May 5 (Reuters) - A Las Vegas suburb is grappling with financial problems similar to those that tipped the cities of Detroit, Harrisburg, Pennsylvania and Stockton, California, into insolvency, Fitch Ratings said on Monday.
North Las Vegas is struggling under flawed financial decisions, escalating costs, limitations on raising revenue and weak economic conditions, Fitch said. On Friday, the rating agency affirmed the city's bonds as speculative grade, or junk, at 'B' with a negative outlook.
These factors, playing out over many years, contributed to recent insolvencies and bankruptcies in municipalities from California to Pennsylvania.
"North Las Vegas, while not in default, is nearing insolvency," wrote Matthew Reilly, a director at Fitch. "The city's dire fiscal picture stems from a steep drop in revenues due to the severity of the recession coupled with multiyear contracted compensation increases."
"North Las Vegas does not consider insolvency as an option," Mitch Fox, city spokesman, wrote in an email to Reuters on Monday. Fox highlighted the city's tentative agreements with its unions and potential new revenues from a 2,700-acre housing development that is moving forward. "The future for North Las Vegas is bright."
Last month, the city warded off concerns of a state takeover by solving an $18 million budget gap with a tentative union settlement over back pay. The unions also agreed to shift $10 million in compensated absences to future years, Fitch reported. Nevada municipalities are not offered Chapter 9 protection.
But Amy Laskey, Fitch's managing director of public finance, said North Las Vegas is looking at long-term, unsustainable budget balances, with the gap between revenue and expenses expected to grow.
Similarly the cities of Harrisburg, Stockton and Detroit were also constrained by financial decisions made years before that increased liabilities without corresponding plans to raise new revenues. Harrisburg wound up in state receivership, while Stockton and Detroit are working through Chapter 9 municipal bankruptcies.
Located just miles from the Vegas Strip, North Las Vegas was one of the hardest hit during the housing bust. Over the last four years, North Las Vegas's combined assessed valuation was cut in half, according to its 2013 comprehensive annual fiscal report.
To cut costs, the city of 223,000 people eliminated vacant positions, implemented a hiring freeze, reduced programs, made layoffs and offered voluntary separation packages. Some capital improvement projects were delayed or canceled even as it pressed ahead with a 170-acre multi-use park costing an estimated $130 million to build.
Fitch estimates the city's general fund deficit will sink to $142 million by 2021, assuming only small increases in revenue during the time. All three ratings agencies have downgraded North Las Vegas to junk. (Reporting By Robin Respaut; Editing by Diane Craft)