Lexington's government faces about a $2 million shortfall on a budget of $51.6 million for the first quarter of the 2010 fiscal year, which began in July, the Urban County County heard at its work session Tuesday.
Without either cost cuts or an increase in tax collections, the deficit could reach about $10 million by the end of the fiscal year.
City revenues are down $1 million over this time last fiscal year.
Bill O'Mara, director of the revenue division, told the council that he and Linda Rumpke, commissioner of finance and administration, would be back before the council in November with recommendations to have a balanced budget by the end of the fiscal year.
"We will have to look at every line item," Rumpke said. "We will have to get a more solid feel of where the revenue will be."
Rumpke said that "we are experiencing a jobless recovery." Globally, some economists are predicting that it will be the end of 2011 before we see a robust economy, she added.
Since much of the Lexington government's money comes from a payroll tax, Rumpke said, if that base does not grow, recovery will be significantly impeded. "We have some significant heavy lifting to do," she said.
The report included preliminary results from September for the city's four main sources of revenue: the payroll tax (officially called employee withholdings), a net profit tax, insurance fees and franchise fees.
Payroll taxes in September were $11.4 million, down $1 million, or 8 percent, from September 2008. A review of the top 30 businesses showed a decrease of $253,000 from manufacturers and retailers, according to the report.
The sharpest revenue decline by percentage was in insurance fees, which dropped 36 percent, from $19,500 to $12,400.
Proceeds from the net profits tax were flat, with about $3.7 million collected in both September 2008 and September 2009.
Only franchise fees trended slightly ahead compared with last September — by $36,000, or 8 percent, according to the report.
While a shortfall looms, local government can have a balanced budget, if not by increased revenue, then by reducing expenses, O'Mara said.
O'Mara said that while the economic news was "sobering," there was a "silver lining" in that expenses are down about $1 million. "We are not spending at the same level as last year," he said. And in the coming weeks, all levels of city government will look for more ways to make cuts.
Several council members expressed concern about the financial picture.
"We're looking at a big train coming at us," Councilman Doug Martin said. He said the financial outlook was something council members have been "very concerned about since June."
The city's nine commissioners made budget reductions for the 2010 budget approved several months ago, but they will be asked to take additional belt-tightening measures "in light of the realities of today," O'Mara said.