A city lawyer told an appellate court yesterday that local voters should have no direct say in budgetary decisions involving the city school system.

“There simply is no room for local legislation” on matters of educational policy, the attorney, Alan Krams, said.

The legal dispute stems from an effort by a coalition, including the United Federation of Teachers, to require that a portion of school funds go toward reducing class size. The amount sought is 25% of the payout from the Campaign of Fiscal Equity lawsuit, which seeks to make the Legislature spend billions more dollars on city schools.

The city has twice succeeded in keeping the coalition’s proposal, which would amend the city charter, off the ballot, a spokesman for the UFT, Stuart Marques, said. The proposal would limit Mayor Bloomberg’s authority to apportion the money.

In oral arguments before a mid-level appellate court, the topic of smaller class sizes was secondary to the legal issue of whether city voters were entitled to earmark school money coming from Albany.

“The question is whether it’s legally possible to do what you want to do,” a judge on the five-judge panel, George Marlow, told a lawyer representing the groups favoring the ballot proposal. “It’s not whether it’s better to have smaller class sizes.”

The merits of small classes are “not even debatable,” Judge Marlow said.

In New York City, the average size of a kindergarten class was just less than 21 students in October 2005, a Department of Education spokesman, David Cantor, said. High school classes had an average of 27 students, he said.

The proponents of smaller class sizes have said that their ballot proposal is legal because the Legislature in 2002 ceded power over city schools — which had traditionally been largely under the state — to the mayor.

The city attorney, Mr. Krams, said the power shift has resulted in the mayor “acting as a state officer in support of a state function.” Proponents of the ballot initiative, meanwhile, said that law is a precedent that gives local voters a say in how the school system will allocate its money.

The 2002 changes to the school governance law were “a wholesale sea change, a revolution,” a lawyer representing the plaintiffs, Randy Mastro, said.

In May a state judge, Lewis Stone, rejected that argument and ruled against adding the proposal to the ballot. He found that the changes in the law did not diminish the state’s authority over educations matters as much as the plaintiffs had argued.

At yesterday’s hearing, the panel gave few signals as to whether it agreed with Judge Stone’s analysis.

Even if the court did rule in favor of the referendum, one judge, Luis Gonzalez, questioned whether an appeal to the state’s highest court would be settled in time for an October 5 deadline for ballot proposals.