Petaluma's mid-year budget review again is one of those mixed-message scenarios.

The city's general fund reserves are projected to be about $1.4 million by the end of June, which is a far rosier projection than just a few years ago when the fund had been drained to a few thousand dollars.

But, Finance Director Bill Mushallo warns, that rainy day fund will be all but eliminated in the next fiscal year without cost cutting or revenue increases.

In a special meeting Monday, the city council will hear Mushallo's budget analysis and consider voting on changes to make ends meet for the rest of the fiscal year, which ends June 30.

Reserves remain "precariously low" at about 4 percent of the total budget, compared to the city policy of keeping 15 percent in the emergency fund, Mushallo said in a staff report to the council.

"An unexpected revenue shortfall or expenditure increase could deplete (the) fund balance," he warned. "All budgets, especially salaries and benefits, remain very tight."

Petaluma has instituted deep cuts over the past several years to balance its general fund budget, which has shrunk by about a third since 2008, declining from $48 million to about $32.5 million today. About 80 percent of the current budget is spent on salaries and benefits.

Last year, Mushallo instituted a rolling, five-year budget outlook as a long-term financial planning tool.

His analysis of the first half of this fiscal year shows the city expects to be about $155,000 ahead of projections. That includes a one-time $500,000 payment this year form Petaluma Refuse & Recycling, the city's waste hauler, after a renegotiated long-term franchise fee agreement was signed.

In the first half of this fiscal year, the city's revenue was $912,000 above projected figures.

"Most forecasters are looking at 2013 being another mediocre year for economic growth," Mushallo said in his report. "It is anticipated, however, that the growth will accelerate as the year progresses."

The housing market was one bright spot last year. Petaluma's median home price continues to rebound and foreclosures are declining to levels not seen in several years, he said.

Property tax revenues also increased, by $212,000, in part due to the dissolution of redevelopment agencies and the resulting redistribution of those funds to the city.

While sales tax revenues increased by 4 percent through December, projected revenues to the city look to be $90,000 lower than expected because of reduced Department of Finance projections, Mushallo said.

In the past six months, revenue from city licenses, property transfer taxes, permits and fines grew by a total of $233,000. That's based on strong property sales and building permit activity, Mushallo said, in addition to parking and vehicle code fines initiated by police.

While revenues were up, spending also was expected to rise. Total expenditures are projected to be about $750,000 over budget, including $310,000 in police overtime and compensatory-time payout, $84,000 for a new parking enforcement computer system and $77,000 in retirement payouts.

About $155,000 taken in police asset-seizure operations will be used to cover police overtime.