He had good news to share, but Mayor Michael Bloomberg seemed so downtrodden last Thursday that a reporter asked him why he didn't seem happier.

It seemed like a fair question. The question came an hour into Bloomberg's presentation of a $57.1 billion preliminary budget in which he announced that the city's economy had a $3.9 billion surplus – almost $2 billion more than estimated in November 2006. The main proposal was a popular $1 billion tax cut. Compare that to Bloomberg's first few years in office, when huge deficits forced him into a grim game of dramatically raising taxes while cutting services.

Yet the mayor spent most of his time talking about how the good times were going to end soon.

Bloomberg responded to the question by insisting that he was happy, and that the city had reason to be happy. "The way to be happy long term, however, is not to go out and spend everything you have on food and drink," he said. "You have to make prudent investments."

This means setting aside much of the surplus to offset future deficits, and putting millions into a trust fund for future employee health benefits. But some would chafe at the assertion that using the city's surplus to confront current problems is akin to blowing one's paycheck on a fancy meal. A surplus, of course, does not indicate that all is well with the city. One in five New Yorkers are still living in poverty, some point out. New Yorkers still face the country's highest tax burden, say others.

Those hoping for more aggressive tax cuts or ambitious social programs didn't find them. Still, Bloomberg's budget does make gestures on these issues. His budget cuts taxes and increases spending, despite the tough talk. And because there is no pain to spread around, criticism of the mayor has been muted. The mayor has also won over many members of the City Council by granting steady funding to arts programs, parks, and other areas that have historically been the subject of squabbling between the council and the administration in an annual ritual known as the "budget dance."

As a rule good fiscal years are less dramatic than bad ones, said Diana Fortuna of the Citizens Budget Commission.

"It's so much more money than anybody expects, and it makes it not at all difficult to balance the budget," she said. "The challenge of a mayor in this kind of environment is how well he handles the future. He's doing fairly well."

The mayor's budget proposal this year takes the same attitude towards the future as he held throughout his tenure (with the notable exception of the year he was running for mayor, and proposed a tax rebate and a grab-bag of spending proposals). Essentially, he says, it scares him. So Bloomberg is setting money aside; some critics have said that a better use of the large surplus would be to deal with some of the structural challenges that can leave New York in trouble in lean years.

Bloomberg has discussed such actions in recent weeks, specifically in a report he issued with Senator Charles Schumer that discussed how to make sure that Wall Street doesn't lose it primacy on the international financial scene.

But any such bold plans were not part of the plan presented Thursday, when Bloomberg resigned himself to trouble ahead.

"These bad years do arrive. They did arrive," Bloomberg said. "It was only two or three years ago that we were running record deficits."

GOOD TIMES, BUT WILL THEY LAST?

New York's economy is doing well. Unemployment is at an all time low, the city has added 124,000 private sector jobs since 2003, and overall wages have increased significantly for three consecutive years.

The city has a surplus of almost $4 billion to work with this year. This is due primarily to Wall Street profits (the $25 billion in bonuses in the security sector were easily the highest ever), and the continued strength of the real estate market.

The situation has been the same for the last several years. Wall Street and the real estate market do better than predicted, bringing a windfall in tax revenue to city coffers, but economists say that a slowdown is imminent. In particular, the administration says that the "extraordinary revenue" from the real estate boom will drop by a billion dollars between fiscal 2008 and fiscal 2009. Wall Street profits are also projected to drop 16 percent this year, and even more sharply the following year.

The city's financial obligations, however, will not go away. Medicaid costs, interest the city must pay on money it has borrowed, and money paid for pensions for municipal workers are all expected to rise significantly. The mayor's office sees a $2.6 billion deficit by fiscal 2009, rising to $3.6 billion the year after that.

As a result, Bloomberg wants to use $1.4 billion of this year's surplus to help pay for the deficit in fiscal 2009. He also proposes adding $500 million to the trust fund he established last year to pay for health benefits for municipal employees. Aside from these admittedly un-sexy moves, the main way Bloomberg proposed to spend the money was with a $1 billion tax cut plan.

Fiscal watchdogs describe the mayor's moves as prudent. New York's tax revenues rely heavily on cyclical industries, and while Wall Street and real estate are hugely profitable today, this success simply cannot last. But advocates of tax cuts think that the mayor should have been more aggressive.

"For every measly dollar the mayor is willing to return to the taxpayers in the form of tax cuts, he wants to hoard for the government another two dollars and ninety cents," complained the New York Sun in an editorial.

The Sun and other like-minded critics argue that the mayor himself notes that the city spends more than it brings in, but that when presented the chance to make structural changes, he lets the opportunity pass him by while continuing the city on its current course.

WHAT THE BUDGET OFFERS

Tax cuts: Bloomberg's biggest budget initiative was announced at his State of the City: $1 billion in tax cuts, including $750 million for a one-year property tax reduction, the elimination of the sales tax on clothing and shoes, new tax credits for small businesses, and an extension of the $400 property tax rebate for homeowners.

Bloomberg says that his property tax reduction is a temporary measure, and makes no promises that he will continue it beyond that. But he has calculated future revenues as though the cuts will continue indefinitely. Many believe that the mayor is doing this to guarantee that if the situation next year is better than expected, the windfall will go to the tax cuts and not new spending.

"I think what he's trying to say to the City Council is don't spend this $1 billion," said Nicole Gelinas of the Manhattan Institute.

Education: For the first time, the city's budget factors in state money for the Campaign for Fiscal Equity – a long-running lawsuit whose recent settlement requires that Albany contribute more to public education in the city. Bloomberg expects the state to phase in its increased funding gradually over four years, from $723 million in fiscal 2008 to $2.3 billion in fiscal 2011.

The city and the state have been at odds for years about how much the city should increase spending in education as part of a settlement to the lawsuit. Bloomberg has resisted increases in the city's contribution. This year, however, he proposes increasing city spending on education, starting with $532 million in the coming year. Some believe this is the mayor's way of pre-empting an effort by the state to determine how much extra money the city should dedicate as part of the final deal on the Campaign for Fiscal Equity.

Poverty Initiatives: Mayor Bloomberg's poverty initiatives got scant mention in his State of the City. Yet his budget proposes spending $65 million in new spending on several initiatives. Among them are:

• a program to help juvenile offenders get GEDs and enroll in college,
• a youth internship program for so-called disconnected youth that the city says will lead to employment for 1,400 people in the coming year
• after school programs for 4,500 young people.

Other related programs that are not explicitly tied to the poverty commission but would receive increased funding include expanding education for young inmates on Rikers Island; developing better statistical models to show how New Yorkers are affected by poverty; and providing employment and training for non-custodial parents so that they will be more likely to pay child support.

James Parrott of the Fiscal Policy Institute said that the mayor's proposals were both encouraging and underwhelming.

"It's good news in that Bloomberg is one of the few elected officials that's doing anything," he said, but added that after the mayor's grand rhetoric on stamping out poverty, they seemed disappointingly modest.

"Some of the things seem reasonable to do, but instead of five or ten, why weren't there 20 things like that?" asked Parrott. He had particular praise for a program the mayor recently announced to help low-income New Yorkers collect the Earned Income Tax Credit, and suggested a tax credit for renters to accompany the tax breaks for property owners.

Capital Spending: In addition to his preliminary budget, the mayor presented a 10-year capital plan. The plan, which is separate from the operating budget, includes $77 billion, a 15 percent increase from the year before. The single largest expense is for educational facilities; at $28 billion, school construction spending makes up about 36 percent of the capital plan. But the plan also includes funding for the Atlantic Yards, the Javits Center, affordable housing, and even $200 million automated water meter readers.

All of this can be taken with a grain of salt. Since it covers such a long period, the plan for capital spending is constantly changing. Much of the spending in Bloomberg's plan won't happen until long after he has left City Hall.

ARTS, PARKS, AND THE BUDGET DANCE

The mayor's preliminary budget sets off a several months of negotiations with the City Council, leading up to a final budget agreement by the beginning of the next fiscal year on July 1. In past years this has been an acrimonious – and rather ridiculous – process known as the budget dance. In the dance, the mayor leads by proposing cuts to programs that he has no intention of actually cutting. He can then use the cuts as bargaining chips, reversing them in negotiations with the council. The programs are eventually restored to their original funding levels.

Council Speaker Christine Quinn (and many others) said the tradition was unnecessary and counterproductive. When she became speaker, Quinn said she would end the dance by convincing the mayor to create stable funding for many of the programs that have been subject to this back and forth. This process, called baselining, sets an amount of money that is automatically included in the budget. In last year's budget, the mayor agreed to put baseline funding in the budget for summer jobs programs for teens and library funding. Because the funding for these programs was always restored anyway, this move doesn't cost the city anything. But it does give a sense of stability to programs that rely on city dollars.

In an announcement the day before he presented his budget, Bloomberg said he would take further steps to end the dance. He set aside $38 million for arts program, $14 million to pay for park maintenance and parks workers, and $10 million for child care programs run through the Administration for Children's Services.

Political observers have seen the agreements as evidence of the warm relationship between Quinn and Bloomberg – which contrasts sharply to the hostility that the mayor felt for (and from) her predecessor, Gifford Miller, who hoped to beat Bloomberg in the 2005 mayoral election.

The deal between Quinn and Bloomberg has also served to endear the mayor to other members of the council.

"That's going to go a long way to us actually discussing some real policy differences that we might have at the end of the budget that we can deal with," said David Weprin, the head of the council's finance committee.

THE OUT-OF-CONTROL BUDGET

The city government does not control everything in its budget, however.

According to the mayor, over half of the spending in fiscal year 2008 will be on things the city does not have control over. These so-called uncontrollables include

• Medicaid costs, largely set by state policy, and expected to rise 8.9 percent this year);
• Pensions for municipal workers, negotiated between labor unions and state lawmakers, and expected to rise $15.1 percent this year; and
• Debt service, influenced largely by interest rates, and expected to rise 8.6 percent this year. Some argue that debt service is not really uncontrollable, since the city chose to borrow money, and Bloomberg said he agreed. Still, he includes it on his list of uncontrollable expenses.

The revenue that New York City has to work with also relies in large part on what happens in Washington and Albany. New York City sends a total of $22 billion more to state and local governments in taxes than it receives in services, according to the Bloomberg administration. Part of the preliminary budget each year is a series of suggestions about things City Hall would like to see done on other levels of government.

Washington: Bloomberg's requests of the federal agenda includes:

• $905 million to fully fund No Child Left Behind in the city;
• More flexibility for Community Development Block Grants; and
• $9 million in reimbursement for unpaid parking tickets from foreign dignitaries.

In total, the administration is asking for changes that would bring $1.2 billion into city coffers.

Albany: The main thing that New York City expects from the state this year in the Campaign for Fiscal Equity money. Other state initiatives that the mayor requested in his preliminary budget include:

• $50 million in increased child care;
• The repeal of the Wicks Law, legislation concerning construction contracts, that the mayor says will cut capital construction costs and save the city $63 million;
• Action by lawmakers to allowing the city to increase its tax on cigarettes to $2 a pack, while strengthening enforcement.

The negotiations between the city, state and federal governments over spending are a constant part of the political landscape, and the mayor does not believe that he will get everything he asks for.

Still, Bloomberg lays the blame for some of the city's most worrisome fiscal problems at the feet of officials elsewhere. The sharp rise in the cost of pensions was one of the things that had Bloomberg sounding so dour last week. It was also something he touched on in his State of the City address the week before, when he admonished Albany for granting generous pension benefits to municipal workers, then leaving city taxpayers to foot the bill.

"It's time for Albany to stop playing Santa Claus with the city's money," said the mayor.