Massachusetts is facing fiscal crisis, a $2 billion crisis.

But even as the state looks to balance its budget by slashing aid to cities like Cambridge—which stands to lose millions—local officials insist they can ride out the storm.

At the helm will be Mayor Michael A. Sullivan, the city council’s financial expert.

Sullivan chaired the council’s finance committee for eight years, and city leaders credit him with a chief role in establishing the city’s firm financial position.

While deficits loom over the State House, Cambridge actually has $28 million in surplus cash on hand to deal with emergencies. And in recent years the city has increased the amount of property taxes it can levy, which will lend the city council more flexibility when discussions on next year’s budget begin in several weeks.

Both the emergency fund and the increase in the so-called “levy limit” came during Sullivan’s tenure as finance committee chair.

Councillor Brian P. Murphy ’86-’87, who succeeded Sullivan as finance committee chair, said his predecessor has offered “strong and inclusive” leadership on city finances.

Sullivan says he is “cautiously optimistic” about the city’s current fiscal situation, so long as finances are not stretched too far.

“We should be able to hold out for another year or two,” he says. But “this is not something we can withstand forever.”

With Massachusetts facing its $2 billion deficit, state funding for local communities is on the “chopping block,” according to Murphy.

“Because of the recession and because of the state’s budget cuts, we are going to have hard times in this city,” Murphy says.

Cambridge annually receives more than $40 million in state local aid, but in Fiscal Year 2003 (which ends in June) the city took a $1.5 million cut in state aid.

City Budget Director Louis Depasquale says he anticipates as much as a $2 million cut in the next fiscal year.

But he adds Cambridge is better prepared to weather the drought than most cities.

“We have certainly positioned ourselves to deal with some tough times,” he says. “We have positioned ourselves better than a lot of cities and towns.”

Three key factors are working in the city’s favor, Depasquale says: its AAA bond rating, plus the two projects Sullivan worked on in the finance committee—emergency funds and a high “levy” limit.

According to Depasquale, the city could levy $36 million more in property taxes before it reached its levy limit.

Raising property taxes would be one option for Cambridge, but Depasquale says city officials have not yet decided how they will cope with the cuts in aid.

While city officials are focused on maintaining the same level of city services, he says they are hesitant to shift the burden onto the taxpayers.

“We are very conscious of trying to keep the rate down as low as possible,” Depasquale says, adding that annual property tax increases over the past five years have been held to about 5 percent, which he characterizes as a “manageable number” for individual taxpayers.

Squeeze on the Schools

Because they receive the majority of the city’s state aid, Cambridge schools stand to lose the most during the financial crunch.

Cambridge spends more per student than any other city in the state but faces major gaps in achievement by poor and minority students and persistent declines in enrollment. The district is in the midst of a hotly-contested elementary school merger process, and the state announced this week that the Department of Education considers six of its schools to be underperforming.

The city will give its schools a 3 percent budget increase in 2004, amounting to about $2.6 million, according to Depasquale.

But the schools received a 4.9 percent increase this past year, and the increase in the coming budget will likely be much smaller than expected, says school committee member Alice L. Turkel.

Turkel says the city has been generous in funding Cambridge schools. Only $13 million of the city’s $43 million in state funding is earmarked for education, but the city chooses to spend more than $25 million of the state aid on schools.

But the system still faces financial constraints, Turkel says, which are putting more pressure on the school committee to through push the elementary school mergers.

“The monetary pressure has been upped,” she says. “The going is getting tough.”

Both Turkel and Sullivan, who as mayor chairs the school committee, agree that the mergers are ultimately aimed at helping schools improve the quality of education. But they say that at the same time consolidation will streamline spending.

“This actually will allow the budget to be used better,” Sullivan says. “I think it’s a better use of resources.”

—Staff writer Christopher M. Loomis can be reached at cloomis@fas.harvard.edu.