ALBANY – A ruling this week in the 12-year-old Campaign for Fiscal Equity case has complicated efforts at legislative reform and further jeopardized the already tenuous prospects of a timely budget, state lawmakers said yesterday, as talk of improving the face of state government has shifted to discussion of a looming constitutional crisis.

Governor Pataki came under fire last month for proposing to increase state spending on New York City schools by $325 million in fiscal 2005-06 after a group of court-appointed referees said the state should raise annual city schools spending by $5.63 billion and capital spending by $9.2 billion over the next five years.

The pressure to increase spending on city schools only intensified this week when the state Supreme Court justice who appointed the referees, Leland DeGrasse, signed off on their recommendations. In a nine-page ruling, Justice DeGrasse ratified the dollar amounts but left it up to state lawmakers to decide how the money would be raised and whether the city would have to contribute.

Mr. Pataki immediately responded by saying his lawyers plan to appeal the ruling. A spokesman for Mr. Pataki did not say what legal grounds the governor would use in such an appeal, and the state’s highest court, the Court of Appeals, has already said it agrees with the constitutional reasoning of those who filed the suit in 1992 on behalf of New York City schoolchildren.

Complicating the matter further is the double status of Attorney General Eliot Spitzer as the governor’s chief lawyer and the likely Democratic nominee for governor in 2006.

In pursuing next year’s nomination, Mr. Spitzer would probably seek the support of Assembly Speaker Sheldon Silver, who has repeatedly urged Mr. Pataki to drop his appeals in the Campaign for Fiscal Equity case.

The executive director of the nonprofit organization, Michael Rebell, said Mr. Pataki has privately indicated a willingness to negotiate a settlement of the suit before the four-week deadline for filing an appeal is up.

Mr. Rebell said he has discussed a settlement with Mr. Pataki’s staff that would keep the spending recommendations for New York City in place and add $3 billion to other struggling school districts statewide.

Rumors of a settlement in the case appeared far-fetched yesterday, however, as legislators, at a public leaders meeting, argued over even ordinary spending proposals. Lawmakers from both houses have cited budgetary reform as a top priority but have been unable to reach an agreement on how a reform package would look. The legislature has not adopted a budget on time in 20 years.

Mr. Pataki proposed last week to implement a contingency budget in the event that legislators fail to adopt a budget by the constitutionally mandated April 1 deadline. The Senate approved such a plan, which would essentially continue state financing at 2004-05 levels, by a solid majority yesterday. Assembly Speaker Silver, however, described the contingency plan as “an unprecedented power grab.”

Under the proposed contingency budget, state spending on public schools would be even lower than the figure the governor proposed in his budget last month. But the plan’s passage would eliminate the prospect of temporary emergency spending bills, which make long-term financing for state agencies and publicly financed services unpredictable.

The upshot in the current budget dispute is this: Pressure on Mr. Pataki to increase school funds by billions of dollars, at a time when he already faces stiff opposition to his plan for closing a multibillion-dollar budget deficit through fee increases and Medicaid spending cuts, has dimmed hopes in Albany that either school spending or the budget deficit will be resolved soon.

Even the state Senate majority leader, Joseph Bruno, ordinarily an optimist about reform, has begun to show signs of frustration. At a press conference yesterday, he put the chances of an on-time budget at “50/50.”

Still, Mr. Bruno defended the governor’s planned appeal of the DeGrasse ruling. Mr. Bruno suggested the appeal could even result in a speedier budget process by taking the issue off the table for at least one more year. Another Senate Republican, Stephen Saland, issued a bleaker portrait of the coming debate over school spending.

“The governor certainly has every right to appeal and should appeal,” Mr. Saland, chairman of the Senate Education Committee, said. “These decisions should not be made by trial court judges, and I would think that as this works its way back to the Court of Appeals, we have to be mindful of the big potential of a constitutional crisis.”

Mr. Pataki, meanwhile, was publicly optimistic about a compromise. “I have in my budget proposed a five-year fix not only for New York City but for the entire state,” he said. “I know the Senate has a plan and the Assembly has a plan. I think we should sit back and start looking at those different plans to see if we can come to a resolution.”