Lexington faces a somber financial outlook that makes layoffs at City Hall "highly likely" in the fiscal year that begins July 1, according to senior officials in Mayor Jim Gray's administration.
As Gray's staff and the Urban County Council began working in earnest this week on a new budget, a first round of economic projections showed expenses outpacing revenue by $25 million in fiscal 2012.
"We have to resize government to fit the revenue stream," Gray said Monday at a budget workshop for top staffers and the council.
"We do have a crisis. As much as someone like myself would like to think that it's not there, it's here," said Gray, who will make a formal budget proposal to the council on April 12. "It is going to be hard. It is going to be painful."
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The city's General Fund revenues are projected to remain flat at $271 million next year, increasing a meager $21,000 from what is expected this year.
Meanwhile, Gray's administration says spending will need to increase from an expected $280 million this year to $296 million next year, thanks in large part to increasing personnel-related costs, which make up about 65 percent of the city's total budget.
The city's collective bargaining agreement guarantees pay raises for many police and fire personnel; health care costs have historically gone up 10 percent a year; and the state legislature increased the amount of money the city must contribute to the state pension fund, said Division of Revenue director Bill O'Mara.
The resulting gap between revenues and expenses is too large to fill with one-time money transfers and temporary spending cuts, said Geoff Reed, senior adviser to Gray.
"So many times the budget, in the past, has been reduced primarily through operating cuts," Reed said. "This budget is now down to the bone. The only way we are going to get the budget balanced is to make reductions in personnel costs."
Although Reed said layoffs are "highly likely," he said timing and number of them "are still to be determined."
Officials also dismissed the idea of a quick economic recovery.
Total employment in Fayette County stood at 141,984 in June 2010, the latest data available, down nearly 6,000 from June 2007, according to the U.S. Bureau of Labor Statistics.
With about 56 percent of city revenue generated by an occupational tax on individual wages, and 11 percent from net profit tax on businesses, job losses have a big impact on how much money the city has to spend, said Kenneth Troske, director of the Center for Business and Economic Research at the University of Kentucky.
Troske, who spoke at Monday's budget workshop, said it is particularly troubling that a majority of the jobs lost in Lexington were in higher-paying professions like accounting, legal services, management and real estate.
There is not a "good, clear answer" why this segment of the job market has taken such a hit, he said.
There's also concern going forward about two of Lexington's strongest employment categories — health care and education, which are largely paid for with state and federal funds.
Health care spending has been driven lately by changes in Medicaid, Troske said. The city's tax revenues will be impacted if the state significantly cuts Medicaid expenditures, as Gov. Steve Beshear has threatened to do if lawmakers can't agree on how to cover a shortfall in the Medicaid budget, he said.
The same goes for education spending. When the state legislature talks about cuts to higher education, that feeds into the city's revenue picture because that means UK and other schools don't hire "or even start laying people off, potentially," he said.
"So the ongoing debate in Frankfort will have a very real impact on our revenue," Troske said.
Given the city's job losses and uncertainty about education and health care spending, "wow, I'm concerned," he said.