Oceanside is spending far more money than it is taking in ---- a trend that an outside auditor and city officials said is worrisome for the city's financial health.

In the 2008-09 fiscal year that ended June 30, the city spent $19.9 million more than it did the previous fiscal year, yet it took in $19.6 million less than it did in 2007-08, according to Diehl, Evans & Co., the firm Oceanside hired to review its books.

The audit covered all city spending ---- from the water and sewer department to the daily functioning of city government. It will be presented to the City Council on Wednesday.

To make up for the difference in last year's spending and revenue, the city tapped into its unrestricted assets, which are a type of reserve fund, said city Finance Director Teri Ferro said.

The practice of using reserves to cover ongoing expenses has been one of the central issues dividing the City Council, with Mayor Jim Wood and Councilwoman Esther Sanchez supporting it and Councilmen Jack Feller and Jerry Kern against it.

Feller said Tuesday that the city will be broke if it keeps it up.

"You can't spend what isn't coming in," Feller said. "You can't live beyond your means."

Wood and Sanchez didn't return phone messages left Tuesday afternoon. They argued during budget workshops last fall that in addition to cutting spending on planning and landscaping projects, the city should use some of its reserves to soften spending cuts that resulted in 26 city workers being laid off.

Among all city operations, the city by the end of June had $52.7 million in unrestricted assets, which included the general fund reserves, the auditor reported.

Those reserves include about $6.6 million from the general fund that can be used without restriction, plus $14.5 million in a so-called healthy city fund, which the City Council can tap in an emergency as long as it has a plan to replace it. The general fund covers most day-to-day government operations.

By January, the unrestricted reserves in the general fund had dropped to about $5.3 million, Weiss said. He said the city used the general fund reserves to cover such expenses as a $483,000 recall election in December and a $288,671 increase in the city's animal control contract with the North County Humane Society, which has since merged with the San Diego Humane Society.

In 2008 to 2009, the city's total adopted budget was $356.2 million; about $120 million of that was the general fund budget.

In October, the council approved nearly $7 million in spending cuts to help plug a two-year $10 million shortfall in the city's general fund.

However, Weiss said that still leaves a $3 million shortfall.

That shortfall is likely to reach $5 million by the end of the 2009-10 fiscal year because some of the October cuts didn't take effect immediately so the savings will be less than the $7 million initially projected, Weiss said.

He said the goal was to make enough cuts in October so more layoffs could be avoided, but on Tuesday he said he couldn't make any promises.

"We have savings to get through the next year or so," Weiss said. "After that, we'll have a problem."

Weiss said ongoing negotiations with city labor unions could produce some savings but more may be needed.

Feller said he was "open to any suggestions that can show where we can save money."

In its report, Diehl, Evans & Co said the city's use of reserves is troubling because the city is using up money it has historically set aside for emergencies.

"We're sort of where we thought we would be," Ferro said. "It's not good. It's not worse. It's flattening out but it's still not going up."

Although housing sales are starting to pick up, Weiss said "we're getting some word that overall property values are continuing to decline" and that could affect the city's revenue.

Ferro said she should have a better idea of the city's overall financial health by mid-February.

Call staff writer Ray Huard at 760-901-4062.