Last year, city department directors were instructed to prepare two budgets; one reflecting a 5 percent reduction in spending and another with a 10 percent cut.

This year there is no such directive from City Finance Director Ernest Zmyslinski, but that doesn’t mean conditions are any better.

In a March 6 memo to department directors, Zmyslinski gives an overview of the upcoming fiscal year, concluding that the state’s economy hasn’t shown signs of significant recovery.

“Rhode Island experienced job losses a year before the nation as a whole and many economists think a recovery will occur a year after the nation shows signs of economic improvement,” he wrote.

He asks that directors “examine the programs and services your department provides with the objective of reducing costs or eliminating programs and/or services that are no longer cost effective or not critical to the function of your department.”

Directors are asked to submit level funded budgets based on the appropriation for the current year by March 30. Budgets will be reviewed during the month of April, with the mayor submitting his budget to the City Council by May 17. The council has until mid-June to approve a spending package and set tax rates that go into effect on July 1. Schools are planning a series of budget meetings starting April 10. The expectation is for the committee to vote on a budget by April 24, in time to meet the mayor’s request. The picture at the School Department is no brighter.Rosemary Healey, school legal counsel and director of human resources, said 39 lay-off notices have been issued and, in keeping with its teacher contract, no more than 20 people would be laid off. “We are all looking to take cuts where we can,” she said. A major issue, from the perspective of school director of business affairs Anthony Ferrucci, is the $2 million surplus from last year that was used to balance this year’s budget. Use of the surplus means the department faces a structural deficit next year. Level funding doesn’t necessarily mean level amounts of spending or, for that matter, unchanged tax rates. Zmyslinski says the city is faced with several “drivers” that could alter the city’s spending including health care, utility costs and pensions.

So far, as Zmyslinski reported to the council last week, spending for the first eight months of the current year is holding close to the budget.

“We tend to be on track. The expense side [of the budget] is tracking very well,” he said in an interview Tuesday. This is significant because, if cumulatively expenses were running ahead of where they should be, the city could face a deficit. Further, this would mean the projections made last year were inaccurate and, to balance things going into fiscal year 2013, it would mean increasing revenues just to sustain current operations.

There are a few unknowns, such as health care costs. The city self-insures, so the number and level of claims for the year can dramatically impact whether expenditures come in budget or not.

“We’re holding our breath,” said Zmyslinski.

Zmyslinski is already forecasting a deficit in the Fire Department overtime budget. The council shaved $1 million from the mayor’s recommended fire overtime budget and, given the current rate of spending, Zmyslinski says that was too deep a cut. He’s optimistic that surpluses in other departments will make up the difference.

Zmyslinski sees no added state aid for the city going into the new fiscal year. There may be something for schools, based on the governor’s budget and commitment to provide added funding for education. Gov. Lincoln Chafee proposed funding about $37 million for schools with a 2 percent increase in the meal and beverage tax.

There is some question whether legislators will approve the Chafee tax plan, but given the improved state revenue estimates since Chafee announced his budget, Zmyslinski thinks the increased tax may not be needed to deliver the added school aid. Added aid would help reduce dependence on the city property tax. School costs represent more than 60 percent of the city budget. The current overall budget is $273.9 million, of which $157.8 million is the school budget. Schools get an additional $6 million in federal funds. Healey pointed out that, while the department and teachers continue to talk, some “big issues” remain. The union voluntarily increased health co-payments to 20 percent of premium costs after its contract expired last August. That contract extension expires in August, along with the 20 percent co-payment. On top of that, the department faces $3 million in fire code improvements this year and similar expenditures next year and in 2014. Healey also says, “We’re being told we can count on full-day kindergarten.” If that was mandated, Robert Bushell, director of elementary education, says the department would not only need to find the space for an added 16 rooms but hire 16 teachers and 16 assistants. Personnel costs alone, he places at $2.4 million. Healey said the mandate is not projected to take effect until 2013-2014.

A number of other variables could impact the budget.

Zmyslinski notes that projections call for the cost of gasoline to hit record highs this summer. He expects rising utility costs across the board, except maybe for natural gas. With the city adopting the same assumption for the rate of return on pension investments as the state – the city dropped its projection from 8 to 7.5 percent – pension contributions will need to be increased if plans are to maintain, or reduce, unfunded liability. The city is also using the state mortality assumptions that will also call for increased contributions.As for the cost of school pensions, Healey said the department expects to see a reduction in costs because of reforms enacted by the General Assembly and the governor last fall. Her conclusion, however, is that most of those savings will go to the state, not the city.

As for city contracts, agreements with all three unions expire June 30. What the administration negotiates in terms of raises and health care co-payments will impact budgets. Presently, the city has a fixed co-payment of $14 a week for an individual and $28 for a family plan.

Unlike some prior years, the city did not take funds from its reserves to balance the current budget. This means it is not entering the new budget cycle with a structural deficit. That bodes well for any added revenues the city needs to raise.

Zmyslinski believes there is some growth in the tax rolls and he notes that, unlike last year when commercial property values dropped because of the March 2010 flood, most of those properties, such as the Warwick Mall, are back and operating again.

There is some question, however, over motor vehicle valuations. The issue of valuation came into play when the mayor and council eliminated all but $500 of the $7,000 exemption to generate nearly $8 million in added revenues last year.

The action spawned the Warwick Car Tax Revolt and focused on motor vehicle valuations, which many argued were unjustifiably high. Legislation has been introduced that would lower valuations and, hence, reduce tax revenues if rates were to remain unchanged.

It’s too soon to know how this might play out.

Asked why he had not requested departments to submit reduced budgets this year, seeing that conditions don’t seem that much better, Zmyslinski said that, while departments drafted reduced budgets last year, they weren’t realistic if they hoped to maintain services and programs.

Level funded budgets, he said, are a more accurate reflection of what departments can do. In effect, he observed, departments are being asked to do the same thing with less since some costs, like gasoline, are expected to go up.

“Hopefully we’re back to an evener keel,” he said.