Mayor Nutter is expected to make his budget address in February or March. His administration is developing a budget for the 2011 fiscal year, which starts July 1.
Here are some of the key issues they face:
The mayor counted on big savings from contracts with the city's four municipal unions, whose agreements expired June 30. Nutter budgeted no money for raises and expected $125 million in savings over five years.
But the arbitration award announced for police last month - the first contract resolved - does not toe that line. While the five-year contract will provide long-term savings on benefits, it also gives police a 7 percent raise over the first three years, with the possibility of more increases in the following years.
In all, the police contract will add $123.5 million in expenses over five years, when you figure in the cost of the raises plus the loss of expected savings.
"I think it's going to be challenging, particularly if the economy doesn't start improving," said Jim Eisenhower, chairman of the Pennsylvania Intergovernmental Cooperation Authority, a state authority that oversees the city budget.
Eisenhower also stressed: "We were encouraged by some of the concessions on the union side, particularly on the pension and health care. We think the long-term impact to the city is very positive."
But the short-term cost is hefty. And contracts haven't been resolved with the three other unions, which are now eying the same kind of raises. If all three get that kind of bump, Nutter is looking at hundreds of millions in unanticipated salary costs.
Nutter could appeal the award on the basis that the city can't afford the raises. Last week, he said he hadn't made a decision on that.
Battered by the economic downturn, the city's wage-tax receipts - the single biggest source of tax revenue - have lagged during this fiscal year. Officials now expect to bring in about $50 million less than anticipated.
A key concern is what will happen to the wage tax if unemployment continues to rise.
Some taxes are faring better, particularly the real-estate-transfer tax, which seems to have been boosted by low mortgage rates and by a federal tax credit for first-time homebuyers.
But that credit will likely expire at the end of April. When it's gone, will the revenue go also?
Where to cut?
A key issue now is: If the city must make cuts to balance the budget, where will it do so?
In preparation for possible cuts, the administration has asked department heads to provide reports on what a 7.5 percent reduction would look like in the 2011 fiscal year.
"It's fairly painful stuff, as you can imagine," said Dubow.
By now, there's nowhere easy to look to save cash. Starting in fall 2008, the city did two massive rounds of cuts, slashing $2.4 billion from the city's five-year financial plan. Funds were cut from pools, libraries and the Fire Department. Tax reductions were delayed.
The city slashed unfilled jobs, summer positions and made a small number of layoffs. It also has been slow to fill positions in recent months. As of December, there were 558 fewer full-time employees on the payroll than in May 2008, before the financial crisis hit, according to city records.
In addition, the mayor won Harrisburg approval last year for a temporary five-year increase of the sales tax and a deferment of payments into the pension plan.
Nutter is unlikely to try to raise another tax - his attempt to temporarily raise the property tax met with massive opposition in City Council - which means that service cuts and layoffs are likely the only place to go.
Dubow said that given the way the government is structured, cuts could affect city workers.
"We're so personnel-heavy," Dubow said, "when you look at where you cut, it has to do with personnel."
Although Nutter and his team must develop a budget plan, his is not the final word on the matter.
The city's 17 legislators also play a key role in the budget process, as they proved last year when they blocked Nutter's proposal to temporarily raise the property tax to cover a budget gap. Ultimately, Council has to sign off on the plan.
Council also bristled last year when Nutter suggested that its members give up their city-issued cars to help with the budget crisis.
Councilman Bill Green said that he hopes for a conversation with the administration early and in advance of the budget address.
"We've been spending time looking for savings. We believe we have found some and have started pointing them out to the administration," Green said. "We expect to have significant influence on the budget."