The city faces significant fiscal challenges as it begins crafting new operating and capital improvement budgets.

City staff told the City Council this week that analysts forecast a $17 million operating budget deficit for the 2011-2012 biennium due to the recession and its impact on tax revenues.

The 2011-2017 capital improvement program deficit is expected to reach $96 million, and the city’s mobility and infrastructure initiative is expected to have a $47 million deficit, staff said.

“Even though we have been able to weather the economic storm up to now better than many communities, we’re facing some immense challenges as we move into next year,” City Manager Steve Sarkozy said.

“This is going to be an exceedingly tough budget cycle, and a lot of hard choices are going to have to be made.”

Bellevue’s history of strong fiscal stewardship and its success in attracting new commercial and residential development in recent years has helped the city weather the current economic downturn.

In addition, a series of cost control measures have been implemented to cope with the recession, including expenditure reductions in all departments and a hiring freeze on positions not considered critical.

At its study session this week, the council was briefed on a new budget development process that differs from the one traditionally used by the city.

Typically, city staff working with the council and community, have developed operating and capital budgets largely by looking at the existing budgets in individual departments and shaping spending in those departments to fit available revenues.

Given the current fiscal climate, however, a new process will be used this year that identifies the community’s highest priorities, then allocates spending based on those priorities.

The council has endorsed seven priorities, or outcome areas, to be used this year as the budget development process moves forward. Those areas include:

Safe community;

Improved mobility;

Healthy and sustainable environment;

Responsive government;

Economic growth and competitiveness

Quality neighborhoods; and

Innovative, vibrant and caring community.

In coming weeks, city staff will develop spending strategies for each priority area. These proposed strategies are expected to be reviewed by the council in April.

The public will have a number of opportunities to weigh in on the proposed budgets before adoption by the council in December. The first opportunity will be at a public hearing this spring.