A tentative agreement between the Bloomberg administration and the city’s largest public employee union is drawing both praise and criticism: Fiscal policy analysts are applauding the elimination of a residency requirement while faulting the city for not addressing soaring pension and health care costs.

The deal announced yesterday at City Hall would provide raises of more than 10% over 32 months for members of District Council 37, but in a significant concession by the administration, it would allow tens of thousands of city employees to live outside the five boroughs for the first time in nearly 20 years.

Leaders of DC 37, which represents about 121,000 municipal workers, had long pushed for an end to the residency requirement, and Mayor Bloomberg yesterday cited the city’s housing crisis as the prime reason for agreeing to the change. “One of our big problems is a lack of housing, and laws that exacerbate that problem don’t really accomplish anything,” the mayor said. “Those laws were appropriate in a different era, back when the city was not doing well.”

Under the tentative pact, union members would be able to live in the six suburban counties surrounding the city – Nassau, Westchester, Suffolk, Orange, Rockland, and Putnam. Like teachers and uniformed city employees, who are already allowed to live outside the five boroughs, DC 37 members would still have to pay New York City income taxes if they moved elsewhere.

The ban on DC 37 members living outside the city dates to 1986, when the Koch administration succeeded in enacting a law that was aimed at stemming the flow of New Yorkers to the suburbs and keeping economic revenue within the five boroughs. “A lot has changed since then,” Mr. Bloomberg said, pointing to the city’s lower crime and unemployment rates, improved schools, and rising population.

Mayor Koch lamented the shift, but he said it made sense given the reversal in the city’s population trend and the difficulty in finding affordable housing. “I can understand it,” he said in an interview yesterday. “It’s a little painful, but I can understand it.”

While the former mayor backed Mr. Bloomberg’s decision, he added one caveat: Administration and union officials, Mr. Koch said, should agree that should the city’s unemployment rate rise beyond a certain threshold, the residency requirement should be reinstated.

City and union officials did not comment on the suggestion, and DC 37’s chief negotiator, Dennis Sullivan, said the issue did not come up during contract talks. A fellow at the Manhattan Institute, Nicole Gelinas, praised the lifting of the residency rule, saying it was a nod to market forces in New York real estate.”It decreases much of the rationale for Bloomberg’s subsidized housing program,” Ms. Gelinas said, referring to the mayor’s 10-year, $7.5 billion initiative to build or preserve 165,000 units of “affordable housing.”

The executive vice president of the Citizens Budget Commission, Charles Brecher, also welcomed the change, saying it could enhance the city’s workforce by allowing agencies to pick from a broader pool of applicants.

Mr. Brecher and Ms. Gelinas each criticized the administration for not securing concessions from the union on pensions or health care. “Every new contract that the city signs that doesn’t include health care concessions on the part of the unions sets the city back, because these costs are collecting for the future,” Ms. Gelinas said.

Mr. Bloomberg said the city was prohibited by law from negotiating pension issues as part of contract talks, but that the union had agreed to discuss pensions as part of a labor management committee. Changes to health care benefits would be taken up with the Municipal Labor Committee, he said.

By agreeing to a contract before discussing changes to the pension and health care systems, the city has given up bargaining leverage, Mr. Brecher said. He also criticized the administration for “backing away” from its policy of securing cost-saving productivity enhancements in labor contracts. The contract was “something of a disappointment,” Mr. Brecher said.

The mayor yesterday said productivity benefits agreed upon in the last DC 37 contract, in 2004, would continue through this contract, but he said there was a limit to how much the city could demand. “It’s just a question of how much you can reasonably expect our workforce to do,” he said.

The contract, which is subject to a vote by the union membership, would cover July 1, 2005, to March 2, 2008. It contains salary increases of 3.15%, 2%, and 4%, and the city also has agreed to increase its contribution to the union’s welfare fund by $100 for each member.