Despite a decline in state aid and rising costs, Mayor John DeStefano Jr. painted a bright future for New Haven at his annual State of the City address last night, emphasizing the accomplishments of his past term as he laid out a three year “stabilization plan” to keep the city afloat in the face of a souring economy.

Before a crowd of over 150 people at City Hall, the five-term mayor pledged to form stronger, more productive partnerships with the state, businesses and other local governments. He also said the city must take “the next steps” in its relationship with Yale, which is slated to begin traditionally divisive negotiations with its labor unions next week.

DeStefano said last night that failure to acknowledge union-backed organizing efforts by Yale graduate students and workers at Yale-New Haven Hospital would lead to “a dramatic and unnecessary disruption” for both the city and the University.

“We all ought to recognize that the organizing drives — are a reality,” said DeStefano, who brokered a deal between the University and locals 34 and 35 during the last round of negotiations in 1996. “They are going to happen.”

The University opposes graduate student unionization and has said it is not in a position to recognize workers at the hospital.

DeStefano, who credited Yale President Richard Levin for several positive changes in town-gown relations, divided the blame for past contract negotiation failures equally between Yale and its unions.

“All of us in this room ought to have the highest expectations that Yale and its bargaining units really do something about how they do business,” DeStefano said. “The failure of labor and management at Yale — is a distraction and frankly a nuisance.”

DeStefano said he would rather focus his attention on the city’s finances. Even as he projected a drop in state funding — which accounts for 54 percent of all city revenues — DeStefano vowed to hold Gov. John G. Rowland and state agency heads accountable for a host of past budget promises.

He added that he expected the state Department of Transportation to relocate the Yale boathouse when the agency moves forward with plans to widen Interstate 95.

“Let us keep our waterfront,” he said. “Let’s not repeat the mistakes of the past and let’s build I-95 below grade at Long Wharf.”

He also admonished the governor for cutting bus service in the city.

“State of Connecticut, don’t balance your budget on the backs of cities and towns,” he said.

DeStefano’s plan to deal with the drop in funding, which he first unveiled at a Jan. 31 press conference, calls for a reduction in the city’s work force through hiring freezes and early retirement packages.

The mayor, who said the cost of city employee health insurance benefits has forced him to make budget cuts, has said that by acting early — “by fixing the roof before the rain sets in” — he will not have to make any layoffs.

DeStefano, who took office in 1994, pointed to a declining crime rate and a two-year drop in the number of blighted houses as signs that New Haven is a “city that works.”

The crime rate has dropped by about 50 percent since 1990, a fact DeStefano attributes to the community policing program that has expanded under his watch.

Although the New Haven Housing Authority failed to secure a multi-million dollar HOPE VI development grant from the federal Department of Housing and Urban Development late last year, DeStefano said he would “keep coming back” until he got the funding. DeStefano said he wants the funds to help facilitate the revitalization of West Rock and Quinnipiac Terrace.

The mayor also promised to close on a deal for the redevelopment of the long-beleaguered Chapel Square Mall — a move he said would spur development on the abandoned Malley’s and Macy’s sites nearby.