LOS ANGELES — Troubled North Las Vegas, Nev. received two downgrades recently after a judge ruled against a state of emergency the city employed last year to avoid honoring union contracts.
The recent downgrades from Moody's Investors Service, to Ba3 from Ba1, and Fitch Ratings, to B from BB-plus, take the city deeper into junk bond territory, affecting $427.9 million in debt.
Standard & Poor's hasn't released a new report based on recent events, but rated the city's bonds BBB-plus in its last rating report.
Fitch and Moody's both downgraded the city's rating on its limited tax general obligation bonds below investment grade after the city declared its second state of emergency in July 2013. S&P reduced the city's bond rating to BBB-plus from A in August 2013.
All three ratings agencies assign negative outlooks.
The city has been battling fiscal challenges for several years. Talk of the state taking over the city of 222,000 began in 2011 after record home foreclosures helped to reverse the fortunes of the once bustling city. Under Nevada law, municipalities can't declare bankruptcy.
The state has never taken over a city the size of North Las Vegas, the state's third most-populous, so the tools it could employ are not entirely clear, according to acting Finance Director Darren Adair.
The state could provide administrative services or force the city to raise property taxes up to the cap of $5 per $100 of assessed value, Adair said. The city currently levies property taxes at $3.35 per $100 of assessed value, Adair said.
The city was anticipating a deficit of $30.9 million last year that it closed using methods such as frozen wages and by siphoning off $32 million from a reserve fund supposed to go toward maintaining its water and sewer system. The state began allowing cities in financial distress to take that amount from such reserve funds in 2000, Adair said, but the city has siphoned off $327 million from those enterprise funds over the past decade living little in reserve for repairs to those systems.
It is anticipating a deficit of $18.8 million for fiscal year 2013-14, according to documents.
The city has pared back services and reduced its workforce by 60% to 1,000 workers through layoffs and attrition over the past three years, according to Adair, but the city has not increased taxes.
"They do have a margin to raise taxes that they could access on their own," said Matt Jones, an analyst for Moody's Investors Service. "They have just chosen not to in recent years. They have kept taxes flat."
The adverse ruling from Nevada District Court Judge Susan Johnson, handed down Jan. 21, could make the city responsible for between $25 million and $40 million in retroactive pay for raises that officials agreed to before the recession struck.
In her ruling, Johnson said the city could conceivably suspend collective bargaining agreements under a state of emergency, but questioned the city's use of its budgetary challenges to declare a state of emergency.
In the absence of a physical emergency, "such as riot, military action, natural disaster or civil disorder," the city cannot suspend its obligations under the collective bargaining agreements, Johnson wrote.
"North Las Vegas used the state of emergency in a way that was novel," said Patrick Liberatore, a Moody's analyst. "Their contention was that without using state powers under a state of emergency to alter their union contracts they would face an emergency situation and have to lay off significant staff."
The court responded that a "fiscal emergency" is not the kind of emergency written about in the statute, Liberatore said.
The city is negotiating with union leaders and also plans to appeal the ruling, Adair said.
"There is no silver bullet solution to the multitude of challenges facing our city," North Las Vegas Mayor John Lee said in his state of the city address a few days before the adverse court decision. "But, our council is sharpening our pencils and committed to moving our community forward."
City officials are working on a comprehensive reorganization plan looking at key areas to invest money to generate revenues, increase efficiencies, and shore up areas of vulnerability, Lee said.
