With a weakened economy, threats of war and the likelihood that Sacramento will help itself to local sources of revenue to balance a gaping state budget deficit, Monterey city hall is battening down the hatches. City Manager Fred Meurer told the city council recently that he estimates a $2.6 million deficit in 2003-04, and then a $5 million shortfall in 2004-05. He said the city needs to cut its spending by 20 percent.

Meurer is intimate with the city''s inner workings-he has been city manager since 1991, following a five year stint as the director of public works. Prior to working for the city, he was an army colonel posted at Fort Ord.

In addition to the cuts, he is calling for a "restructured" government. Despite the unavoidable air of crisis, he is being very deliberate about his decisions.

Monterey is hugely dependent on tourism-this fiscal year, hotel taxes account for some $11 million out of the $41 million budget. Right now, tourism revenue is slightly lower than where it was last winter, which was almost $2 million below the year before.

Also threatening Monterey, and every city and county in California is a state budget deficit of some $35 billion. Local governments expect to lose various revenues to the state including vehicle licensing fees. For Monterey that would be a $1.1 million loss per year. Millions in low income housing redevelopment funds could also be lost.

In addition to cutting its spending by millions, Meurer says, the city should also invest in a marketing campaign to draw more visitors. However, if war in the Middle East sends gasoline up to $5 a gallon, count on a tourism drought.

"That could be really bad," he says.

Many of the subsidized services the city provides its residents will likely be slashed-services like the Senior Center, the Sports Center and the Childcare Center. Essential services-police, fire and public works-will feel less of a pinch.

"We will also need to make some very hard decisions as to what services are essential, which services are discretionary," Meurer told the city council last week in a review of priorities.

On Monday afternoon, Feb. 3, Meurer sat down with the Weekly to explain what the city faces.

What is the situation with the city budget?

This year, the budget that started July 1, when we started planning there, we had a $3.7 million imbalance. We had no idea as to what depths the economy was going to sink. We had a new president, we had all kinds of new plans. What the future held, nobody knew. Now we have a clearer picture of the future based on the past 18 months. To date we have not seen the state economy even giving a hint of turning around. What we have seen is the state economy going even further south. As we look to the future and we look to the public and corporate confidence, we don''t see any bright pictures there either.

We hope to start by identifying what the cuts are going to be, and then we will look at the revenue potentials. Just last week we had a meeting next door with a number of business organizations-a sort of who''s who of Monterey business-and said the downtown economy is suffering. All you have to do is walk down Alvarado Street and you see a lot more empty storefronts than you did a year ago or two years ago. The answer is: ''City, you buy and restore the State Theater.'' Well right now I don''t have a funding source to buy and restore the State Theater. That would be a new demand for a city service. Now you might say, ''Well, re-prioritize.''

Maybe don''t build a new city hall?

Don''t build a city hall. OK that''s fine. We didn''t build a city hall in the late ''80s-needed one in the late ''80s. So do we get further and further behind? The council said we will not forget we have a responsibility for stewardship.

Now the good news is, the council, in their wisdom, for a long time did not spend all the money that the city took in. They''ve been putting it in the bank for the rainy day.

How much is there?

About $6.4 million. We also have various reserves for facility replacement or facility improvement. We always need to be sure what we have meets the community standard. We don''t want the roof falling in at the conference center. The piers under the wharf cannot be ignored. Those are our responsibility. Similarly, with the library, the Sports Center, the Senior Center. We''ve got a wide number of facilities.

Have all of the supervisors and department heads been asked to suggest cuts from all their programs?

Order of magnitude we''re talking about is a 20 percent cut in operations. Net. If you went to the senior center, many, if not all, of the senior center services are free. A 100-percent subsidy and there is no means test. That means you''ve survived this number of years therefore you qualify. Maybe we have to re-look at that. Maybe it should be based on means.

How much should we charge to use the Sports Center? 100-percent of the cost? Do I charge them for the indirect costs? We don''t run it that much like a business. I mean that''s just part of being government. We could. The council could say, ''no, we want to charge the full cost of doing business for this or that'', where it''s totally discretionary.

When will the cuts be decided? You''ve said the situation is changing every day.

It does change every day. We still don''t know what the state is going to do. We know what the governor has suggested but we know it takes two-thirds of the legislature to do that. So I hope that by about August we should be able to define what we''re going to look like if we have to eat that many cuts.

What is the "no layoff" policy?

Right now the council has a policy that says we would have no layoffs before June 30, 2003.

Why?

To provide some sense of stability to our workforce. The city council accepted [my] recommendation that they would make a commitment that there would be no layoffs before January 1, 2004. The thought process there is twofold. It provides us with approximately one year of stability, so folks can be focused on how are we gonna do this. It provides us some time so that we can do our best to identify the positions that might be eliminated.

Which might happen in January 2004?

The execution schedule-that''s a horrible word-the schedule for doing what the council wants to do is really not defined. I would anticipate that if we decide in August what it should be, the earliest we could move somebody out the door who didn''t want to leave would be January or February of that following year.

We need to make sure we don''t try to balance this whole budget problem on the backs of the little person out in the street doing pavement repairs or down in a manhole fixing the sewer or standing across the counter handing out towels at the Sports Center. The whole organization has to be restructured. So I will be looking for opportunities to save executive management dollars, management dollars and non-management dollars. I''m not going into this believing any level of the organization is going to be exempt from this.

Is part of this also that Monterey offers more services than other cities?

We are very, very blessed. As an example, as we''re wrestling with this, right now we provide 69 [library] hours a week. Right now the city of Carmel offers 54 hours a week, Pacific Grove, 62 hours a week, Salinas 57 hours a week, Seaside 50 hours a week. That gives you a snapshot of one service.

What might this look like? Will you cut back hours?

I don''t know. The city council was very wise in terms of saying we want to make sure we have help identifying this. So they have asked the parks and recreation commission to identify the cuts they would recommend that still leaves maximum value for the dollars spent. Similarly the library board will be looking at their full range of services and saying, ''where can we cut back?'' I guarantee you whatever we cut will be the most important service we provide to somebody. But we have to look at that greater good and we know that at some point in time we are going to have a lot of unhappy people. But they would be even unhappier if the council failed to make the hard decisions as soon as they could. We would fail our responsibility to the public if we don''t make those hard decisions.

It''s really easy to add things. It''s great to cut ribbons, it''s great to have groundbreakings. What''s hard is cutting back services.