The state Emergency Financial Control Board meets next week to determine whether New York City is crossing any of the tripwires that would necessitate a state takeover of Gotham’s finances, as happened during the financial crisis of the 1970s. The circumstances are not yet so dire, and the board will leave the city’s affairs to the city for at least another year. The board, which is functionally controlled by the governor and includes Mayor Bloomberg, will at most gently scold hizzoner for excessive borrowing and financial gimmickry but shrug off such measures as the necessary price of doing business in the aftermath of September 11.

Nearly all the city’s problems, however, existed before the terrorist attack. The new budget worsens many of these problems by repeating the mistakes that have gotten us here: It relies on long-term borrowing of more than $1.5 billion and various other non-recurring revenue sources to pay for recurring expenses. It borrows more money than is saved in recurring savings. It therefore only enlarges the debt while passing it on to the following fiscal years. As Fred Siegel has explained on this page, the mayor does finally control the application of whatever budget is passed by controlling the actual spending, no matter the plan. And it seems almost certain that following the governor’s race, midyear corrections will be made, as next year’s shortfall is estimated at more than $5 billion.

During the boom of the late 1990s, the city ran a surplus, in the face of a spending binge in which outlays soared 32% between the 1997 fiscal year and 2002. That is, the city increased its spending at greater than twice the rate of inflation, while still managing to bring in record surpluses. When the bubble burst, the recurring expenses continued to grow, and the surpluses went fast. The big recurring item was, and continues to be, labor contracts. Personnel costs amount for more than 50% of the new budget. In his early years, Mayor Giuliani forced unions into deals that basically kept pace with inflation, but in 2001, he struck deals with District Council 37 and the uniformed coalition that well exceeded the cost of living.

These deals left the city with a $2 billion operating deficit, which Mr. Giuliani filled in for a year with most of the remaining surplus. The deficit was in Mr. Giuliani’s budget even before the World Trade Center was attacked. E.J. McMahon of the Manhattan Institute has observed that the $2.8 billion of this year’s gap that is attributable to Mr. Giuliani is more than is the result of September 11. Mr. Bloomberg has done little to address this inherited problem. The charitable view is that he had to choose his battles and could ill afford to offend while gaining control of the schools. The price tag is that the city’s share of the Board of Education’s funding is up 10% this year alone, or $491 million. While some of this money was given to the city by the state, under the terms of the school control deal, the city will be holding the bag next year — and indefinitely after that, since under the law city spending can drop only in the event of a drop in absolute revenues and then only in proportion to the drop in revenue.

Up to this point, the mayor has launched no serious discussion about reductions in staffing. Mr. Bloomberg did not even raise the spectre of staff reductions in labor negotiations. The only reductions in headcount have come from the police and fire departments and from parks and recreation, hardly where one would expect to begin reducing the size of the city’s workforce. Given that the city’s debt is larger and closer than it was a year ago, this almost certainly sets up the mayor for a drive to raise taxes, though he has resisted that so far, except for the cigarette taxes that strike at the poorest sector of the city and the least potent politically, though Congressman Rangel has suddenly awakened to this gambit.

There are options other than raising taxes. The bloated city payroll is ripe for reductions, and for reform. The previous two mayors have recognized the need for such changes, but neither followed through. And then there are the classical supply-side measures. Tax reductions at the top margin, deregulation, and an increase in the incentives to work and earn. The state Financial Control Board may be unlikely to recommend a takeover of the city’s finances this year, but the fact that it will meet next week is a reminder that Mr. Bloomberg has no time to lose if he is going to avoid having to pay for gaining control of the schools by losing control of the city.