City Council staffers could face criminal charges for setting aside millions of dollars in the city’s budget for phantom organizations that do not exist, a shady practice that is threatening the mayoral ambitions of Speaker Christine Quinn and Comptroller William Thompson Jr., and tarnishing the mayoralty of Michael Bloomberg. An official who requested anonymity said a senior staffer to a council member was expected to face charges.

Ms. Quinn, a likely candidate for mayor who has cast herself as a reformer and advocate for transparency at City Hall, is now entangled in a federal investigation that hit upon the misleading and possibly illegal accounting practice that dates back to 2001.

Political insiders say yesterday’s disclosure about the practice also raises questions about why the listing of phantom organizations in the city’s budget had not been discovered by Mr. Thompson, the city’s chief financial officer, or Mr. Bloomberg, who signs off on the budget each year. No one has suggested they had any role in the effort to obfuscate the budget process.

Two former directors of the City Council Finance Division, however, work for the Bloomberg administration, Haeda Mihaltses as the director of the mayor’s Office of Intergovernmental Affairs and Larian Angelo in the mayor’s Office of Management and Budget, which links the mayor further with any fallout from the council’s budget practices. A spokesman for Mr. Bloomberg said the officials still have the mayor’s confidence. When asked if he had known that phantom organizations were in the budget when he signed it, Mr. Bloomberg said he had learned of the practice earlier that day.

“I just told you, I had absolutely — the first I heard of it was today,” he said. “If I had known there was fake organizations in there do you really think that I would have signed the budget? Thank you very much. One would hope you’d expect a little more from me, for goodness’ sakes.”

The federal investigation seems to have begun last September, when the U.S. attorney’s office began scrutinizing the allocation of money for the pet projects of council members.

Prosecutors are investigating to see whether public officials or council aides siphoned off the money hidden behind fictitious organizations. So far, there is no indication that the practice was anything beyond a bookkeeping trick that gave the speaker a slush fund that may have been used to reward favored organizations and council members.

Ms. Quinn said the money set aside for phantom organizations on her watch was ultimately spent on legitimate community initiatives. Documentation provided by her staff accounted for $4.7 million that had been linked to fictitious groups on her watch, and showed it ended up in organizations such as the Greenwich Village Little League, the Caribbean Women’s Health Organization, and the New York Historical Society.

Ms. Quinn said yesterday that it has been a longstanding council practice dating back to at least 1988 to set aside reserve funds in the budget adoption process that would be used to fund programs throughout the year. In spring 2007, she said, she instructed her staff to stop this accounting trick. Ms. Quinn said she learned a few months ago that the practice had continued despite her directive, and that the money was being held in fictitious organizations.

The two highest-ranking members of the council’s finance division no longer work for the council, she said. She declined to say whether they had been fired, and said she did not know why her instructions had been ignored. Ms. Quinn said yesterday that she did not think there was a paper trail documenting her orders, which she said she made clear in meetings with staff members. The accounting practice was first reported in the New York Post.

According to city records, allocations in the City Council’s 2006 budget include $300,000 to The Association of Community Partners, $150,000 to Moving Up, Building Bridges, and $300,000 to The American Association of Concerned Veterans, among others. Fifteen shell organizations were slated to receive a total of $2.57 million for the 2006 fiscal year.

Lawyers say that knowingly inserting false information in an official document, such as the city’s budget, violates a state law against filing what is known as a “false instrument,” which sometimes counts as a felony. Federal prosecutors are handling the investigation and it’s not clear whether any federal law is violated by this action.

It would be unusual for criminal charges to be filed if prosecutors did not have evidence that public money was stolen after being hidden in the budget behind false organizations.

Using public funds, the council has hired a criminal defense lawyer from the law firm of Sullivan & Cromwell. The lawyer, Steven Peikin, was until 2004 a prosecutor in the same U.S. attorney’s office that is conducting the current investigation into the council.

New York City’s budget process is convoluted and multi-staged, with the line items of the budget receiving little to no scrutiny until someone seeks the funding their group is owed. That means that if no check was cut in the name of these fake organizations, it is unlikely that their presence as line items in the budget would draw much attention on their own.

A former speaker of the City Council who was in office when this practice allegedly started, Peter Vallone Sr., said yesterday that, to his knowledge, his office never used false charity organizations to hide taxpayer money during his tenure at City Hall, between 1986 and 2002.

“There would never be any practice in my administration which would involve allocating money to a false organization,” he said.

Another former speaker of the City Council, Gifford Miller, did not return calls for comment.

Mr. Thompson, who is running for mayor, said in a statement that the allegations against budget practices of the council raise serious concerns.

“If there were any attempts to subvert the New York City Charter or to hide money in non-existent organizations, these actions would represent a breach of the public trust,” he said. His spokesman could not be reached for comment about the damage the disclosure may have on Mr. Thompson’s political future.

A former parks commissioner who is the director of New York Civic, Henry Stern, said the budget accounting practice implicates officials outside the council as well as in, and is “totally wrong.” “He’s in his seventh year as comptroller. She’s only in her third year as speaker,” he said, referring to Mr. Thompson and Ms. Quinn. “All these books are in print, how come the comptroller didn’t know anything about it? It’s their job to audit all these city agencies. I think although it’s primarily the speaker’s fault, we should look closely at what the comptroller knew and when he knew it.”

The executive director of Citizens Union, Richard Dadey, was incredulous that a more than 20-year-old council practice went unnoticed by the mayor’s Office of Management and Budget and the Office of the Comptroller.

“They either were asleep at the switch or looked the other way in the monitoring of this practice,” he said. “I just find it hard to believe that after 20 years this practice wasn’t uncovered by someone outside of the council.”