April 3 (Reuters) - The city of North Las Vegas is nearing insolvency and could default on some of its $436 million of outstanding debt, Fitch Ratings warned on Thursday.
The recession-ravaged city of 223,500 people has until April 15 to cobble together a balanced budget under state law.
City Councilman Wade W. Wagner is “cautiously optimistic” that North Las Vegas will pass a balanced budget, he told Reuters. Failing to do so is one of the triggers for the state to take control of the city, although the state has not said it intends to do that. Nevada does not let its cities file for Chapter 9 bankruptcy.
North Las Vegas, located less than 10 miles from the Las Vegas Strip, has cut its employee count in half since 2009 to about 1,100 workers. The city also recently let go of a handful of department directors, Wagner said.
North Las Vegas has suffered two bruising court losses this year, and it is struggling to cope with an estimated $18 million budget gap, or about 15 percent of its spending, Fitch said. All three rating agencies have dropped the city’s general obligation bonds to junk. Fitch rates the city’s debt a “B” with a negative outlook, indicating a material risk of default on its bonds.
On March 21, the Nevada Supreme Court rejected an appeal by the city to throw out a $4 million award to a landowner in a soured redevelopment deal.
In January, a district court ruled that the city could not freeze $25 million in union employee pay raises.
On Wednesday night, the North Las Vegas City Council proposed a $7.7 million settlement with its unions that Wagner said the city put together by “literally scraping the last bit of batter out of the cake dish.” The proposal is made up of consolidated tax funds, monies from the court system and savings from employee attrition, among other sources, he said.
Settling with its public employees is the final step toward balancing its budget, Wagner said. The city did not have a reserve fund set aside for settlement.
“If we can do this, we don’t have to do anything else for at least a year, or possibly two,” Wagner said.
Under Nevada state law, the city could be put into receivership if it fails to close its budget gap or successfully negotiate the settlement with its unions. The Nevada Tax Commission could also ask voters to approve disincorporation. Payments to bondholders could be at risk in either scenario, Fitch said.
While the state has provided some financial guidance to North Las Vegas, it has not broadcast any plans to take over the municipality, the credit rating agency said.
About $292 million of the city’s debt, or more than half of the city’s outstanding $436 million of limited tax general obligation bonds, is secured by revenues from water and wastewater facilities.
The utilities pay about $23 million a year in debt service, according to Fitch. The city’s general fund now has $9 million in reserves, down from $45 million in 2008. (Editing by Jan Paschal)