City Council learned at the first of two budget workshops that general fund revenues will be down 3 percent from last year's.
The proposed budget estimates $9.9 million in general fund revenue. That is set against a spending plan of $10.2 million.
The difference is made up by general fund reserve money, which at $6.5 million is nearly double the 2008 amount.
"If we leave things just they way they are, we will be biting into that surplus each year until approximately 2018," said Brent Kuhn, the city's chief financial consultant, on Tuesday. "It could be sooner."
The city is planning with the assumption that voters will renew Measure A in November.
In 2009, Measure A was approved with 82 percent of the vote. It allows salaries of police officers and firefighters, which usually come out of the city's general fund, to be paid through the ½-cent sales tax approved in 2004, known as Measure P. It sunsets in 2014, and officials are looking to put it on the November ballot.
The proposed budget would increase general fund spending on police by 10 percent and on firefighters by 3 percent.
"If the measure does sunset and it doesn't get extended, the impact to the general fund will be far greater," Kuhn said.
The city is required by law to retain at least a 30 percent reserve in relation to appropriations, so deficit measures would be necessary if the reserve continues to dwindle.
While property tax has remained relatively flat across the board, sales tax is expected to increase by 2 percent.
City Manager Steve Carrigan said he met with or heard from four separate developers this week; all are looking to build homes in town.
"I don't want to say it's going to happen overnight, but we're seeing it a lot faster than even I thought," Carrigan said, adding it may take two months to have a better picture.
"I'm encouraged," he said.
Mayor Mike Villalta voiced his approval of the budget's direction.
"This is a positive report," Villalta said.
The second budget workshop is scheduled at 5 p.m. Tuesday at City Hall, 520 J St.
Enterprise reporter Thaddeus Miller can be reached at (209) 388-6562 or by email at tmiller@losbanos
Enterprise reporter Thaddeus Miller can be reached at (209) 388-6562 or by email at tmiller@losbanos enterprise.com.