Less than a week after appearing before the Financial Control Board, Mayor Bloomberg seems to have realized the depths of the city’s financial straits. Perhaps it was the appearance of the president of the United Federation of Teachers, Randi Weingarten, before the control board as City Council Speaker Gifford Miller’s invited representative. But far from his claim before the control board that “you cannot just look at expense cuts,” which seemed to be all but an announcement of coming tax hikes, Mr. Bloomberg yesterday accused the City Council of “pandering” to municipal unions, and warned that “We’re going to have to find some ways to downsize.” In any event, with school control behind him, it seems Mr. Bloomberg is preparing for the cut-throat business of labor negotiations, and he will have to challenge the city’s largest — and perhaps its most powerful — municipal employee union immediately, a negotiation that will set the tone and the pattern for the deals to follow.

The contract District Council 37 signed with Mayor Giuliani last year — under which its members received raises that nearly doubled the rate of inflation — expired last month. The union also had a no-layoff agreement in this contract and will fight hard to keep that and the same rate of new money each year. Mr. Bloomberg has not helped his bargaining position by pretending the situation was normal up until now. Rather, he has dug himself a deep hole to crawl out of, as unions have no reason to make concessions if it is clear the mayor would rather raise taxes (“share the pain” is how labor leaders often refer to such an action) than extract any real savings through efficiency increases, reduced salaries, or layoffs from the city’s workforce.

As our Benjamin Smith reports today on page one of The New York Sun, $277 million of the $500 million listed in this year’s budget as productivity gains is in fact simply the unions consenting to allow the city to spread its cost of living adjustments to pensioners over 10 years, instead of five: a loan disguised as a gain. The remaining $223 million is in the form of unspecified savings, which most observers took to mean restructuring city employees’ health care benefits to require a co-payment under the basic plan, as state and federal employees, and most people in the private sector must do. To date, this has not happened, nor has any of this money — which is part of this year’s budget — been gained in any other way. The irony in the co-payments proposal is that the city and state’s public sector heavy and generally inefficient medical system — which is largely government subsidized — creates inefficiencies the government then pays for in the form of monthly health insurance premiums for city employees.

Mr. Bloomberg seems to finally understand that the only way to achieve productivity gains — without paying dearly for them, as he did with the UFT — is to make clear that the city’s economic situation is dire (which in fact it is) and to threaten layoffs. The city cleared this year’s deficit with loans, but will be scraping its credit ceiling next year, meaning tough decisions will have to be made. The mayor’s remark about pandering suggests that he is starting to focus on the city’s financial future, but in passing a budget before showing some backbone, the mayor has made his bargaining situation that much more difficult, and the decisions he must make that much tougher.