New Brunswick municipalities have difficult decisions ahead as they begin to discuss how to deal with a reduction in the unconditional grants they receive from the province.

Fredericton Coun. Mike O'Brien said cuts were already being considered before the province's grant was trimmed. (CBC)

The province announced Thursday that it would cut the grants by one per cent. It's also limiting property tax revenue by capping assessment increases at three per cent.

That means municipalities must decide which services are essential and which ones can be trimmed as they prepare their next budgets.

The City of Fredericton, for example, is losing $58,000 from its total budget of $100 million. The city's finance committee chair, Coun. Mike O'Brien, said cuts were already being considered before the grant cuts were announced.

"We started our 2011 budget process with a detailed review of every service that we offer to the public and even internal services, knowing that there'd be some implications on property taxes, which we're going to feel this year, and with an eye to the possibility of a reduction in the unconditional grant," he said. "So it's not unexpected. But it'll raise some more challenges for us."

The Village of New Maryland will receive an unconditional grant of $203,000, a cut of about $2,000.

Mayor Frank Dunn said that may mean postponing some projects.

"I don't think our intent is to raise taxes," he said. "If it's there, then it'll be only based on the amount that we need to operate and continue as we are now. I don't think it would be wise for us to say, 'OK, let's take on a big project.'"

The challenges will likely continue to grow as municipalities expect they'll have to follow the province's lead and absorb cuts of two per cent in subsequent years.

The one per cent cut will reduce the unconditional grant program to $67.3 million provincewide.

The New Brunswick government is facing an $820-million deficit in 2010-11.