Lower revenue from property and sales taxes has contributed to $2.6-million gap in the city’s general fund at mid-year.

The City Council last week was faced with closing the gap between dropping revenues and rising expenditures.

The council also needed to find $730,000 for a library fund’s shortfall in revenue.

“I’d like to remind council that $2.6 million might sound like a big number, but it is less than 4 percent of the general fund,” said City Manager Scott Mitnick.

To balance the fiscal year 2009-10 budget, the City Council voted 4-1 on Feb. 23 to approve staff’s recommendations to adjust the city’s general and library funds by freezing vacant positions, cutting back in various departments and transferring $400,000 from the city’s reserves to the library fund.

City reserves are supposed to be used only for one-time capital expenditures and not ongoing budget needs such as the library, but council members made an exception.

Finance director John Adams also alerted the City Council about an expected $3.2-million budget gap expected in the 2010-11 budget.

The council directed staff to find ways to balance that budget.

Sales tax declines, a flat property tax, a decline in development-related revenue and lower investment earnings all play into the city’s budget woes, Adams said.

Transportation funding has also eroded.

Money the city usually gets from the state has been taken away due to California’s budget cuts.

The state’s requirement that the city follow strict storm water guidelines at its own expense has also hurt the municipal budget, Adams said.

The city also collects fewer taxes compared to some other cities, Mitnick said, including a lower hotel tax, no utility user tax, no child care tax, no parking tax revenue and “the lowest business license fees in California.”

Councilmember Andrew Fox said city jobs must be considered before staff returns in the spring with measures for cutting next year’s budget, which begins July 1.

“Staffing needs to reflect the services we’re providing to the community, and we need to start taking a very good look at what we need today versus what we needed 20 years ago,” Fox said.

After Adams mentioned that the city may have to cut library hours, Fox responded.

“Before we cut library hours, we need to take a look at the city workforce,” the council member said.