Mayor Bloomberg’s strategy of keeping the city in the black by rolling over budget surpluses, instead of cutting spending, will probably crash into fiscal reality next year, according to a report released yesterday by the Independent Budget Office. Analysts at the budget office expect the city’s economic growth will level off and the real estate market will slow down, robbing Mr. Bloomberg of the windfalls that have allowed him to fill multibillion dollar budget gaps with little pain.

“We’re not going to grow our way out of the 2007 problem like we did in 2006,” the office’s chief of staff, Douglas Turetsky, said. “The longer the mayor and the City Council wait to address the 2007 problem the more difficult the challenges are, because they will have less time to find the money they need to get either spending cuts or revenue increases passed.”

Mr. Bloomberg, in his $50.2 billion executive budget unveiled earlier this month, included a raft of election-year goodies, including plans to roll back the city’s portion of an “emergency” sales-tax increase on clothing and shoes, lower the city’s assessment on improvements to multi-unit properties, and renew a $450 property-tax rebate aimed at taking the sting out of a property-tax increase he asked for and won two years ago.

For the past two years, the mayor has been able to offer voters relief without gouging the city budget because of unexpectedly large tax revenues. But that pattern of surpluses available to mask underlying budget gaps may be about to change, the IBO said.

“Tax collections are not likely to exceed expectations to the extent they have in the past two years,” the report said. “That means it is unlikely there will be a sizable surplus available from 2006 to close the 2007 gap, which is estimated to be $4.5 billion, or 12.3% of taxes and other local revenues.”

In the current fiscal year, Mr. Bloomberg had projected a $2 billion surplus, but it has turned out to be close to $3.3 billion. Those kinds of happy surprises have allowed Mr. Bloomberg to avoid slashing services. His 2006 plan merely nibbles at the edges of city spending.

“He’s been really lucky. We all thought he was going to hit the wall this year,” a budget analyst at the Manhattan Institute, E.J. McMahon, said. “But a couple of lucky breaks means that you have big problem next year, and that makes the city much more vulnerable in any downturn. Bloomberg quite rightly anticipates a drop-off in real estate revenues, but what he has to hope is that it is only a cooling and not a bubble that is going to burst. There are a lot of grounds for concern, and the IBO is underscoring that.”

According to the report by the budget office, a watchdog agency in city government, Mr. Bloomberg’s wiggle room has come from a record growth in tax revenues compared to last year:

* Business income tax revenues are up 27%;

* Personal income tax revenues are up 14%;

* Sales tax revenues are up 10%.

Since 2002, revenues from the tax on real-property transfers have grown 111% and revenues from the mortgage recording tax increased 131%, the Independent Budget Office figures show. Combined, those two taxes now account for 6.6% of the city’s total tax revenues, up from 4.2% just three years ago, the report says.

The concern is that such robust growth in revenue cannot be sustained. The report estimates that total spending for 2006 under the executive budget will continue to rise at an average annual rate of 2% from 2005 to 2009 and reach $57.6 billion. The problem is that total revenues will probably grow at an average rate that is only a quarter of that, 0.5%, the report says.

It isn’t that Mr. Bloomberg hasn’t reined in spending – that has been fairly flat. Instead, the increases have been driven by pensions and fringe benefits for city workers, by debt service, and by Medicaid costs. The IBO report projects that those costs, along with the money needed to settle lawsuits against the city, will grow from 2005 to 2009 at an average rate of 6.8%.

Then there are the unexpected costs. The mayor’s 2006 budget includes $234 million in added expenditures, including $71 million for the Metropolitan Transportation Authority’s takeover of private bus lines and $57 million for campaign matching funds for this fall’s elections. The report forecasts about $350 million in police overtime, which is $89 million more than Mr. Bloomberg budgeted.

Also looming is the prospect of higher costs from labor contracts. The results of arbitration with the police union are expected to be announced any day now. Mr. Bloomberg has set aside money that would cover contract settlements that are based on the pattern set by agreements with District Council 37, which represents 121,000 city workers. Depending on the terms of the binding decision on the police contract, the city may end up liable for retroactive pay increases, which could exceed the money the mayor has set aside.

As a rule of thumb, each 1% increase in wages for all city workers costs the city $218 million, which compounds. By 2009, that would be $1.1 billion in additional city spending.

“The problem is the longer we wait to address the gaps in 2007 and beyond, the deeper spending cuts and steeper revenues increases will have to be to bring the budget into balance,” the report says.

Mr. McMahon, looking to the November election, put a finer point on it. “Whoever wins the next mayoral election,” he said, “is going to have to make some tough decisions.”