Lancaster Mayor Rick Gray had good financial news Tuesday. The cash-strapped city recently was told it will receive several grants and has made other gains.

But what those relatively small numbers will mean to the city's big fiscal picture remained unclear.

Gray, addressing City Council members at their regular meeting, told them:

• The city will receive $137,000 from the state Department of Environmental Protection for collection of recyclable material. The amount is $12,000 more than budgeted.

• The state DEP also expanded the city's permit for wastewater treatment to allow city sludge to be used as fertilizer rather than be further treated or buried in a landfill. The result is the city's sludge disposal costs will be significantly less next year.

• Revenue from real estate transfer taxes in the first half of the year was $278,327, or 12 percent more than the same period in 2009.

• The 914 building permits issued during the first half of the year was a 16 percent increase over the same period a year ago.

• A $400,000 grant from the National Fish and Wildlife Foundation will be used for "green" infrastructure initiatives to help prevent city sewage from overflowing into the Conestoga River during heavy rains.

• A $73,000 federal Byrne Justice Assistance grant will fund the purchase of three new police cars.

• And, the city plans to apply for additional grants to help prevent the layoff of firefighters and fund lead paint abatement programs.

But that good news easily could be overshadowed by the unknowns, said Patrick Hopkins, the city administrative services director.

While real estate transfer taxes were up in the beginning of the year as homebuyers rushed to take advantage of stimulus-funded tax credits, that tax revenue is expected to fall in the second half of the year as the economic slowdown continues, Hopkins said.

And while the number of building permits increased, the dollar value of those permits declined slightly — from $26 million to $25.5 million, Hopkins noted.

Unlike previous years, there are few major projects reflected in this year's total.

"I don't think we're going to hit our target for 2010," Hopkins said of the $600,000 budgeted for this year. Through August, the city has reached only half of that amount, he said.

As Hopkins drafts the city's 2011 budget that Gray will present to council members in two months, he is trying to be conservative, he said. A quick economic recovery is not forecast, and he does not expect significant increases in earned income tax revenue or interest income on city reserves.

Gray has asked city department heads to submit budgets that keep operational expenses at 2010 levels. That amount was a .5 percent cut from 2009.

One looming unknown is the cost of health insurance for city employees, Hopkins said. The city's current contract expires at the end of the year, and the city is shopping for another one. That could be a $9 million cost, Hopkins said.

He said it was too soon to predict whether the city's 2011 budget would include a real estate tax increase or how much that increase could be.

This year, the city's $46.1 million budget included a 25 percent increase in real estate taxes. It also included the elimination of 43 staff positions. Most of them were cut through attrition, but four firefighters were laid off.

"There are some big budget items out there that are still unknown," Hopkins said.

bharris@lnpnews.com