The city of Monterey is grappling with a $5 million sea of red ink – just as it prepares to consider a major transformation of its downtown into a shopping and entertainment destination to rival downtown San Luis Obispo or Santa Barbara.

As the city reeled from this year’s declines in hotel, sales and property taxes, the state recently swooped in and demanded $2.6 million in redevelopment funds to help with its own mega-deficit.

“As a community, we have to make some very hard, rational decisions,” City Manager Fred Meurer says. “The sooner you make hard decisions, the easier they are.”

Meurer says he’s passed the tin cup among city employees. Managers, he says, have offered salary concessions. Firefighters have agreed to 4 percent givebacks, while general employees will give back 3 percent, and negotiations continue with police.

City Finance Director Don Rhoads says he’ll also recommend the city put some $2 million in neighborhood improvement projects on hold.

The major backer of the downtown plan, architect Henry Ruhnke, says the penny pinching makes it tougher for the city, which is set to consider the downtown plan in early June, to take the essential first step in the downtown revamp – a $300,000 traffic study aimed at making it easier to navigate the city’s center and turning Alvarado into a two-way street.

“THE SOONER YOU MAKE HARD DECISIONS, THE EASIER THEY ARE.”

“No national retailers will go in on a one-way street,” Ruhnke says. “It is critical, but do we have to do it [by] June 1?”

Ruhnke argues that a bustling downtown will eventually fill city coffers, but in the short term, he says, it’s smarter to move forward without fighting potential supporters for a share of an ever-shrinking municipal pie.

“I would hate to see the city lose political will because it ran into a buzz saw,” Ruhnke says.

Instead, he’s putting the squeeze on downtown property owners. The Monterey County Property Owner’s Association has pledged nearly a fourth of the $45,000 needed to create a leasing strategy for attracting choice retailers and restaurateurs to downtown Monterey.

The City Council is set to consider both the downtown plan and the budget in June.

“At least our council has options,” Meurer says, pointing out that the city has wisely put aside money in rainy day reserves. “Today, it’s raining.”