This statement is overexaggerated, but based in fact.
The real statement by A.O.C., procured by Bronx Times and reported by USA Today, was “I don’t see dignifying him with [a response to his debate challenge].” This was then stretched by Dolan in his reply, wherein he speculated that “She said it would be beneath her dignity to debate with us. I think she knows that I would ask questions that she wouldn't have answers for.” (USA Today)
It’s important to note the the original source that was cited on NewsDetective was from an Instagram post. The quote that supported their claim — “They should also respect the Democratic process and debate bona fide balloted opponents — she doesn’t. @repaoc […] says it is beneath her dignity to debate.” — was in the comments of a news profile, and received very little attention from those interacting with the post. (Instagram, NowThisImpact)