EL CERRITO -- City Manager Scott Hanin told the City Council on Tuesday evening that it must account for a probable loss of $1.2 million in revenue next year at the same time he asked council members to set their priorities for the city's 2013-14 budget.

El Cerrito expects to receive about $600,000 less in sales tax and see a similar decline in income for its former redevelopment agency in the next fiscal year because of scheduled state take-aways.

The loss will not be catastrophic given its size relative to El Cerrito's $45 million annual budget, Hanin said.

But while the city will break even this year, Hanin warned that breaking even in 2013-14 will mean further squeezing expenses in much the same way the city has since 2008.

Among the fiscal challenges are an anticipated 10 percent increase in employee health care costs next year and a substantial one-time increase in CalPERS pension costs in the future, Hanin said.

"We don't have a lot of chances to increase revenue, with property tax flat, little housing turnover and little new development," Councilman Mark Friedman said after listening to Hanin's presentation on the state of city finances.

"It will be a year where we will have to be careful about expenditures," agreed Councilwoman Janet Abelson.

Hanin asked for the council's reaction to a series of 16 actions the city could take to save money.

Council members expressed a willingness to cut city office hours, increase fees for city services and reduce the cost of health care and pension benefits for city employees, including requiring greater employee contributions to both plans. At the same time, they want a balanced budget while keeping the city's reserves at a minimum of 10 percent.

Reserves will be between 9 percent and 10 percent of budget at the end of the current fiscal year on June 30, Hanin said.

Council members also indicated interest in creating a long-term plan to bring reserves up to 15 percent as well as a reserve fund to cover maintenance of city offices and facilities, something Friedman said the city has been trying to do since he previously served on the council in the 1990s. El Cerrito now has 163 employees and 27 unfilled positions on the books.

Hanin said that with that many vacancies El Cerrito city will need to continue finding innovative ways of deploying its staff effectively.

"We are incredibly busy for a city our size," he said. "(That many) vacancies are not sustainable and at some point we're going to have to cut back on what we do."

Hanin and his staff will use the information from the session to produce a draft 2013-14 budget that it will present to the council on June 4, with approval of a final budget due by the end of June. Earlier in the evening, council members voted, as it has for the past few years, to maintain property tax rates for the city's swim center financing at the minimum authorized by voters.

Property owners will again pay $38.61 annually for a single-family home, $29.73 for a condominium and $270.66 per acre for nonresidential property. The council also issued a proclamation encouraging residents to observe Bike to Work Day on May 9.