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FARMINGTON — The new year may bring a $5 million cut to Farmington's already strained finances.

City councilors, Mayor Tommy Roberts and City Manager Rob Mayes are worried that Santa Fe lawmakers will repeal a "hold-harmless" provision in food and medical tax laws during their legislative session in January. A repeal, they say, will add an insurmountable burden to the city's finances.

"When you take something as significant as food and medicine out of the tax base, it's devastating," said Mayes.

The city's general fund budget is about $54 million, he said.

The state's hold-harmless payments make up about 10 percent of the city's general fund revenue.

According to the city's latest budget report, Farmington funds the majority of its programs and operations through its general fund and 67.5 percent of that is made up of sales tax revenue.

The next largest source of income is its electric dividend — 13.9 percent of the general fund — which is made up of money earned from the city's shares in the San Juan Generating Station.

The city's sales tax rate — 7.125 percent — is among the lowest of the state's major cities. In addition, the city only collects 34 cents of every dollar of sales tax revenue generated.

The city's total sales tax revenue was about $39 million, Mayes said. The hold-harmless payments make up about 13 percent of that.

"We have no contingency plan where we could manage a 13 percent loss in tax revenue," Mayes said. "We're most concerned by hold-harmless. That's 10 percent of the general fund budget the state may take away. We can't absorb that."

A recent downward trend in sales tax revenue is compounding the problem.

The city is operating at 3.2 percent under projected tax revenue, Mayes said, and at 3.6 percent below last what the city was getting this time last year.

"If the trend stays, I'll be looking at a $1.2 million reduction," Mayes said. "The good news is that it hasn't gotten any worse. We've managed to keep (spending) at $126,000 below actual revenue. If you think about how you manage your home finances, we manage (ours) the same way."

A 3 percent to 3.5 percent drop in sales tax revenue is manageable through conservative spending practices, he said.

But a volatile economy and uncertain political climate are worrying many city officials.

"If they don't hold us harmless, we have to figure out how to balance our budget with $5 million less," said Councilman Dan Darnell.

The debate over the hold-harmless provision began about eight years ago when Santa Fe lawmakers eliminated sales tax on food and medicine but approved payments to cities to make up for that lost revenue.

Lawmakers have discussed whether to stop the hold-harmless payments for a number of years.

Darnell hopes that Gov. Susana Martinez will veto decisions that result in a repeal as she has done in the past.

"We're going to have a number of challenges in fiscal year 2014," said Mayor Roberts. Hold harmless is "a huge impact on the budget. We will continue to take the position that cities ought to be reimbursed."