The first of two public hearings on the proposed 2013 city budget is Thursday at City Hall, and the two magic words on everyone’s mind likely will be “revenue diversification.”

It was a phrase City Manager John Szerlag stressed during Monday’s budget workshop and it is an issue some council members say has long gone unaddressed.

But whether the city will step away from its historical reliance on property taxes remains to be seen.

To the mayor, “revenue diversification” is code for new taxes when more cuts are needed.

To others, it’s the only way for a city, whose revenues come almost entirely from residential property taxes (a trend not likely to change anytime soon) to pay for much-needed capital improvements.

Szerlag said most cities strive for a 60-40 split in residential and business property taxes so cities can keep their residential character.

But cities can’t afford complete dependence on one area of the market for revenue.

“The housing market can fluctuate wildly with no comfort level in trying to predict what will happen,” Szerlag said. “Revenue diversification is not market dependent but service based.”

And if the city is to raise the extra $14 million per year it needs to make future capital improvements, Szerlag said finding alternative sources of revenue is critical.

“We’ve lost 30 percent of our work force and we need stability there. There’s been no elimination of services, but it’s declined in many areas,” Szerlag said. “The city needs to advise on core competencies, best practices to deliver services cost effectively and revenue sources.”

Szerlag has mentioned alternative, or non-property, taxes as a way to raise revenue, such as a fire or public services tax.

Szerlag did privatize some services while city manager in Troy, Mich., but he said that was not a likely option here.

Councilmember Lenny Nesta agreed, saying privatization – outsourcing services provided by employees – isn’t all it’s cracked up to be.

“You can do better in house. The Estero Fire Department tried it and it ruined the department so much they fired the company in three months,” said Nesta, a retired firefighter.

For Sullivan, any new tax is a non-starter, calling it a “coward’s tax.”

“I will not support new taxes. We haven’t done enough to save money,” Sullivan said. “The average wage earner makes $35,000 a year and many are unemployed and on fixed incomes. Taxes are an easy way out. Just throw money at it.”

Sullivan said his plan is to continue working with unions for further pension savings. And if privatization is a good way to further reduce costs, he said he would support it.

A plan such as a new salary structure for new employees wouldn’t work because the union would balk at two pay scales, Sullivan said.

Since the bottom fell out of the real estate market, the city has, in the face of plummeting revenues, made a number of cuts.

The city went from $156 million in revenues in 2007 to $111 million in 2012; that’s $45 million out of the budget, according to city spokesperson Connie Barron, who added the Cape is looking at how other communities are dealing with the same issues.

“We want to see what’s available, what’s out there,” Barron said. “If six other cities are doing something, we need to look into that.”

Nesta isn’t sure the city has any other choice if it wants to fix roads and continue to provide basic services.

“It depends on what the citizens want to pay for core services. We’re at the bare-bones minimum. What do you want to cut? Fire or police?” Nesta said. “We need $14 million and half of it is needed on roads. You can’t run a city without infrastructure.”

One of the solutions Szerlag proposed is bringing in an outside consultant to do an organizational analysis of the city, a plan that could cost the city as much as $500,000, but could also be money well spent.

“We need to look from the top down to see if we’re structured to provide services in an effective manner,” Barron said. “In nine months we’d like to put a plan together and bring it to council.”

Nesta and others did stress that things aren’t all doom and gloom. The 2013 budget is balanced. The time to worry may come, however, if nothing is done.

“We have to do our homework and do things more efficiently. We can’t stay on the same path with the debt we have,’ Sullivan said.

“All our money comes from ad valorem. We need more money in our coffers,” Nesta said.

Thursday’s meeting is set for 5:05 p.m.

There will be a second public hearing on the budget on Sept. 20, after which the city council will cast its vote.