over the tone and substance of reports detailing the city's budget problems. The three are suing McCall over their dismissal.

In his testimony, Roniger said: "As I recall from a distance, it was my view that the letter took too soft a position vis-a-vis the city." Roniger later said that "in my view, the city's [fiscal] position was somewhat more difficult than what I recall the letter suggested."

The letter, a copy of which was obtained by The Bond Buyer, was addressed to Dinkins, but McCall in legal documents said that it was written with the knowledge that the city would hand it over to bond raters at Standard & Poor's. A downgrade would have proven politically embarrassing to Dinkins, McCall's friend and political ally.

It is unclear what impact, if any, the letter had on Standard & Poor's decision in August 1993 to keep the city's rating at A-minus. Standard & Poor's, for its part, said the decision was based purely on the city's plan to cut spending in fiscal 1994 and beyond.

"The only thing I recall is that we got something from the comptroller's office being supportive of the proposed cuts," in the budget, said Richard Larkin, a managing director at Standard & Poor's. "To us, [the letter] sounded like a fluff letter and it had no impact on the rating."

In his Aug. 31 deposition to lawyers representing the analysts, McCall said he never met with Standard & Poor's regarding the letter, but that "the response that [he] hoped for was publicly announced" in the agency's decision to affirm the city's rating.

But the letter, according to the lawyers representing the former analysts, Joan Westmeyer, Jesse Ostrow, and Norman Gertner, gives credence to their charge that the firings were politically motivated, and an attempt by McCall to silence criticism of Dinkins during an election year.

The three are seeking damages totaling more than $2 million, court documents show. The suit charges that the three analysts were fired for their history of tough analysis of city budgets.

In his deposition, McCall says the firings were part of a transition after he was appointed comptroller and denies the allegations by Westmeyer, Ostrow, and Gertner.

McCall, a Democrat, was appointed state comptroller in May 1993 following the resignation of Edward V. Regan. McCall is running against Republican Herbert London in November's election.

London recently received the endorsement of the man who beat Dinkins in last year's contest, Giuliani, who criticized McCall for "having a political agenda" in his assessments of Giuliani's fiscal 1995 budget. The city's fiscal year begins July 1.

Dennis Tompkins, a spokesman for the state comptroller's office, would not comment on the letter. He said the depositions obtained by The Bond Buyer are incomplete because "none of the witnesses have received a copy to make corrections, which is standard procedure."

He also accused lawyers representing Westmeyer, Ostrow, and Gertner of releasing "transcripts in the middle of a disclosure process" and "subverting the judicial process," actions which are "highly irregular and inappropriate."

Dated June 29, 1993, the letter extolled a plan unveiled in the summer of 1993 by the Dinkins Administration to address deficiencies in the city's fiscal 1994 budget.

But even with the plan, analysts, including those in McCall's office, said the fiscal 1994 budget required close monitoring. The city continued to project billions of dollars in future budget gaps while relying on more than $1 billion of one-shot revenue raisers in fiscal 1994.

In fact, several fiscal analysts interviewed for this article said the letter is unusual because it soft-pedals many of the city's fiscal woes, and because it was written with the assistance of city officials. Parts of the letter even run counter to the tone and substance of reports produced by McCall's New York City budget office -- the Office of State Deputy Comptroller for New York City.

According to the office's August 1993 report, the city "will have to take additional actions to ensure that the FY 1994 budget remains in balance." The comptroller's report said that the plan projects billions of dollars of budget gaps in fiscal years 1995 through 1997, and that the projected gaps could be hundreds of millions of dollars higher than the city estimates.

Most notably, the letter appears to contradict the level of one-shot revenue raisers documented in reports produced by McCall's New York office. Credit analysts take issue with the use of one-shots, or nonrecurring revenues to plug budget gaps, because the technique cannot be used year after year.

The letter says: "Your use of one-shot revenues is within historical averages and less than 2% of your budget," or about $620 million.

But the comptroller's June 1993 report lists $947 million of one-shots in the city's fiscal 1994 budget, which began July 1, 1993. The office's August report details $1.164 billion of one-shots in the city's $31.2 billion fiscal 1994 budget.

The one-shots included a planned sale of the city's Off-Track Betting Corp., the sale of prison barges, and the controversial sale of delinquent property tax receivables. In fact, the August report says that "one reason the city continues to face budgetary difficulties is its reliance" on one-shots.

In his testimony, McCall said Roniger was responsible for "validity of any document that we produced that he was involved in."

The letter, according to McCall's testimony given on Aug. 31, was drafted following a meeting between McCall and officials in the Dinkins Administration who were mapping a strategy to help prevent a downgrade in the city's bond rating by Standard & Poor's.

Following the adoption of the city's fiscal 1994 budget and four-year financial plan, Standard & Poor's began a review of the city GO rating, according to McCall's testimony.

The budget included revenues such as state and federal aid that many of the city's budget monitors believed would never materialize, prompting concern among rating agency officials.

In June 1993, the Dinkins Administration called a meeting with McCall to discuss a strategy that would be used to convice Standard & Poor's against downgrading the city. McCall was invited to the event by Norman Steisel, Dinkins first deputy mayor.

Philip R. Michael, Dinkins budget director, led the discussions, McCall said in court documents. Also attending the meeting was mayoral adviser Donald D. Kummerfeld, who was appointed by Dinkins to develop a plan to eliminate the city's structural budget gap. During his testimony, McCall said he did not recall if Dinkins had attended.

During the meeting, officials asked McCall if he "would participate in a meeting with S&P." McCall said he would, but later determined that his "schedule wouldn't permit it."

As part of the discussions, McCall decided to take an additional step. According to his testimony, McCall said Linda Scott, McCall's special assistant, drafted a letter to help the city retain its bond rating. The letter, he said, was produced following a "discussion with Philip Michael." McCall in his testimony said Roniger was part of the letter-drafting process.

McCall said he viewed his direct involvement in the matter as part of his job as "the chief fiscal officer of the state" and as a result, "it was important that the city continue to have market access and that the city's bond rating would not decline."

But according to lawyers representing Westmeyer, Ostrow, and Gertner, McCall signed a letter that was largely crafted by the city's budget office. Brian W. Guillorn, who is representing the analysts, said his clients witnessed the letter being received from the city's Office of Management and Budget to the comptroller's office.

"My clients will testify that the letter that was sent [to Standard & Poor's! was virtually the same draft sent by OMB," said Guillorn, a lawyer working for the firm of Kathy H. Rocklen, P.C.

Michael, who resigned as city budget director in August 1993, said in a telephone interview yesterday that "he negotiated" the letter's language with McCall following several discussions. Michael confirmed that he drafted a letter for McCall to sign. He said the final letter that was sent to Standard & Poor's was nearly identical to his draft.

"There were not a lot of changes," Michael said. "I first discussed the matter with [McCall], then I got his concurrence on the general points. Basically, I negotiated the letter with him."

Patricia Fry, a budget analyst who was fired from the comptroller's New York office in March 1994, also following a dispute over city budget reports, said she obtained the letter when she took the job in the fall of 1993. At that point, she was told by staff members in the comptroller's office that the city's budget office, not McCall's office, had drafted the letter.

In fact, the document was so controversial among McCall's senior staffers, such as Roniger, and first deputy comptroller Comer Coppie, that they were concerned that Fry had obtained a copy of the document, Fry said. Roniger "told me not to show the letter to anyone because Comer Coppie thought the comptroller would look bad if anyone found out about it," Fry said.

RELATED ARTICLE: Dear Mayor Dinkins ...

The following is the text of a letter dated June 29, 1993, written by New York State Comptroller H. Carl McCall to then-New York City Mayor David N. Dinkins. Dear Mayor Dinkins:

I appreciated the opportunity of a meeting with you and being briefed on your Adopted Budget. Obviously, significant changes were made as part of the adoption process.

I am particularly gratified that you proposed a larger gap-closing plan than was contained in your Executive Budget. By increasing the gap-closing actions to $300 million, rather than limiting it to your $176 million contingency plan, you appear to have fully covered the risks associated with the State aid request of $280 million. Moreover, your larger gap-closing plan allowed you to reduce your federal aid expectations to $150 million from $250 million. It is also important that this new plan contains $300 million worth of actions that recur, in the outyears of the plan, thus the already large outyear gaps do not grow in size.

Your use of one-shot revenues is within historical averages and less than 2% of your budget; your revenue estimates are reasonable, and I note that despite the heavy recessionary and spending pressures of the last two years, you have been conservative in your Adopted Budget revenue projections.

Based upon my most up-dated review of your Adopted Budget, should you receive the FY 94 State aid and/or legislative approvals that it assumes, I expect FY 94 to be the City's 14th straight year of G.A.A.P. budget balance.

I remain concerned about the outyears, but I know you and your staff are working diligently to address these problems. I am familiar with and encourage the efforts of your special panel of distinguished citizens to identify major structural, cost-saving changes. I am committed to working with the City to achieve the goals of structural balance and long-term fiscal health.

Your partners should also do their fair share. It is important that we come forward and vigorously support the President's economic plan. We must insist that our congressional representatives vote for passage of the plan that could mean millions of dollars in new Federal aid and increases in Community Development Block Grants.

We should also support President Clinton's proposed changes in the federal tax law that could result in additional tax revenue for New York City of $47 million in this fiscal year, and approximately $73 million annually thereafter.

We must also insist that our representatives support the President's efforts to end unfunded mandates, and we must demand similar initiatives at the State level. Currently, New York State is one of only four states that requires significant payments from local governments for Medicaid. In this fiscal year, the City will spend $2.4 billion of its revenues on Medicaid.

Please be assured that I believe you have the will and intent to solve these difficult outyear issues, and that you will get the job done.

Sincerely, H. Carl McCall

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