DECATUR - City Manager Steve Garman is proposing an annual city budget of about $123 million, down 1.2 percent from last year's overall budget.

The city for the past three years has called for no increases in operating expenses in the general fund, Garman said.

At the same time, costs of running the city have increased.

"The city staff and city council have worked hard to keep expenses from increasing as fast as the (consumer price index)," Garman said. "On those expenses the city controls, we have been very successful."

Despite increased wages for city employees and firefighters, the city's general fund budget is up 3.9 percent over the past year, Garman said.

The budget includes a three-year pay increase for city workers and firefighters and retroactive salary increases for the two years they did not get a raise.

The city also faces surging pension costs.

Pensions for police, fire and city employees have increased 4.4 percent over last year. Over the past four years, pension costs have increased nearly 53 percent, according to a news release from the city of Decatur.

Garman said the water fund is the sole "red flag" he sees in the city's finances.

The city manager proposed a 25 percent water rate hike, effective in May, and increases of up to 4 percent in subsequent years to keep the water fund from operating in the red.

That means if a water customer has a monthly bill of about $16, the increase would bring the monthly charge to about $20, costing an additional $48 per year.

Without a rate increase, the water fund is expected to run a deficit of about $1.8 million by the end of fiscal year 2010.

The rate hike is needed to cover rising costs, pay for improvements of aging infrastructure and fund the dredging of Lake Decatur, among other projects.

The council also is considering building a sister lake to secure additional water for residents and industries.

But the water rate increase is necessary to buoy city finances, independent of the project to secure more water, Mayor Paul Osborne said.

The Decatur City Council is expected to study water rates at a special meeting at 8 a.m. Saturday on the third floor of Decatur Civic Center.

The council is expected to approve a new budget for the upcoming fiscal year before the end of the month.

Mike Frazier can be reached at mfrazier@herald-review.com or 421-7985.