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Labor costs are rising for the city of Honolulu, putting Mayor Kirk Caldwell at odds with the City Council over whether to cut costs or raise revenues.

On Tuesday, city officials told the Honolulu City Council Budget Committee that new contracts with the city’s four unions will add an estimated $37.5 million to the expense column in the coming fiscal year.

Initially, the administration guessed these costs would be $20 million, but changed that figure to $26 million after negotiated salary increases came in higher than expected for employees represented by United Public Workers and the Hawaii Government Employees Association.

Now the administration is bracing for the result of arbitration with the city’s police and fire unions. Budget Director Nelson Koyanagi said he anticipates the unions, particularly the State of Hawaii Police Officers Association, to be awarded hefty salary hikes.

“Police alone is going to be a very substantial number,” Koyanagi told the Budget Committee. “I’m not sure when that arbitration will be done, but the amount that they’ll be coming in at will be more than what was finalized for the other unions.”

The administration built its budget based on the assumption of a 3 percent increase in costs associated with collective bargaining, which includes salary and benefit adjustments. In reality that amount has been closer to 4 percent.

The idea was for the city to use funds from vacant positions to help cover the costs of collective bargaining. The administration also hoped to free up funds by getting the city council to pass a 5 cent increase in the gas tax, something that was estimated to raise about $15 million in the first year.

But the City Council quashed those plans, killing Caldwell’s proposed gas tax while also shifting money away from funds set aside for vacant positions.

The administration was left with little wiggle room when it came to covering collective bargaining costs. Options included raiding the city’s surplus and dipping into money reserved to pay for post-employment retirement benefits.

Both tactics, administration officials warned, could affect the city’s fiscal stability, particularly as it relates to bond ratings and borrowing.

Managing Director Ember Shinn again detailed the administration’s stance on how to pay for collective bargaining in a . She also said it’s the council’s duty to balance a budget it threw off kilter, which could include raising revenues elsewhere.

“The City Council made the decision to reject an increase in the fuel tax,” Shinn said. “The legislative branch now has the responsibility to offer an alternative to balance the budget. At this late date, an increase in the real property tax and/or bus fare increases may be the only options.”

Simply relying on cuts, she said, will reduce services in the upcoming fiscal year and “create the need for a much larger revenue increase” in Fiscal Year 2015.

Shinn urged council members to cut the nearly $10 million they added to the operating budget for nonprofits and special interests. This money is in addition to $5.5 million the city has reserved for grants-in-aid for nonprofits.

She said the amount of money the council has added equates to an 8 cent increase in the property tax rate of $3.50 per $1,000 of assessed value. On average, she said this would cost the average homeowner an additional $48 a year.

The City Council plans to pass a budget on June 5, though at this point it’s unclear exactly how it plans to account for the $37.5 million in anticipated collective bargaining costs.

Councilman Ikaika Anderson joined Budget Committee Chair Ann Kobayashi in criticizing the administration for relying on a gas tax to balance the city’s budget.

He called the $15 million a “ghost figure,” and likened it to a tactic used by former Mayor Jeremy Harris who would balance his budgets using $15 million from a future property sale.

Anderson also said he plans to submit a budget that cuts out the nearly $10 million in council earmarks for nonprofits.