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NEW YORK, Dec 10 (Reuters) - The administration of New York Mayor Michael Bloomberg is lining up for one last showdown in its $3.5 billion dispute over retroactive pay raises with the city's public school teachers.
With just three weeks remaining before his team cedes power to Mayor-elect Bill de Blasio, Bloomberg's administration will cite accounting rules at a closed-door state hearing on Wednesday as it tries to shut the door on any retroactive raises being paid out as bonuses in future years, according to people taking part in the hearings.
In the administration's view, the rules stipulate that any lump-sum payout must be booked in the year it is made, not spread out over years. The amount owed would be too big a hit for any one year and would break the city's balanced budget requirement, they say. The stance effectively closes down any attempt by the teachers for a settlement along those lines, at least with the Bloomberg administration.
De Blasio will be sworn in on Jan. 1, and it is unclear if his staff will take the same view on the accounting rules at the center of the dispute.
The recommendations of the state fact-finding panel are not binding, but they are expected to provide a basis for further negotiations. The panel's report could also have implications for the city's other public sector unions that are demanding up to $8 billion in retroactive wage increases.
At an earlier hearing, the teachers union, the United Federation of Teachers, which has been working without a contract since 2009, argued that under generally accepted accounting principles, or GAAP, rules for municipal budget keeping do not require an arduous one-time cost.
An accounting expert for the United Federation of Teachers also cited a 1991 deal when the city deferred part of a teachers' wage increase, paying $47 million out in 1995 and 1996 -- with interest of 9 percent -- and thus setting a precedent for the practice of deferred payments.
"It's a very big bill attached to this retroactive pay raise, and (the Bloomberg administration is) specifically raising this as a deal breaker," said Barry Epstein, an accounting expert at Cendrowski Corporate Advisors, who testified on behalf of the union. "Essentially what they are saying is, we'd be happy to pay this to you except we can't do it because we have a balanced budget law and this will bust the budget."
"My answer to that is they are misinterpreting their accounting requirements," Epstein said.
The mayor's office and the Department of Education declined to comment. But other people familiar with the proceeding supported Epstein's characterization on the city's position.
The UFT, citing the confidentiality of the negotiations, declined to say if it would seek retroactive raises in the form of one-time bonuses, though it has argued that they are permissible under accounting rules.
The dispute with public sector unions dates back to the period after the 2008-2009 financial crisis when Bloomberg declared a multi-year pay freeze for city workers. Unions opted instead not to renew their contracts, relying on a state law that preserves the terms of existing contracts until a new contract has been agreed.
The state fact-finding panel's report could also serve as a guide for uniformed service unions that do have binding arbitration. The three-member panel's report is expected in early 2014, meaning the de Blasio administration would have limited time to change the city's official line on the matter.
Unions have been hoping they will find a more sympathetic negotiating partner in de Blasio, the city's first Democratic mayor in two decades who won office in a landslide last month, with broad union backing.
The unresolved contracts will be one of de Blasio's biggest challenges. He has said the city cannot afford to meet all unions' demands but has not closed the door entirely on retroactive pay increases.
A spokeswoman for de Blasio declined to comment.
All of the city's 300,000 unionized workers are working without contracts, and the city estimates that the bill for missed raises would total $7 billion to $8 billion, a massive liability for the city's $70 billion budget.
The outcome of the dispute is a major concern to investors who hold $40 billion in city debt. Some have said they have sold part of their city bond holdings or are not making additional purchases until the situation is clearer.
Jeffrey Sommer, acting executive director of the city's Financial Control Board, which has been operating since New York's 1975 financial crisis, said it is unclear if paying out past raises in the form of a bonus would be permissible.
"Can you cross a fiscal year? Maybe," said Sommer. "We'd have to see the specifics. It's going to really be up to the city's accountants who do the final audit."
Any deal to defer payments, however, would be unlikely to allow an extended period such as 10 years, he said.
The back pay issue has intensified since last month when Bloomberg said he would hand a balanced budget to de Blasio, eliminating an anticipated $2.2 billion deficit.
Ronnie Lowenstein, head of the Independent Budget Office, a publicly funded city budget watchdog, has said her office soon will release a forecast with significantly higher long-term revenue predictions than Bloomberg's. That is likely to seized upon by city workers eager to bolster their case.
Lowenstein said that paying out retroactive raises as bonuses in future years and covering the cost with non-recurring expenses would be in accord with the principle of not using one-off income to cover recurring expenses.
"If some portion of the raises are one time payments that would meet that definition," she said at a recent conference organized by the Citizens Budget Commission.