Petaluma's budget outlook remains lean, although a new shopping center and improvements in the regional and local economy provide some hope, City Council members heard this week.

Bill Mushallo, the city's finance director, provided a short and long-term outlook to the council as part of a mid-year budget review.

Increases in sale tax and property tax revenues, totaling about $360,000, are promising. But franchise fees decreased and the city had "significant" drops in fines and forfeiture funds of about $500,000.

In total, general fund revenues this fiscal year are down about $615,000, Mushallo said. At the same time, $268,000 in spending was cut.

Those figures would leave about $400,000 in the city's general fund budget at the end of the fiscal year in June.

"The city remains dangerously close to a zero balance in the general fund," Mushallo said. "All budgets are really, really tight."

Beyond this fiscal year, the city is looking at an average $1.6 million deficit between revenues and expenditures each of the next few years, he said, leaving the city's emergency reserve fund essentially empty.

"We've really got a lot of work to do here in balancing next year's budget," he said. "We also think that rebuilding reserves is very critical for the city over the next several years."

The city will tackle how to attain those savings in the next few months.

Given current projections, the city would be $6.4 million out of balance by 2016.

More accurate ways of forecasting salary and benefit costs will make the long-term picture clearer, he said, as will an expected reevaluation from PERS, the public employees' retirement system, of its investment returns.

Salaries and benefits make up about 80 percent of Petaluma's general fund budget, the main discretionary pot of money cities use to operate. Three-quarters of those salaries are for police and fire personnel.

Six firefighting positions previously funded by a grant would have to be funded by the general fund next year.

Another burden is several hundred thousand dollars a year for storm water maintenance that is being shifted from the wastewater budget in response to criticism that utility ratepayers were improperly paying for it.

Mushallo said economic numbers in tourism and job are promising for Petaluma's near future. Hotel occupancy in Sonoma County was up 10 percent last year over 2010 and local unemployment dropped to 9.3 percent in December.

And the new East Washington Place shopping center, which broke ground Monday for the Target-based center along Highway 101, is expected to add at least $1.2 million in sales tax revenue over the next five years.

Budget impacts from the dissolution of redevelopment agencies will become clearer in the next few months, Mushallo said.

"We're really going to approach this deficit from all directions," he said. "We can't just approach it from expenditures. We need to look at revenues, expenditures, all types of avenues including economic development."

Councilwoman Teresa Barrett suggested an increase in the transient-occupancy test be placed on the June ballot, a tax Mayor Glass said he supported. The existing 10 percent tax on overnight hotel, motel and campground stays raises about $1.1 million a year.

City Manager John Brown said a November ballot measure would be more practical.