St. Paul Mayor Chris Coleman has instituted a hiring freeze and asked city department directors to come up with plans to reduce their 2009 budgets by 20 percent in anticipation of a cut in state aid, according to a memo released Wednesday.

The city is already looking at losing as much as $28 million in local government aid this year as the governor and Legislature look at ways to fill a projected deficit of as much as $500 million for the budget term that ends next summer. The state also faces a $4.85 billion budget deficit for the next two-year budget cycle.

State aid to cities and counties is on the chopping block, and local governments statewide are scrambling to adjust for the as-yet unknown reductions.

Those payments, which are used for operating expenses, are scheduled to come at the end of the month. In St. Paul, that money has already been spent.

The city has enough money in reserves to cover a loss of the entire $28 million, which is about a 15 percent hit to a total $182 million operating budget. But using reserves "comes with a price," Coleman said, because it reduces cash flow, lessens interest earnings and would mean more expensive borrowing because of credit-rating downgrades. Whatever reserves are used will need to be replenished starting in January.

Money for any vacant or new positions already included in 2009 budgets will be put into a contingency fund. No money will be released without Coleman's approval.

The city's proposed overall budget for 2009 is about $542 million.

"I wish I could say that we just need to get through the next fiscal year, but the reality is that we are already projecting a $13.5 million budget gap in 2010 before any LGA [local government aid] reductions," Coleman wrote.

Also Wednesday, the council parked a proposed ordinance to deregulate taxicab fares. Not one council member wanted to bring it up for a vote.

The Department of Safety and Inspections sought the ordinance as a way to increase competition and allow for quicker adjustments to cover costs, such as fuel.

Council Member Pat Harris said he thinks deregulating fares should be done in a broader process with other metro cities and the Metropolitan Airports Commission.

The council also voted to reduce a proposed fee increase on various city-issued licenses from 5 to 3.5 percent. The final vote is set for Wednesday.

Chris Havens • 651-298-1542