The “conceptual agreement” for a new state budget reached by Governor Pataki, Assembly Speaker Sheldon Silver, and Senate Leader Joseph Bruno is Mayor Bloomberg’s first real test. The three wise men of Albany have undemocratically withheld the details of their back-room pact from not only the public and the press, but even from the state legislature. The information that has been leaked suggests that this deal may mark the turning point at which the city begins a slow retreat from the budgetary progress of the Giuliani years back toward the fiscal crises — often accompanied by chaos and crime — that plagued New York in the generation that preceded him.

The state’s tax revenues have already fallen $1.4 billion short of what Mr. Pataki predicted as recently as January, yet the budget apparently would spend $600 million more than the governor had proposed that same month. As our William Hammond Jr. reports, much of the difference is paid for with gimmicks and chicanery, by spending rainy day reserves, borrowing money, and dipping into funds dedicated for expansion of the state’s health care system. If things don’t improve quickly this election-year spending binge will bring calls for tax increases. By the logic of the budget, the most constructive thing New Yorkers can do is start smoking cigarettes.

Mr. Bloomberg has focused on austerity with a $42 billion city budget, which would increase spending by less than 2%. This is in the face of what the mayor’s office projects will be a $5 billion shortfall in the city budget next year. The mayor has received an as of yet unspecified but apparently substantial infusion of state aid, much of it earmarked for the city’s public schools. Much of this would be one-time aid, but the state’s largesse would quickly become the city’s permanent obligation. This was supposed to be in exchange for mayoral control of the city’s schools. But the committee impaneled by Mr. Silver to study mayoral control of the school system canceled its meeting scheduled for Friday. It starts to look like the speaker, no friend of education reform, has outmaneuvered the mayor.

Mr. Bloomberg pronounces himself pleased with the funds received, though he is making but the best of a bad situation. If the economy fails to improve, Albany’s election-year generosity may mean the ruin of the city’s finances. The situation is threatening to deteriorate into a replay of the Lindsay and Dinkins years, when the city responded to severe economic woes with higher taxes. At some point the Republican policy-makers will have to turn their focus to supply-side measures that deal less with state largesse and local austerity and more with tax cuts on the margin, deregulation, and other incentives for growth.