Fairfax City Manager Edward A. Wyatt has proposed a $38.8 million budget for fiscal 1987 that calls for a 3 cent increase in the property tax rate to offset a decline in local business tax revenues and a spending increase in the city's capital improvement program.

If the proposed real estate tax rate of $1.16 per $100 of assessed value is approved by the City Council, property owners with a house worth $95,800, for example, would next year pay $1,111, an increase of $77.

Wyatt said he was uncertain about why revenues from the city's one percent tax on local businesses have declined this year. "We just can't pinpoint it," he said. "Perhaps people's shopping patterns have changed and they have gone toward regional malls."

Wyatt said the city's current business and residential community shows a total real estate assessment of more than $1 billion, a 9 percent increase in last year's overall property assessment of $950.3 million.

"This is a hallmark," Wyatt said Tuesday afternoon at a special budget presentation meeting. "We predicted last year, with our tremendous economic growth, that this would occur."

Wyatt proposed a 4 percent cost-of-living raise for all city employes and also recommended 19 new full-time positions, which would include, among others, city bus drivers, motorcycle and patrol officers, police dispatchers and auto mechanics for city vehicles.

Wyatt also proposed allocating $12.5 million to the city's school system to cover an estimated $10.8 million in tuition fees to Fairfax County, which operates the city's six public schools.

Because Fairfax City owns the school buildings, Wyatt included a 43 percent increase in funds for renovations and improvements to the facilities: a $240,000 multipurpose room addition at Jermantown Elementary School and, at Lanier Intermediate School, a $94,000 music room addition, a $125,000 home economics room and design fees for a new gymnasium.

Wyatt noted that the student population in Fairfax City has been "markedly reduced" and that city officials should carefully watch this enrollment trend. Officials were forced to close the John C. Wood Elementary School in 1983 because of declining student enrollment.

"We've lost 50 percent of our children population in our schools since 1977," Wyatt said. "The community is very much concerned about this trend . . . . We had hoped it had bottomed out."

He said he had "no intent" to close any more schools yet.

The city's transportation fund is another major expenditure outlined in the proposed budget, which represents a 6.8 percent spending increase.

This year Wyatt allocated only $828,543, a 26.7 percent decrease from last year's $1.23 million transportation program, because of the elimination of the city's independent commuter bus service, the Fairfax City Express.

Officials decided this year to drop the commuter service by June 30 and instead expand local bus system to serve the Vienna Metrorail Station, outside the city's northeastern edge. Wyatt said the new bus service will start when the Vienna station opens June 7.

Major projects included in the budget's $3.9 million capital improvement fund, which represents a 31 percent jump over last year's capital spending, are $980,000 for improvements to historic buildings, including Old Town Hall and Earp's Ordinary, the John C. Wood Municipal Complex and City Hall; $558,290 for recreation equipment replacement, landscaping and other improvements to the city's public parks, and $1.8 million for road and traffic improvement projects.

Public hearings on the proposed budget are scheduled for Tuesday and March 25, with action by the City Council set for April 8.