It just doesn't get any better.

Lancaster Mayor Rick Gray told City Council last week his administration has started work on the 2010 budget — and the numbers look abysmal.

The city, Gray said, is facing a $5.4 million shortfall in 2010, and the funding gap may force officials to hike taxes, slash personnel costs — or both.

"This is nothing new, it's in line with what we've been saying for years," said Gray in an interview Friday.

But the faltering economy has taken an additional toll this year; revenue, Gray said, has plunged to 2007 levels. Meanwhile, the cost of public safety in particular — police and fire — has soared, and health care costs will skyrocket, up an estimated 9 percent next year, Gray said.

"We're working as hard as we can to not have layoffs," Gray said. Instead, the city is trying to design an early retirement plan to induce some workers to leave voluntarily.

Gray said he wasn't yet sure how many positions may need to be cut. Representatives of the city's three unions said late last week that they hadn't discussed the issue with the mayor, though officials have scheduled a meeting with all three union presidents, presumably to do so.

"Right now we're looking at all options," Gray said. "But all along we've been saying it's going to get ugly at some point."

Accurate prediction
The future is now. And the Gray administration did, in fact, predict it.

According to projections posted on the city Web site, in 2008 officials forecast a deficit of $5.1 million in 2010. By 2011, that could rise to $6.6 million.

The city hiked taxes in its 2009 budget by 5 percent, from 9.18 to 9.64 mills, and closed a $3.6 million budget gap by, in part, taking money from its fund balance — essentially, savings.

The city's reserved fund balance stood at $15.4 million at the end of 2006, but is expected to drop to $7.96 million by the end of this year. At this rate, the Gray administration predicts the fund could be depleted by 2011.

"You can only live off your savings for so long," Gray said.

But in his message to council Tuesday, Gray hinted that the city may need to pull even more from its savings this year. Without drawing on reserves and hiking taxes, he said, the city might be forced to make a "significant reduction in the number of police officers and firefighters," to halve the number of housing inspections and spend less on cleaning streets and maintaining parks.

He said the just-concluded mayoral campaign — in which Gray, a Democrat, narrowly won re-election over Republican challenger Charlie Smithgall — precluded a clear-eyed discussion of the city's fiscal state until now.

"Recent political debate provided little, if any, honest discussion of how city taxpayers can afford to pay for existing public safety services," Gray told council.

Indeed, Gray spent much of the fall being rhetorically pummeled by Smithgall on public safety issues, including the loss of the policing contract with Lancaster Township. Smithgall had charged that Lancaster Township's decision to ink a deal with Manheim Township would blow a big hole in the city's budget; Gray said city taxpayers were actually better off without the contract — but he acknowledged the city might need to eliminate some police positions, perhaps through early retirement.

Since 2005, Gray told City Council last week, the cost of police services has increased by $3.4 million; fire bureau services are up $2.1 million over the past four years.

By comparison, public works expenses are up just $400,000 over the same period; spending on economic development and neighborhood revitalization has risen by just $300,000.

"Police and firefighter union contracts, which comprise the highest portion of the budget for salaries, will both increase3 percent," Gray told City Council. "Though these increases may seem relatively small, when coupled with prior increases, they have a compounding effect, which results in a substantial increase in costs."

Now hard choices have to be made, said Gray — and the city's unions are going to have to help out.

Gray told City Council he "will expect substantial cost reduction proposals from the city's three bargaining units" — the American Federation of State, County and Municipal Employees, Lancaster City Police Officers Association and the Lancaster Professional Firefighters Association, IAFF Local 319.

Mike Fox, district director of AFSCME District 89, said the union has not yet been approached by the administration. "We have not been told of any proposed 'substantial cost reductions' at this time," Fox said in an e-mail.

Ken Barton, head of the city firefighters' union, also said he'd heard nothing, but "we're short [staffed] now. When I came on there were 115 firefighters in four stations, now there are 83 in three stations, and we were supposed to go up to 89 two years ago, but haven't."

Christopher Erb, president of the Lancaster City Police Officers Association, said he and the presidents of the other unions have been summoned to a meeting at city hall the week of Thanksgiving, presumably to discuss budget issues. He declined to discuss specifics of what might come out of that meeting: "It would probably be inappropriate to talk about it," he said.

But Erb noted that the Bureau of Police actually generates a significant amount of revenue for the city. "Between parking tickets, warrant fees and services, false alarms, the bureau brings in millions, but it doesn't help offset police costs — it goes right into the general fund," Erb said.

He also wondered why city officials seem so quick to pin the blame for Lancaster's financial situation on the unions, when city officials through the years have made decisions that continue to cost taxpayers millions.

"If you look at the Armstrong property in the northwest, why would you allow that to go to two nonprofits [Lancaster General Health and Franklin & Marshall College]?" he asked. "That's a huge acreage that could have been used for other purposes, and now it's not being taxed.

Lancaster General has said it will make payments in lieu of taxes on the property, and F&M also has an unspecified tax agreement with the city.

"Bottom line, you don't go pointing fingers at people when you yourself are making decisions that contribute to the problem," Erb said.

Crises for cities
For years, Gray has talked about the structural problems facing cities like Lancaster. Last week, in an op-ed published in newspapers across Pennsylvania, Kevin K. Murphy, president of the Berks County Community Foundation, wrote of Pennsylvania's "municipal crisis." He noted that many communities throughout the state are "facing deep financial distress," and — like the City of Reading — could find themselves asking the state to step in.

Earlier this fall Reading applied for protection under the state's Act 47 program; and while bad decisions by city officials contributed to that, Murphy wrote, "poor behavior by city government alone doesn't account for how Reading got in this boat. The underlying cause of Reading's financial distress ties back to its legal inability to help itself. Simply put, the tax revenues — property and otherwise — that Reading is legally permitted to collect do not add up to enough money to fund the police and fire service it needs, let alone anything else."

Gray said Lancaster is in the same situation, though not as far along as Reading. He and other Pennsylvania mayors have begged the state Legislature to allow them to raise additional revenue — by permitting local sales taxes, for example. The Legislature has punted.

"We're all in trouble," Gray said of Pennsylvania's cities. "We might have a little more time than some other cities.

"We can't see the waterfall yet," he said. "But we can hear it."