The city took in revenues about 1.4 percent over budget in the first six months of the fiscal year, but it still faces numerous challenges as it prepares for the budget cycle.

The city’s general operating fund generated about $2.4 million more than originally estimated, Budget and Strategic Planning Director Anne Seward told City Council on Wednesday night. That included double-digit revenue increases in building permits and taxes on meals, hotels, electric utilities and business licenses.

“The economy has provided some help for us,” Seward said. “We’re seeing some positive indicators there.”

But that doesn’t mean the budget will be a breeze, she warned. The city is facing increasing expenses tied to the Virginia Retirement System, a health insurance premium increase, a compensation plan that suggested city employees should get raises and several unfunded mandates from the state, including tax relief for disabled veterans.

“We’re pretty dependent on the state and federal government,” Seward said. “The state has been pulling back on the revenues that support the city.”

In preparation for the budget process, the city has asked its larger departments to create plans to reduce expenses by 5 percent. It did not request the same of smaller departments or constitutional officers, Seward said.

“There’s not a whole lot left on the bone there,” she said.

The city also has notified its independent service partners — including Western Tidewater Regional Jail, the Western Tidewater Community Services Board, the Western Tidewater Health District and Suffolk Public Schools — to prepare for level or reduced funding, Seward said.

“We’ll be looking very closely at the presentation they will give to council,” Seward said of the school system.

The school system’s initial budget plan requests $3.5 million in increased funding from the city, but School Board members last week instructed superintendent Deran Whitney to ask for money for raises and other expenses.

“We have a lot of work to do in the next 30, 60 days,” Seward said.

On March 7 and 21, the City Council will again hold work sessions on the budget. The city manager’s proposal will be made public on April 4, and a public hearing is anticipated for April 18.