Yesterday’s state Court of Appeals ruling in the Campaign for Fiscal Equity (CFE) case is a victory for judicial restraint and common sense. Needless to say, it’s also a huge break for Eliot Spitzer: Now he won’t have to take office as governor under the shadow of a financially backbreaking judicial mandate.

Instead of embracing the plaintiffs’ demands for $5.63 billion in added operational funding for New York City schools, the court effectively upheld Gov. Pataki’s proposal to add a minimum of $1.93 billion more.

Equally important, the state’s highest court also reaffirmed the boundaries of judicial power in New York. “We are the ultimate arbiters of the state Constitution,” Judge Eugene Pigott Jr. wrote in the 4-2 majority opinion. “Yet, in fashioning specific remedies for constitutional violations, we must avoid intrusion on the primary domain of another branch of government.”

Thirteen years of school-finance litigation in New York can now end on terms far more favorable to taxpayers than those dictated by more activist courts in other states, such as New Jersey. But, while the decision seems to foreclose any further court action, it leaves a lot of questions to be addressed by the next governor and the Legislature. Among them:

Where will the money come from?

Pataki said he could finance $2 billion in added state aid to the city over five years via an expansion of state-authorized video lottery terminals at racetracks. By contrast, the CFE’s preferred solution would require a massive tax hike.

Spitzer has been straddling the issue. As attorney general, he was technically the governor’s lawyer but distanced himself politically from his client’s case. He suggested during his campaign that $4 billion to $6 billion would be required to address CFE – which some saw as endorsing the plaintiffs’ goal. Although he can’t publicly admit it, Spitzer should be happy the Court of Appeals has let him off the hook. But his campaign promise to “fully fund” education has raised expectations that will be difficult to dampen – much less finance.

How will the money be spent?

Ignoring much evidence to the contrary, every court to rule on the CFE case endorsed the claim that smaller class sizes are the key to ensuring a sound, basic education. But hiring more teachers for this purpose is may also mean that fewer kids will end up with really good teachers.

The shortage of experienced teachers in city schools serving low-income children, another problem cited by the courts, isn’t helped by labor agreements that give the city’s teachers the right to transfer to schools in better neighborhoods as they gain seniority.

Used more creatively – in support of merit pay, a larger number of charter schools and/or vouchers or tax credits to promote choice – $1.93 billion could drive significant change for the better in city schools. The final CFE ruling gives Spitzer an added rationale for fighting for such reforms, since they can also yield more bang for fewer bucks.

Will there be any added accountability for results?

Upholding the intermediate appellate court (and overturning the original trial judge, Leland DeGrasse), the Court of Appeals said there’s no need for the state to conduct a fresh “costing out” study every four years, which would be a recipe for further spending hikes. In a victory for Mayor Bloomberg, it also said there’s no need for the city Department of Education to prepare a comprehensive plan to ensure more accountability. Instead, the court deemed the state’s existing accountability mechanisms “minimally adequate” but sufficient.

The high court’s commendable reluctance to dictate accountability measures doesn’t mean Spitzer and the Legislature should ignore the question. Any funding hike approved pursuant to the CFE case should come with strings attached, with fiscal consequences for failure to deliver.

It will take a determined governor to prevent legislators and the usual special-interest groups from using CFE as an excuse to promote Albany’s traditional education “solution” – lots more money, no reform.

But thanks to the Court of Appeals, these issues at least will be contested in the right forum. In one of his more beneficial legacies, Pataki stocked New York’s highest court with judges who were unwilling to micromanage policy. They’ve now kicked the ball back to the Legislature, once and for all. CFE and its allies must turn their attention to direct lobbying of the people’s elected representatives – which is just the way it should be.