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April 3 (Reuters) - (The following statement was released by the rating agency)
North Las Vegas, NV’s efforts to remain solvent were dealt another blow on March 21when the state Supreme Court rejected the city’s appeal of a $4 million judgment related to land the city had planned to condemn and redevelop. Fitch’s ‘B’ rating on the city’s general obligations, with a Negative Rating Outlook, indicates that material default risk is present.
In January, district court granted summary judgment to labor unions in their suit challenging the city’s ability to freeze contracted salary increases through a declaration of emergency. The city is trying to negotiate that settlement down from $25 million while dealing with an estimated $18 million (about 15% of spending) general fund budget gap for fiscal 2015.
As state law bars Nevada municipalities from filing for bankruptcy, the state could become the receiver if the city is unable to close its budget gap and successfully negotiate the settlement for back pay. The Nevada Tax Commission could also eventually ask voters to approve disincorporation. Fitch believes bondholder repayment could be at risk in either situation.
To date, the state has provided some oversight through its Committee on Local Government Finance but has not indicated any interest in state receivership. Current statute requires that taxes for bond repayment continue to be levied under disincorporation. However, under state receivership, the statute directs the state to formulate a debt liquidation program.
The city’s fiscal troubles stem from steep declines in revenues due to the severity of the recession coupled with multiyear contracted pay raises. North Las Vegas has seen little benefit from the economic recovery that is boosting revenues elsewhere and has virtually no additional expenditure flexibility. A modest $9 million in general fund reserves at the end of fiscal 2013 has been whittled down from $45 million in fiscal 2008. Likewise the city’s water wastewater fund has drawn on its reserves largely to support the general fund, dropping to $50 million in unrestricted cash in fiscal 2013 from $178 million in fiscal 2009.
North Las Vegas has about $436 million in LTGOs outstanding (including $292 million secured by the water and wastewater revenues) with about $8 million in fiscal 2015 debt service costs paid from the general fund. The utilities pay about $23 million in annual debt service.
Nevada local governments are required to file a tentative balanced budget with the state by April 15. Management is planning to present its budget to City Council on April 10. However, no clear plan to address the city’s deficit has been identified. We will continue to monitor these unfolding events.