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ALBANY � An appellate panel in Albany yesterday shot down part � but only part � of a bond bailout bill crucial to New York City finances, and essentially gave the city the go-ahead to begin shifting a daunting debt to taxpayers statewide. The ruling yesterday in Local Government Assistance Corp. v. Sales Tax Asset Receivable Corporation and City of New York, 94390/94533, represents a huge, albeit incremental, win for the city. But the practical, immediate effect of that victory is in question, since the state is likely to seek an injunction while the case works its way to the Court of Appeals. In the meantime, assuming an injunction is granted, the sale and marketing of bonds that Mayor Michael R. Bloomberg says are vital to the city’s economic recovery remain on hold. Local Government Assistance Corp. v. Sales Tax Asset Receivable Corporation has multibillion-dollar implications for cash-starved New York City and raises pivotal issues regarding the appropriate judicial response to poorly written legislation. Yesterday, the Appellate Division, Third Department, said a key portion of the enabling legislation is clearly unconstitutional, yet severable. Thus, the main objective of the legislation � to help the city financially by eliminating its budget-breaking remaining obligations from the 1970s fiscal crisis � remains valid. “It is beyond cavil that the overriding purpose of the Legislature in creating the [Municipal Assistance Corp. (MAC) Refinancing Act] was to assist the City financially in enabling it to eliminate the remaining payments due on the MAC indebtedness,” Justice Carl J. Mugglin wrote for the 4-1 panel. “Such purpose will be accomplished even with the severance of the offending portion of the act.” The appeal is rooted in the city’s 1970s fiscal crisis and the huge debt burden it carried into its current fiscal crisis. Last June, in an effort to assist the city, the state Legislature enacted a refinancing plan to shift $2.5 billion in MAC obligations to taxpayers across the state, thereby decreasing the burden on the city. The Municipal Assistance Corp. Refinancing Act permitted the Local Government Assistance Corp. [LGAC], an obscure state board controlled by Governor George E. Pataki, to transfer a $170 million sales tax payment to the city for the next three decades. Those payments would cover the $2.5 billion MAC refunding bonds issued by the Sales Tax Asset Receivables Corp. (STARC), a newly created issuer. Under the bailout, the state would save the city $2.5 billion by spending $5.1 billion, and LGAC would tap a portion of New York state’s sales tax revenues to cover the payments. The short-term benefits � a savings of $500 million in each of the next five years � were of utmost interest to Mayor Bloomberg and led the Legislature to take prompt action. Unfortunately, in their haste to help the city, state lawmakers either overlooked or inadvertently included a provision that threatened to undermine the intent of the legislation. The state Constitution prohibits “revenue financing,” or the trading of future state revenues for immediate aid. One clause in the legislation passed last year specifically exempts the LGAC payments from the annual appropriation requirement. Other clauses, however, indicate that the Legislature would have to appropriate funds annually. The legislation was passed over Mr. Pataki’s veto, and a subsequent attempt to repair the flawed legislation failed. The matter first came to court last August, when Mr. Pataki sued to block the sale of the first $530 million in refinancing bonds. Albany Supreme Court Justice Thomas W. Keegan issued a temporary restraining order and the matter moved along to Supreme Court Justice Louis C. Benza on the merits. Despite the “poor draftsmanship” of the bill, Justice Benza found that the Legislature could not have intended to undermine its stated goal by sabotaging the bill with a poison pill provision. Besides, Justice Benza said, when all is said and done, the legislation requires an annual appropriation, and therefore meets � in a rather circuitous fashion � constitutional restrictions. Justice Benza lifted the injunction and cleared the way for prompt marketing of the bonds. Mr. Pataki then appealed to the Third Department, where Presiding Justice Anthony V. Cardona granted a temporary restraining order and effectively barred the bond sales while the matter was pending before the Appellate Division. There, the case hinged largely on whether the judiciary should effect legislative intent when the legislation itself is defective. Corporation Counsel Michael A. Cardozo appeared for the city, and Guy Miller Struve of Davis Polk & Wardwell in Manhattan represented the Pataki administration. Severance Argued Mr. Cardozo argued for severance, urging the court to simply excise the troublesome provision, and reminding the court that legislation enjoys a presumption of constitutionality. Mr. Struve countered that the judiciary should not attempt to edit and improve upon the work of another branch of government. He also maintained that the sort of refinancing at issue here is precisely the type banned by the Cconstitution since it pledges future city revenues. In yesterday’s opinion, all five justices agreed that the provision suspending the requirement for annual appropriation is unconstitutional. They also agreed that the unconstitutional provision is severable. Where they differed was on the question of whether the act unconstitutionally impaired the contractual rights of current holders of LGAC bonds � a potential infirmity that seemingly could not be repaired through judicial fine-tuning. Justice Mugglin and the majority acknowledged that the state pledged to LGAC bondholders that they would have first priority on tax monies available to the Local Government Assistance Corp., and that New York would do nothing to alter or impair their rights or remedies. However, the majority said that “nothing in the Act explicitly requires that the [$170 million] be paid at the expense of existing LGAC bondholders.” Justice D. Bruce Crew III, in a partial dissent, disagreed. “[T]he act does more than put STARC bondholders on par with LGAC’s existing bondholders, it grants them preferred status,” Justice Crew wrote. He noted that some lawmakers apparently came to the same conclusion and have proposed legislation to make clear that the bailout payments are subordinate. An amendment to that effect, however, was not enacted. Also on the panel were Justices Karen K. Peters, Thomas E. Mercure and John A. Lahtinen. Appeal in Works An appeal to the Court of Appeals is already in the works. Equally inevitable is the recusal of the Court’s newest member, Judge Robert S. Smith. Until he was named to the high court by Mr. Pataki, Mr. Smith, then of Kornstein Veisz Wexler & Pollard in Manhattan, was the governor’s attorney in this case. Mr. Struve, who took over when his predecessor became a Court of Appeals candidate, declined to comment on yesterday’s ruling. Mr. Cardozo said in a statement yesterday that the Bloomberg administration is pleased with the ruling and eager for STARC to begin marketing the bonds. He expressed confidence that the essence of yesterday’s ruling would survive Court of Appeals scrutiny. “Issuance of the bonds is important to the City’s economic recovery,” he said. The LGAC board issued a statement vowing an immediate appeal as well as an attempt to block, through an injunction, any bond sales while the case is pending. It said the financing scheme is “bad public policy that would burden hard-working taxpayers and saddle our children, and even our grandchildren, with billions of dollars in debt costs for borrowing that occurred in the 1970′s.” And it offered to work with the city to devise a better solution to New York City’s financial woes.

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