Consider the Gotham Corporation – a multibillion-dollar service conglomerate given up for dead in the mid-1970s and widely written off as an Old Economy dinosaur just a decade ago, only to emerge as one of the great turnaround stories of the 1990s.

When the national economic slowdown began to erode Gotham’s revenue outlook in the spring of 2001, the outgoing CEO made a fateful decision not to curb expenses. Instead, gambling on a strong rebound, he balanced the books by drawing down a $3 billion pile of cash accumulated during the boom years.

A year later, Gotham’s cash cushion is almost gone and red ink is spreading in the wake of 9/11. A new CEO and board chairman have agreed to cope with the situation by raising some prices, selling some assets, refinancing some debt, cutting expenses slightly and borrowing $1.5 billion to keep the lights on.

The CEO has taken direct control of a troubled, strategically crucial Gotham subsidiary, but he has yet to produce a long-term plan for returning the overall enterprise to solvency and growth. Meanwhile, Gotham’s payroll is nearly as large as ever, and its unionized workforce has yet to make a single cost-saving concession.

With losses mounting, big price hikes are rumored to be just around the corner – which can only help Gotham’s already lower-priced competitors.

Sound like a good investment to you?

If Gotham Corp. actually existed, its finances would look a lot like New York City’s – and its once high-flying stock would now be tumbling down to single digits.

Fortunately for Mayor Bloomberg, New Yorkers and their employers aren’t nearly as mobile as investment capital. While some businesses relocated after the attack on the World Trade Center, even the most footloose of New York’s 8 million residents aren’t pulling up stakes in the face of the city’s fiscal problems – not in noticeable numbers, not yet, anyway. The city continues to benefit from a huge store of post-9/11 goodwill and civic patriotism.

But last week’s budget agreement between Bloomberg and the City Council provides plenty of grounds for added worry about the future of New York’s economy.

If there’s any good news in this deal, it’s that it could have been much worse. The council had been pushing for a job-destroying combination of tax hikes and spending increases that would have cast a much darker shadow on the city’s recovery prospects than Bloomberg’s plan, which relied heavily on gimmicks and new debt to close a $5 billion gap, while holding the line on (most) taxes this year.

But because the adopted budget cuts spending by even less than Bloomberg had proposed, the city still faces a shortfall of at least $3.7 billion in fiscal 2004.

That potentially huge budget gap will form the backdrop for the mid-July meeting of the state Emergency Financial Control Board, a sort of supercharged corporate audit committee for the city government. Chaired by Gov. Pataki, the board also includes the governor’s would-be Democratic opponent, state Comptroller Carl McCall, along with city Comptroller William Thompson and Bloomberg. Three additional gubernatorial appointees effectively put Pataki in charge of the show.

The purpose of the board’s yearly summer meeting is to confirm that the city isn’t close to any of the tripwires that would require a state takeover of its finances. The board’s staff is expected to answer a set of basic questions.

• Is the city failing to meet any of its debt service obligations? The answer will be no.
• Did it run a deficit of more than $100 million in fiscal year 2002? Likewise, no.
• Will the city run a deficit of more than $100 million in fiscal year 2003? Uh . . . well, barring an unforeseen disaster, no.

This is not because anyone thinks the new budget is solidly balanced, but because the mayor is expected to do everything in his power to stop a deficit from developing if his revenue or spending projections prove overly optimistic.

As it now stands, Bloomberg intends to cover $1.5 billion in operating expenses with proceeds from long-term bonds – the municipal equivalent of taking out a second mortgage to pay for groceries. It’s a temporary stopgap, permitted this year under an emergency borrowing statute passed in the wake of 9/11.

If the governor and the two comptrollers abide by the usual unwritten election-year protocols (that is, if they behave like most corporate audit committees), they’ll react to this unpretty fiscal picture by intoning some platitudes about the challenges of the post-9/11 environment and telling CEO Bloomberg to keep up the good work.

But if they take their jobs as the city’s fiscal overseers seriously, they will use next month’s meeting as a chance to press Bloomberg to get a jump on next year’s problems, before it’s too late. He’d probably consider it a favor.

Say this much for government finance, New York-style: The city may not be subject to the same sort of market discipline as a private company, but the accounting, at least, will take place out in the open.