RICHMOND -- The city is facing a budget shortfall of $7.4 million, an amount expected to increase to $9 million after raises for city employees go into effect in July.

Although sales tax revenues have rebounded since the recession, property taxes have lagged somewhat, increasing by a mere $1 million in the past year. Part of the problem is the 330 properties still languishing in some form of foreclosure. And while property values have risen by 12 percent over the past year, according to Trulia, a real estate website, home sales are down by 10 percent.

Meanwhile, salary costs have also increased, from $61 million in 2010 to $69 million this year, while benefits, including health care and pensions, have spiked from $26.7 million in 2010 to $36.8 million, according to the city. And this summer, employees belonging to five of the six city unions will get salary bumps of up to 3 percent, after deferring them last year.

That means the City Council may be faced with difficult choices about how to balance next year's budget when it tackles the issue later this spring.

"We certainly can't have something like this (deficit) next year, and we certainly can't have it for two years in a row because then we won't have any money," City Manager Bill Lindsay said in a recent interview. "The city needs a significant course correction."

Last year, Richmond dipped into its reserve fund, taking an estimated $7 million to balance the budget, and refinanced civic center bonds. But because the city is required to maintain a balance of at least 7 percent in its rainy day account, tapping reserves is an option of last resort.

Instead, the city is looking at freezing all new positions and saving money through attrition. Last year, Lindsay asked all department heads to figure out a way to trim expenses by at least 17 percent.

But there's good news too. Measure U, the quarter-cent sales tax approved by voters in November, will soon go into effect and is expected to raise $8 million for the 2015-2016 fiscal year. However, the council has said it wants to use part of the money to repave streets, long a source of concern for residents.

What everyone wants to avoid is what residents feel the most -- service cuts. Councilwoman Gayle McLaughlin described service levels as "bare-bones" already and said it wouldn't make sense to cut any more.

She also raised the possibility that the city could tap some money from a $90 million, 10-year community benefits agreement with Chevron to help fund some programs; however, it remains uncertain when that money will start flowing because it's tied to the company receiving the final go-ahead to break ground on its $1 billion refinery modernization.

"I think it will be tight, but I also believe with property and sales tax increasing, with Chevron money, with some development money, and with Measure U additional tax money for some special projects taking some of the load off the general fund, my hope is that we will maintain ourselves at the same level as last year," she said in an email.

Although the city has trimmed back on staff -- who total around 800 people -- expenditures have continued to rise, growing by $8 million in the past year and now totaling $140 million, according to a midyear budget review released last month. A large chunk of the money is spent on public safety, with police and fire costing the city $90 million, or 64 percent of the general fund.

That prompted Councilman Vinay Pimple to propose that the city close at least one fire station and look at hiring new officers instead of officers from other agencies, who cost the city more in pension costs.

"Police officers in Richmond are pretty highly compensated compared to other comparable cities, so that's something we need to look at," Pimple said.

Contact Karina Ioffee at [email protected]. Follow her at Twitter.com/kioffee.

Reposted from Contra Costa Times.