Covington’s 2010 budget is about finding ways to cut back, according to the budget message City Manager Derek Matheson planned to present to the City Council Tuesday night.

Last year, the recession had not hit the city, “so while we had to be very conservative in our budgeting, we didn’t have to reduce the budget,” Matheson explained.

“The recession has definitely hit us this year,” Matheson said.

Cash flow is down across the board, with reduction in revenue from the real estate excise tax or REET and permit fees hitting Covington hardest.

“In 2007, we were bringing in $185,000 a month in permit revenue,” Matheson said. “In March, when we did the first layoffs, we brought in $15,000 that month.”

Funds from REET had been pledged to pay back 2007 transportation bonds but the city has $700,000 in debt service to pay back on those bonds that REET revenues just won’t cover this year.

“The good news is that property tax, sales tax and utility tax continue to hold their own,” Matheson said.

It doesn’t hurt that Costco and Home Depot opened in the city within a few months of each other last year, which will help protect some core services, but staff still has to recommend $1.1 million in reductions from the operating budget, Matheson said.

“We’re able to absorb that $700,000 in debt service without cutting positions in the general fund because the council has been so conservative the past two years,” the city manager said. “We under-projected utility tax revenue by about $600,000.”

Add to that the money that came in from Home Depot and Costco and the debt service can be managed because “the Council resisted the urge to spend all that money.”

In order to tackle the challenge of making cuts, Matheson and Finance Director Rob Hendrickson put together a budget balancing strategy Matheson described as “organization wide strategies and position specific strategies.”

Under the first category, there are three ways to manage that, with the first being transferring money from reserve funds and capital funds — with the latter typically used to pay for construction projects — to the operating budget.

Second would be to move community development expense to the general fund and finally, Matheson said, modify employee compensation.

“We’ll replace our current monetary merit award program with another form of compensation like additional floating holidays,” Matheson said. “Each employee is able to earn an additional 6 percent of their salary based on achievement based on an individualized set of goals for a year.”

Employees instead will be offered extra paid time off.

In addition, the city will move to a less expensive medical plan in 2011.

As far as position specific strategies, that means lay offs, something the city has already done this year.

Matheson said that in March four positions were eliminated and one other was reduced to half time because “that’s when it became clear our permit revenue was tanking … commercial, residential, land use, business license fees (were disappearing).”

The budget proposes eliminating five more positions, including that of the economic development manager, a job that was added little more than a year and has been paid for by the utility tax that has been in place since early 2008.

“We’ve focused the reductions in specific departments where revenue and workload is down,” Matheson said. “The proposed budget protects our core services like public safety and infrastructure maintenance.”

One area that takes a significant hit in this budget proposal, Matheson explained, is the capital investment fund.

“It eliminates all transfers to the (capital improvement program) by 2011,” he said. “What that means is that if the city wants to achieve its dreams of building roads, building parks, building a town center, we’re going to have to rely more on federal and state grants and earmarks and voter approved bonds that are backed by guaranteed revenue sources.”

Matheson said the budget proposal also recommends the Council consider adopting a $20 vehicle license fee, which the city is allowed to do without a public vote through the creation of a transportation business district, which “other than recommending we look at a vehicle license fee because the 2010 budget doesn’t assume one, I just lay out to the Council what their revenue options are if they want to avoid any of the reductions.”

There are some other options for generating revenue due to banked taxing capacity in property and utility taxes but it could be difficult to ask the council to tax residents more when they, too, have been hurt by the recession.

And yet, there could be still more bad news, Matheson said.

“We can’t talk about the budget without talking about Initiative 1033,” he said. “If it passes, it won’t affect us in 2010, but it will start to affect us in 2011.”

Hendrickson described I-1033 as “the vulture that’s hovering over this whole forecast.”

“Without 1033, the general fund does OK and we’re still able to pay our debt service,” Hendrickson said. “If 1033 passes, we don’t anticipate being able to pay our debt service because we don’t anticipate REET going up for the next four or five years. It just blows up our debt service fund.”

If the Tim Eyman sponsored initiative which would limit general fund revenue, as Matheson explained it, to growth by population plus inflation for Covington “that would be about zero percent right now.”

“The positive is if 1033 does not pass, I think we’ll be OK letting the economy recover on its own,” Hendrickson said. “We’ll be able to support the core services and move forward without any drastic strategies. If 1033 passes, we’ll have to develop a whole new strategy in how to work with that. Without (the vehicle license fee) the street fund is in tough straights and that’s going to be a big hit to maintenance.”

The City Council will have time to consider the proposed budget and will pass a final budget by the end of the year.

Hendrickson said the council members are well aware of the city’s challenges, thanks to Matheson’s leadership, but it’s still not easy.

“I’ve been in this business a long time and this is about the toughest budget I’ve ever seen,” Hendrickson said.