Crafting next fiscal year's budget for Salt Lake City may be a test of buoyancy as the city struggles to keep its head above water in a sea of slightly improving, but still austere, budget projections.

Rolling up their flannel shirt sleeves Saturday, Mayor Palmer DePaulis, the City Council and their staffs gathered informally in a downtown hotel to begin paring down a $2.5 million revenue-expenditure gap for next fiscal year.The gap - the difference between money the city will have and how much it will need - is wide but improved over last year's roughly $4 to $5 million pre-budget shortfall, leaving the city barely treading above fiscal waters.

"I think of it like this: Last year we were five feet under water, this year we're only three feet under," said an optimistic DePaulis.

The gap is not an actual shortfall but rather a projected shortfall the city would experience if it did not reconcile expected revenue with expenditures before it formally adopts its budget.

"We're looking at about $2.5 million we would have to come up with through additional revenues or cuts," Gordon Hoskins, city budget manager, told the group.

By June 30, which is the end of the fiscal year, the city must erase the gap and, under state law, adopt a balanced budget, a task that last year pitted the council against the mayor, who vetoed one budget before another was adopted.

The city's economy, like the rest of Utah's, remains flat or at best is experiencing a slight upturn, city Treasurer Buzz Hunt told the group.

"Right now, the bottom line is kind of flat," he said, pointing to revenue figures since 1986 reflecting only slight growth in city revenue.

Sales tax collections are projected to be 6.7 percent higher next fiscal year than what is budgeted for this fiscal year. That is $1.3 million over this year's budgeted $19.7 million in sales tax, according to the treasurer's office.

Franchise tax revenues are also estimated to be slightly above this year's projections although property tax collection is expected to be slightly below this year's figures, Hunt said.

But one indicator showing a slight recovery in the city's economy is an 8.8 percent rebound in taxable sales (purchased goods for which sales tax is collected) during the first two quarters of this fiscal year, DePaulis said.

"The hopeful theme is that the first two quarters are showing an upward trend . . . that may hold and keep us in line with 1985 and 1986," DePaulis said, referring to boom years when the city experienced strong economic growth.

One of the greatest challenges the city faces on the expenditure side of the ledger is confronting a 28 percent increase in insurance expenses, costing the city roughly $1 million, Hoskins said.

The figure, however, is less than the 35 percent increase expected by the state and counties who have paid more insurance claims to employees. "We're healthier," said city Human Resource Director Karen Suzuki-Hashimoto.

The city is projecting over $50 million in expenditures for employee salaries, not including raises. Last year, angry city employee unions said they expected pay increases this year.

Merit increases alone would cost $650,000 and a 1 percent cost of living increase would cost $500,000, according to budget division figures, large numbers in the face of tight fiscal constraints next fiscal year.