LOS ANGELES - North Las Vegas, Nev. faces the same four factors common in the financial struggles of Harrisburg, Stockton and Detroit according to a report Fitch Ratings released Monday.
"North Las Vegas, while not in default, is nearing insolvency, and Fitch's rating indicates that material default risk is present," said 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. The city also faces a structural budget deficit, one-time expenses, and restrictions on certain revenue-raising measures."
Fitch currently rates North Las Vegas's general obligations at B with a negative outlook.
The agency downgraded over $400 million of the city's limited-tax general obligation bonds to junk in July last year, citing its ongoing financial problems. In January, Fitch further downgraded the bonds to B from BB-plus.
The city of 222,000, which has junk ratings on its bonds from all three rating agencies, has been battling fiscal challenges for several years.
The bonds are rated Ba3 by Moody's Investor's Service and BB-minus by Standard & Poor's.
"Flawed financial decisions, rigid and escalating cost structures, revenue raising limitations and weak economic conditions - playing out over many years - contributed to all three recent bankruptcies and may indicate risk for similarly distressed cities like North Las Vegas," Reilly said in the report released Monday.
Decisions made in North Las Vegas during the boom years have contributed to the lack of options to deal with its current fiscal distress, including entering into five-year labor contracts with no reopeners, borrowing to construct a $130 million city hall, and failing to reduce the general fund's dependence on annual utility fund transfers.
Stockton and Detroit are in bankruptcy, and the Harrisburg city council's attempt to file for Chapter 9 bankruptcy over the objections of its mayor was rejected by a federal judge. The city ultimately settled on a recovery plan created by a state appointed receiver. Nevada law does not permit North Las Vegas to file for bankruptcy.
"For Harrisburg, Stockton and Detroit, management's ability to avoid insolvency was constrained by financial decisions made years before that increased city liabilities without corresponding decisions on how to fund those obligations," Reilly said.
In response to rising budget caps, North Las Vegas eliminated about 800 full-time equivalent positions through attrition and voluntary separation and layoffs. With no additional expenditure flexibility beyond layoffs, the city issued resolutions declaring a state of emergency in fiscal years 2013 and 2014 to suspend labor contracts.
A January 2014 judgment against the city leaves it exposed to approximately $25 million in back pay.
Weak economic conditions still plague the city, which was among the hardest hit in the U.S. by the collapse of the housing market, resulting in a combined tax assessed value decline of 52% over the past four years.
The housing market continues to experience high foreclosure rates as, despite recent increases, home prices are still 50% below their 2006 peak.
North Las Vegas is also limited in its revenue raising options. The city retains about 30 cents in flexibility under the statutory tax rate cap of $3.64 per $100 of assessed value.
However, management has indicated that this would only raise an additional $1 million, and the city council has so far decided not to increase the rate.