O'ahu property assessments are down about 6.7 percent from a year ago, according to notices being mailed out this week to 284,000 property owners islandwide.

The drop in the assessed values means less income for the city, unless the City Council raises tax rates. Property taxes are the city's main revenue source, accounting for the bulk of the $1.8 billion operating budget.

The decline in values comes as real estate sale prices have dropped during the down economy. The administration of Mayor Mufi Hannemann has been warning of a $140 million budget shortfall for fiscal 2010.

The 6.7 percent is less than the 10 percent drop in assessments that had been projected by budget officials just last week. A 10 percent drop in assessments would amount to an $85 million loss in revenues, city officials said.

Gary Kurokawa, chief of the city's tax assessment division, said it's too early to say how much less the city would receive in revenues if rates stayed the same.

It will depend on how many property owners choose to file an appeal on their assessments, Kurokawa said.

Property owners can appeal if they do not agree with the assessed value of the property, the classification of the property, or the amount of the exemption allowed, according to the city.

By law, the city must put 50 percent of the taxes being disputed in an escrow account.

Both Council Chairman Todd Apo and Budget Chairman Nestor Garcia said they're relieved the decline wasn't steeper.

"My guess was 8 to 12 percent, so the values are down less than I expected, that's the upside," Apo said.

It's not a certainty the council will raise tax rates to offset the drop in assessments. Rates are not set until late May or early June.

Apo said that this budget season, more than ever, the council must first focus on cutting spending before looking at what kind of adjustments need to be made on the property tax side.

"It's got to be focusing on our core services," he said.

Apo's comments echoed those of Garcia, who last week said everything from the Royal Hawaiian Band to the city's spay-neuter program might be on the chopping block when his Budget Committee begins deliberations in March.

Garcia last week sent a letter to the administration stating that the city's budget priorities should be public safety, health, human services, fee and revenue producing departments, support functions and recreation.

"Along these lines of discussion, I would like to explore in greater detail how we are to make cuts if cuts are needed," he said in the letter.

Councilman Charles Djou agreed there needs to be a harder look at spending but expressed doubt that the city would be able to cut as drastically as might be needed.

"I fear the city administration and majority on the city council will react to the decrease in property valuations with a massive tax increases on the public during this recession," Djou said in a written statement.

After property values decreased slightly last year, the council voted to raise rates to offset the difference in revenues.

For this fiscal year, homeowners are paying $3.42 per $1,000 of valuation.

Anticipating that there may be a need to increase rates next year, the Hannemann administration pushed for and the council approved creation of a separate owner-occupant classification. Hannemann administration officials argued that owner-occupants may need to be shielded from higher taxes.

As a result, it's likely that those who live in their own homes will be paying a lower rate than those who own rentals or other types of residential properties as investments.

The total gross assessed valuation of all taxable real property on O'ahu decreased from $191.2 billion to $178.3 billion, an overall decrease of 6.7 percent. The decrease is due to an overall decline in all real property assessments.

Most, but not all properties saw a decrease in valuations, and the 6.7 percent figure is just an average.

Valuations are determined by examining sales figures from July 1, 2008, to June 30, 2009. If there is not enough sales data in a particular neighborhood, tax assessors look at similar neighborhoods in a community,

The value of existing properties actually dropped by $16 billion, or 8.4 percent.

New property developments added $3.3 billion in value to the overall total, helping offset the decline somewhat.

By geographical district, the Wai'anae Coast's 13.3 percent drop in values was the biggest decrease.

The 'Ewa-Waipahu area, Wahiawä, Windward and Central O'ahu all saw residential valuations drop by more than 6 percent.

Assessment notices mailed out this week are not tax bills, since the council does not set tax rates until the spring.