The Municipal Assistance Corporation for the City of New York said yesterday it will provide $100 million in aid to the city in fiscal 1993 to help close a projected budget gap and eliminate the need for funds from a "mirror bond" refinancing.
The MAC money has been a source of controversy in recent weeks between New York City and the corporation's chairman, Felix G. Rohatyn, who said MAC began reconsidering the donation promised in February after it learned the city found a $455 million budget surplus in fiscal 1992.
Mr. Rohatyn said he feared the city would use the $100 million of MAC money for reasons other than reducing or eliminating its proposed mirror bond refinancing.
The mirror bond refinancing -- where the city issues debt to purchase bonds held by MAC in an attempt to free up sales tax revenues used in MAC debt service -- has been criticized by rating agencies.
Standard & Poor's Corp. told city officials it would lower its rating of the city's general obligation bonds, now rated A-minus, if the city used the "mirror bond" financing.
In an effort to allay Mr. Rohatyn's fears, Philip R. Michael, director of the city's Office of Management and Budget, told members of MAC's board of directors that the city will use its 1992 surplus and any surplus achieved next year to help eliminate or reduce its use of mirror bond refinancings.
In announcing his executive budget unveiled April 27, Mayor David N. Dinkins said the city had eliminated its use of mirror bonds in fiscal 1993.
However, the city proposed a $300 million mirror bond refinancing to help bridge a fiscal 1994 budget gap estimated at $1.3 billion. Mr. Michael told MAC board members the city will also try to get rid of the controversial financing technique in fiscal 1994.
Mr. Michael said the city will use $150 million it expects to have in its general reserve fund in fiscal 1993 to reduce its proposed mirror bond refinancing in fiscal 1994, which begins July 1, 1993. He said the city will work to further reduce its reliance on mirror bonds through "more belt tightening and cutting ack on spending," but refused to elaborate.
MAC's promise to provide $100 million in aid comes after the corporation in February refinanced debt to defease outstanding bonds and also achieve lower interest rates on the new debt.
The refinancing provided the corporation with a $300 million interest cost savings over the next three years. After Mr. Michael's explanation of the use of the MAC money, the board voted unanimously to make the $100 million available to the city for fiscal 1993. In the vote, the corporation approved an exception to its rules that all surpluses must be used to reduce debt service.
Despite the agreement on the use of MAC proceeds, the city and MAC disagreed on a plan by Mr. Rohatyn to use the future MAC surpluses specifically for education spending or to pay off MAC debt. Mr. Rohatyn's remarks come at a time when both the City Council and city schools Chancellor Joseph A. Fernandez have proposed using MAC money and possibly MAC debt issues to expand education programs.
During the meeting, City Council Speaker Peter F. Vallone proposed spending $500 million in MAC resources over the next two years to fund education improvements. He said the plan would use $100 million in MAC rusplus and $400 million in the issuance of new MAC bonds.
Last week, New York Gov. Mario M. Cuomo and Mr. Fernandez supported the use of $200 million in MAC surpluses to fund education programs in the city.
First Deputy Mayor Norman Steisel said in a telephone interview yesterday that the city would like to use all future MAC surpluses to downsize government through new investments in technology that will increase worker productivity.
But an observer of city finances, who asked not be identified, said using MAC bonds to finance education could cost the city more money than if it issued general obligation bonds.
The source said that despite its higher credit rating, MAC is scheduled by law to dissolve in 2008, when all its bonds must be paid. As a result, MAC would have to issue short-term debt that would mature in 2008 or before. The city, on the other hand, could issue 30-year bonds at a lower interest rate, the source said.
Although city officials have not embraced any of the education funding plans, they may have no other choice but to increase school aid, the source said.
The city may be close to violating the Stavisky-Goodman Act, a state law that requires the city to allocate funds to the Board of Education's budget based on a formula from its previous year's allocations, the source noted.
However, Mr. Steisel said "he doesn't believe" the city is in violation of the act.
