UPDATE 2-NYC mayor presents $58.5 bln budget, 3.7 pct hike

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By Anastasija Johnson and Joan Gralla

NEW YORK, Jan 24 (Reuters) - New York City's mayor, Michael Bloomberg, proposed on Thursday raising spending 3.7 percent next fiscal year to $58.5 billion, despite what he called "challenging times."

The city directed agencies late last year to slash spending in the current and 2009 budgets by $1.42 billion as profits earned by the city's financial industry have plunged because of the subprime mortgage crisis rattling the U.S. economy.

"There's no reason to think that when the country has a cold, we won't have a sneeze," the mayor told reporters.

Bloomberg, whose switch to an independent from the Republican party fueled talk of a third-party presidential bid, cut his forecast for Wall Street's 2007 profits to just $2.8 billion -- less than one-fourth of his $16.8 billion June forecast.

"Because we didn't squander our resources when times were good, we're much better prepared to deal with these more challenging times," he said in a statement.

Wall Street's evaporating profits could cut city tax revenues by $660 million.

The billionaire mayor, who won his first four-year term in 2001 by stressing his business experience as the founder of information company Bloomberg LP, was repeatedly asked about the risk of a recession. "My gut says everybody including me thinks the economy is going south so we're all probably wrong."

Despite hiring freezes, he pledged to continue to train new firefighters and invest in infrastructure.

The city's capital plan for the five-year period ending in 2012 totals tops $59 billion -- about what he wants to spend in the new one-year budget.

Bloomberg noted that organizations often lose focus and get in trouble by overspending during good times and said the budget constraints would force managers to be more disciplined.

He added he did not now foresee "having to look people in the eye and say we're not going to have libraries open and the cop on the beat and the firefighter showing up at the same time or in better time."

Urging the state and federal governments to come through with promised aid and unionized workers to cooperate in contract talks, Bloomberg said: "Everybody is going to tighten their belts."

No agency will be allowed to "kill" its most popular program in a bid to get more money by sparking interest group protests, he said. Instead, he said he expected agencies to trim spending with 2.5 percent across-the-board reductions in the current fiscal year and 5 percent in the next.

If the economy sinks further, he warned he might scrap a 7 percent property tax cut and a $400 rebate for homeowners, which together cost $1.25 billion. If he had to choose, Bloomberg said he would fight harder for the homeowner rebate.

The anti-trans fat and anti-smoking mayor also proposed hiking cigarette taxes by 50 cents a pack, saying previous increases had saved lives and curbed teenage smoking. (Reporting by Joan Gralla; Editing by Tom Hals)