NORTH ATTLEBORO - With state legislators sounding a warning that communities should prepare for a 10 percent cut in state aid, town officials are bracing for an even tougher budget year than originally expected.

"The biggest challenge coming up is going to be trying to keep all the services the town provides intact if the forecast the state has given us is correct," selectmen Chairman John Rhyno said. "We all have to work together and try to do the best we can."

The news comes in the wake of the town's announcement that the tough economy is already making an impact on the budget.

Town Administrator Mark Fisher has been closely watching the budget for the 2009 fiscal year and has said that revenues are off projections by about $1.2 million. The shortfall is because of deficits in three areas: property tax collections, excise tax collections and a drop in the amount of investment income generated for the town.

"Every time I turn around, I'm hearing about layoffs and that may have an effect on people paying their taxes this year," Rhyno said. "If the state revenue projections are accurate, it's going to be really challenging for us." While a Jan. 5 special town meeting was initially called to address the revenue shortfall, no articles were submitted relating to the matter because the town was able to make up for most of the money in other ways.

Fisher said many departments have turned back money by leaving vacant positions unfilled. Assessors also helped by releasing $350,000 from their overlay account, which is money that is set aside to cover any tax abatements given to local property owners. The money that was released was set aside to cover abatements in 2005, 2006 and 2007.

Drops in fuel and utility prices have also helped the town save some money, as well.

However, that leaves very little wiggle room for additional cuts. Prospects for the 2010 fiscal year budget, which officials are putting together now, are also looking dim.

North Attleboro School Superintendent Rick Smith has released his preliminary budget draft for the 2010 fiscal year, which calls for a $2 million increase. Most of the added money would be used to provide raises to staff with contracts that have not yet been negotiated - including the teacher's union, which did not receive raises this year.

If the town is subject to a 10 percent state aid cut, Smith said the school department budget alone would have to be cut $2 million from its current level.

"The last time that happened, we were talking about closing a school. It's just about the only one step we could take," Smith said during his budget presentation.

In addition to the challenges presented by finances, the town continues to struggle with the issue of government reform. The board of selectmen is taking a two-pronged approach - by moving forward with a plan to give voters the opportunity to vote on switching to a mayor-town council form of government and by taking a look at ways to improve the current form of government.

Selectmen appointed a government study committee to review the 2000 charter, which proposed moving to a mayor-town council form of government. Voters never got a chance to weigh in on that charter, after it was killed by a committee at the state Legislature.

The government study committee will review the charter and make any changes necessary so the document can be presented to town meeting in June, the first step in bringing the proposal to voters. At June's town meeting, Representative Town Meeting members will be asked to sent the charter to the state Legislature a second time. If the Legislature then approves it, it will be placed on the town's election ballot - possibly in April 2010.

In the meantime, selectmen are conducting bimonthly meetings to discuss possible reforms to the current form of government. Those discussions will take up at least an hour of the selectmen's agenda on the first and third Thursdays of each month.

Some of the issues raised by selectmen for consideration are changing some boards and committees from elected to appointed posts, consolidating departments that deal with land use under the umbrella of a planning and development office and improving the way the town responds to citizen complaints.

Rhyno said he hopes some of the more immediate changes will have an added benefit of helping the town with its fiscal circumstances.

"Government reform can add efficiency to town government, which can help to save some money," Rhyno said.