Comptroller John Liu’s finding that the Economic Development Corporation (EDC) had shortchanged the city treasury by $125 million raises the question of whether the comptroller can force the EDC to return the monies.

Asked at a telephone press briefing on Wednesday if he’d use his power to refuse to sign off on city contracts to compel EDC to pass the money along (EDC, though effectively a branch of the mayor’s office, is technically a non-profit corporation that contracts with the city to do economic development), Liu replied: “I hope it doesn’t need to get any further beyond this point,” adding: “We will use every authority we have in this office, and I imagine the mayor will do the same thing, to get that $125 million.”

It seems unlikely, however, that the mayor will have Liu’s back, since two mayoral agencies have already signed off on the EDC’s practice: A memo by the city’s Law Department, written in March, justifies the EDC’s retention of the lion’s share of the money, some $98 million in lease payments from properties in Times Square. And the memo reveals that the city’s Office of Management and Budget (OMB) had the authority to capture the $98 million in question, but decided to permit Economic Development Corporation (EDC) to retain it.

Moreover, the memo says, OMB’s decision and EDC’s use of the money were perfectly legal, according to the city’s contract with EDC. “There are no additional agreements between the City and NYCEDC that would require NYCEDC to remit such funds to the City,” the memo says.

Liu’s audit report disputes the memo’s finding that EDC’s contract entitled EDC to keep $98 million in city money. A 1988 agreement with EDC’s forerunner forbids the retention, the audit report says, and so do two contracts governing the parts of the project that generated the unremitted $98 million. Moreover, the audit report says, EDC in 1995 wrote a letter to the Deputy Mayor for Finance and Economic Development acknowledging that money collected from the project was to be remitted to the city.

Liu charged that EDC used “every excuse in the book” not to hand over the funds, and “in some cases, they have obfuscated their own financials” to avoid paying.

EDC immediately fired back on the charges of underpayment, issuing a press statement that, among other things, defended its actions on the grounds that “The payments NYCEDC has retained help to support NYCEDC’s mission of spurring economic activity, creating jobs, and generating tax revenues.” Of the 42nd Street lease payments, EDC spokesperson David Lombino adds: “We asked the Law Department point blank if we had the right to keep these funds, and they said in no uncertain terms that we did.”

As for where the money went, Lombino confirms that it was just folded into the corporation’s operating expenses. A look at EDC’s 2009 public authorities law filing reveals some of the big-ticket items that the corporation has helped fund, including: Gotham Center, a Tishman Speyer office complex in Long Island City; Columbia University’s Manhattanville expansion project; the South Bronx Greenway in Hunts Point; a master plan for redeveloping Willets Point in Queens; and construction of parking garages for the Yankees’ new stadium.

Bettina Damiani of the subsidy-watch group Good Jobs New York says that Liu’s report is very timely, especially given how Bloomberg has increasingly expanded EDC’s powers to oversight of projects in the outer boroughs. “We’re thrilled with the comptroller’s office to opening the door to what has always been an opaque process, to say the least,” says Damiani. “Anything to shed some more on the process is more than welcome.”

The EDC dispute recalls the mayor’s high-profile clash last fall with outgoing Manhattan District Attorney Robert Morgenthau over $448 million that City Hall claimed the DA had failed to turn over to the city. In an audit of that practice, Liu largely sided with the DA.