Under cover of the summer doldrums, Mayor Bloomberg’s budget staff is feverishly putting the finishing touches on one of the biggest bonding boondoggles in New York State’s history. On the surface, the impending transaction seems unremarkable enough: Some $2.1 billion in outstanding debt will be paid off with the proceeds of new bonds. Manhattan-based investment banks and law firms will reap big profits, and what’s now a $500 million annual debt-service obligation will magically shrivel to nothing in the city budget. So everybody should be happy, right? Not so fast.

As authorized by the New York State Legislature in May, the bond deal actually is so complex and byzantine that few people outside of public finance circles can even begin to understand it. But this much is clear: Albany legislators couldn’t have come up with a more costly, less equitable way to allegedly save money.

The debt in question is the legacy of the mid-1970s fiscal crisis, when the Municipal Assistance Corp. was created to issue bonds necessary to pay off the city’s accumulated deficit and stave off bankruptcy.

Underwritten by the city’s sales tax, MAC bonds have been restructured several times over the past quarter-century. These changes invariably produced savings for taxpayers, and they never pushed the debt beyond its original scheduled expiration date of 2008.

But under the Legislature’s bill, the existing debt would be extended until 2034 at a total cost of up to $5.1 billion – more than twice the remaining outstanding debt. Decades from now, when today’s baby boomers are collecting Social Security, New Yorkers yet unborn would still be mopping up the red ink left over from the heyday of Studio 54, Reggie! bars, and the Son of Sam.

To make matters worse, the Legislature abandoned the time-tested MAC financing structure and authorized the city to form a new, non profit “local development corporation,” for the sole purpose of issuing its own bonds to pay off MAC. Under federal tax laws, the interest on most if not all of the debt issued in this peculiar manner cannot be treated as tax-exempt. So the new bonds are likely to carry a higher rate than the existing MAC debt.

This is no concern to Mr. Bloomberg, however, because the Legislature also promised to pay $170 million a year in state sales tax revenue – specifically, a sliver of the “first penny” already technically pledged to yet another state bonding entity – to cover all of the debt service on the new bonds. So, in effect, what had been the city’s debt for the past 25 years will now become the state’s debt for the next 30 years.

Unlike previous MAC-related assistance, the resulting $2.1 billion in city budget savings would be a sheer windfall for City Hall, with absolutely no strings attached. No wonder Mr. Bloomberg is rushing to clinch the deal before anyone can have second thoughts.

The unusually high expense and generation-shifting impact of the transaction were among the “serious fiscal and policy objections” cited by Governor Pataki when he vetoed the MAC refinancing bill in May. But the Legislature – at that point, completely out of control on fiscal matters – overrode the governor without a second thought.

There is still time to derail this runaway debt train, however. As Mr. Pataki noted in his veto message, the New York State Constitution says that “[n]o money shall ever be paid out of the state treasury or any of its funds, or any of the funds out of its management, except in pursuance of an appropriation by law.” In this case, the Legislature failed to actually appropriate the $170 million a year it has promised to send the city to back up the new bonds.

As soon as possible, the governor should make it clear that he will not release this money without an appropriation – and that, by the way, he won’t support such an appropriation in any event. This should spook unsuspecting investors sufficiently to bring the bond issue to a halt, at least for the time being.

As an alternative to the plan approved by the Legislature, Mr. Pataki had proposed authorizing MAC to restructure its own debt on a more limited basis through 2013.This would have saved the city $1.1 billion over the next couple of years – but the interest costs over the life of the re-issue would have been a whopping $2 billion less than the current plan entails.

Thursday’s annual meeting of the state Financial Control Board, which Mr. Pataki chairs and controls, would provide a perfect forum for the governor to highlight the many questionable aspects of the pending deal and to publicly put his own, more sensible alternative back on the table.

At the same time, the governor should recommend that any restructuring of MAC debt be contingent on actions by the mayor to reduce the city’s structural budget gap, now projected at more than $2 billion in fiscal year 2005 and growing to more than $3 billion by 2007, despite massive tax hikes. Rather than view this as interference, Mr. Bloomberg should welcome it as leverage he can use in his fight to wring much-needed productivity savings from recalcitrant municipal labor unions.

As millions of homeowners across the country know, there’s nothing wrong with refinancing debt if it is done in a way that minimizes added expense. But the MAC refinancing approved by the Legislature and now being pursued by the city is indefensible by any standard of fiscal prudence. Instead of generating short-term savings for the city at the longterm expense of the state, the goal of this exercise should be to cut the cost of government for all taxpayers.