UPDATE : N.Y. Fiscal Crisis Spills Into Classrooms : New chancellor gets high marks for reforms. Funding cuts could hinder his efforts.

Since taking charge as public schools chancellor here 18 months ago, Joseph A. Fernandez has dazzled New Yorkers with an astounding string of accomplishments. But as New York grapples with its most severe financial crisis since nearly going bankrupt in the mid-1970s, Fernandez’s momentum is in danger of being severely arrested, if not reversed.

Fernandez has already slashed the bloated central administrative staff of the nation’s largest school system by almost one-third, won abolition of the city’s notoriously bureaucratic teacher-licensing agency, gained legislation making it easier to transfer incompetent principals out of their schools and pushed through a controversial condom distribution plan in high schools to help curb the spread of AIDS.

He also has persuaded more than 200 of the city’s 1,104 schools to adopt “school-based” management, which seeks to give teachers and parents more authority over budget, staffing and curriculum in individual schools.

“He’s made more changes in the past year and a half than the last four chancellors put together in all the years before,” said an admiring Gwendolyn C. Baker, former president of the city Board of Education.

But to help plug a projected $3.5-billion gap in the city’s budget for the fiscal year beginning in July, Mayor David N. Dinkins has proposed a cut of $579 million in school funding, roughly 10% of the system’s annual operating budget.

Fernandez’s plight is one shared by school superintendents elsewhere as the nationwide economic downturn has decimated state and local government tax revenues.

Yet New York’s schools--which enroll close to 1 million students, almost three-quarters of them black or Latino--have never fully recovered from the devastation of the city’s ‘70s fiscal crisis, when more than 14,000 teachers were laid off, class size mushroomed, support services all but disappeared and maintenance was slashed to the bone.

Fernandez calls the latest cuts nothing less than “total disaster” for the city’s schools. Still, he averted the layoffs of thousands of teachers earlier this year by persuading their union to accept a $40-million deferral of the negotiated 5.5% salary increase. And he has come up with between $200 million and $300 million in additional personnel reductions and cost saving measures that are least punitive to students, staffs and schools.

“It’s sort of tragic that he’s been forced to deal with these cuts, but I think he’s dealing with them better than most people could,” said Sandra Feldman, president of the United Federation of Teachers.

“It seems like a real judicious and well-managed effort,” said Jeanne Frankl, executive director of the Public Education Assn., a civic group that monitors public schools and moved Fernandez up to a “B” from a “B-minus” in its latest “report card” on the chancellor’s performance.

But eventually, Fernandez acknowledges, he cannot avoid teacher layoffs and other hits in the classroom in order to absorb the remainder of next year’s proposed funding cuts. “We can’t do it any other way,” he said. “What does that mean for the schools? It means devastation.”

That prospect is all the harder for Fernandez to take because New York’s schools seem finally to be turning a corner. Fernandez says the dropout rate, now about 28%, is declining, the attendance rate is improving and math scores, for the second year in a row, are turning up.

Still, Fernandez maintains that he is not going to let the city’s fiscal crisis bring his reform program to a standstill, particularly his efforts to get more schools to adopt the “school-based” management initiative, which became the hallmark of his innovative approach to education in Miami, where he served as schools superintendent before coming to New York in January of 1990.

But doubts abound as to how much of his reform plan he will actually be able to accomplish, particularly if the city’s financial problems persist for years, as some fiscal experts have predicted.

“He’s dealing with a bus without any fuel. You can’t really move it from one place to another,” said Phillip Kaplan, executive director of the New York City School Boards Assn., which represents the 32 so-called community school boards within the New York district.