Enclosed is a breakdown of the city of Las Vegas' budget from City Manager Douglas Selby:

The City of Las Vegas like many other municipalities has experienced a severe downturn in our revenues due to the uncertainty in the national and local economy.  In particular, we have seen a rapid and sustained drop in C-Tax revenue, which makes up 51% of our general fund budget.  We are optimistic about our local economy and its ability to rebound and grow over the long term; however, we know that over the next 24 months we cannot sustain programs, projects and services at the level of the preceding 5 years.  Over 85% of our revenues are outside of our immediate control which leaves us with no alternative but to look at reductions in our expenditures to balance our budget.  The following report is intended to provide an assessment of our current financial status, an action plan to balance our budget for the remainder of this fiscal year, and a preliminary strategy to address a continued downturn in revenues in the future.

Situational Analysis

Consolidated tax makes up about half of our general fund. After experiencing an average growth rate of 9.2% during the first half of this decade (fueled by 11 straight quarters of double-digit consolidated tax revenue growth), fiscal year 2007 (FY07) revenues plummeted to a negative 0.4% consolidated tax growth. This net drop in excess of 12% was at first thought to be temporary.  However, during FY07 the sub prime mortgage crisis began as the housing bubble burst.  By the end of FY07, the sub prime crisis began to extend into related markets as banks and lenders tightened credit.  Lack of home buyers and the drying up of credit needed to build and buy homes, caused the building and construction sector to pull back, particularly in residential, but also commercial development.  As home prices began to fall, property values also fell, impacting assessed property value.  Developers and builders have delayed or canceled projects.  Homeowners, who previously used sub prime loans to finance all manner of goods and assets, are no longer able to continue this practice, which contributed to lower C-Tax revenues.  As of December 2007, we have experienced 6 quarters of dismal C-Tax revenues.  The collective wisdom of local municipal finance managers is that this situation will carry into FY10 and possibly FY11, and that we may actually level off at a "new" normal growth rate of well less than 10%.  It is clear that something must be done to respond to shrinking revenues over the second half of this decade. The following graph provides a summary of C-tax over the past 8 years.

General Budget Approach

The unprecedented downturn in revenues due to the local and national economy, coupled with city labor costs that over a five-year stretch will out pace revenue growth, have placed the City of Las Vegas in a position requiring aggressive action to control expenses in order for us to end this fiscal year with a balanced budget. The outlook for FY09 which starts on July 1, 2008, does not appear to be any better and will require even deeper cuts in our expenditures.

With assistance from the Finance Director and other department heads, I am currently working on finalizing strategies for meeting these challenges while trying to preserve (1) our ability to continue to deliver needed services to our residents, albeit at a reduced level, (2) the city's financial bond rating, (3) jobs and (4) long-term programs that will lead to improved operational efficiency in City government.  Our revenue picture will dictate how well we can honor these priorities.  An additional consideration is the long-term possibility that revenue growth will stabilize at a much lower rate than previously experienced.  The strategies that are being finalized have been developed with the input of all city department directors and will be shared with our labor organization leaders for their input.  The strategies are subject to change based on input from the City Council and changes to our revenue outlook.  However, the fundamental need to dramatically cut expenditures until such time we witness a sustained economic recovery must be addressed today to avoid a crisis in the future.

Fiscal Year 2008 Budget Cuts

The priority during the remainder of FY08, which ends on June 30, is to meet our revised budget. The revised budget reflects an across the board 4.5% cut to all general fund departments (except for Metro and utility costs). This total cut of $16.7 million represents a 3% cut of our $555 million general fund budget.  When combined with a $4.8 million draw down of prior year fund balance, the total general fund shortfall is $21.5 million, or 3.9% of our $555 million general fund budget.  The cuts are predominantly vacant positions ($13.2 million), many of which will be indefinitely unfunded. Attached to this report is the summary of the budget cuts and impacts for the remainder of this fiscal year.

Fiscal Year 2009 Budget Cuts

Fiscal Year 2009 (FY09) revenue projections currently estimate a growth of 2% over FY08. This modest growth is a result of a forecast of continued positive growth in property taxes and fees rather than a recovery of C-tax revenue.  Most of the vacant positions used to support the FY08 cuts will probably remain unfunded in FY09.  These extended "soft reductions in force" (i.e., elimination of vacant positions) will have a significant effect on the type and scope of services we are able to offer, both internal and external.  Departments have submitted their plans to meet the reduced FY09 budget targets, including vacancy management plans. I will also be reviewing the current five-year capital improvement project plan, building reserves and related operating impacts with our department heads to assess other areas where we can possibly save money by deferring projects, reducing contingency funds and deferring replacement of equipment. We will be meeting with City Council over the next few weeks to finalize the budget recommendations before the March 31 Budget Workshop.

Building and Safety Enterprise Fund

Immediate action is required in the Department of Building & Safety (B&S) (an enterprise funded department) due to a dramatic downturn in the residential market that is rapidly depleting their retained earnings balance.  The last two fiscal years have witnessed a 36% reduction in B&S revenues with no end in sight.  Current operating cost exceeds revenues by $5.7 million, and there is no capacity in the general fund to subsidize the shortfall for even one year. 

Consequently, action has been taken to identify 31 positions for elimination, 3 of which will be managers.  Although these cuts are extensive, management believes the essential services of B&S will be maintained given the current level of demand.  It is important to note that even with these reductions, B&S expenditures will likely exceed revenues by about $2 million per year.  We will continue to closely monitor the financial condition of B&S and take additional corrective actions if necessary in mid-FY09.  The B&S financial situation is illustrated in the following graph.

Fiscal Year 2010 and Beyond

If revenues do not show evidence of sustained recovery by January 2009, we will not be able to sustain a balanced budget in FY10 without program cuts that will result in layoffs of employees paid in whole or in part through the general fund.  Absent additional cuts in FY10 and FY11, forecast models show that the general fund balance will drop significantly below 10% of revenues (i.e., less than 5 weeks of operational coverage) putting the city at risk of losing its bond rating, but more importantly, preventing the city from adding any additional staff or services for up to three to four years. The following graph illustrates what will happen to our fund balance based on cuts being considered for FY09. The Council's current budget policy calls for us to maintain a 12% fund balance. I will be recommending that this be reduced to 10% recognizing that a further drop below 10% may be unavoidable unless we can carry over more money from FY09.

Other actions we are recommending over the next four months are designed to prepare the city for limited revenue growth for the next two years followed by a modest revenue recovery after FY12.  Our growth in labor cost (which is about 75% of our general fund budget) has exceeded revenue growth two years in a row and is projected to exceed revenue in the next year.  This trend is illustrated in the following graph.  This means a significant element in preparing for FY10 budget involves examining our options for reducing the cost of labor.

We have only two fundamental approaches to address labor costs.  One is to work with our bargaining unit leadership on changes to pay and/or benefits.  For example, forgoing merit and COLAs for one year could save approximately $13 million.  The second option is reducing our workforce numbers.  It is premature to speculate about what functions would be impacted under this option, but I am recommending that a plan be developed for possible implementation as early as January 2009 which would identify programs and activities that would be modified, terminated or suspended indefinitely if the current revenue performance continues.

Summary and Conclusion

For the balance of FY08, we will pursue our plan of utilizing vacancy savings and fund balance draw down.  In addition, there will be some service impacts such as community and recreation center closures on Sundays, elimination of some Leisure Services events, elimination of special events requiring overtime, elimination of city bus use beyond traditional routes, suspension of the Citizen Leadership Academy, and cuts in travel, consultant and supply budgets among other things. These adjustments are necessary to avoid general fund layoffs of full time employees in the short term. These actions and impacts are summarized in the attachment to this report.

Leading into FY09, city staff will prepare a comprehensive assessment of service impacts of frozen vacant positions and reductions in hourly positions, overtime, and professional services.  We will present a service reduction plan and impact analysis to the City Council in detailed briefings over the coming weeks.  Meetings with union leadership will also occur to ensure open communication and joint planning.  On March 31 the City Council will convene to provide direction regarding the proposed FY09 budget.

Finally, once we have a finalized FY09 budget, staff will begin a formal dialogue with labor organization leadership to discuss labor contractual obligations for FY10.  We will also continue to monitor the solvency of the Building & Safety Enterprise Fund.  With the help of the department directors, we will develop program reduction or elimination plans to be activated if our revenues do not recover as we hope they will over the long term.  Our Finance Director will continue to monitor and report on our financial funds diligently.  As the City Manager, I commit to work with the Council to prudently manage the city's resources while we go through this turbulent period.  As signs of recovery emerge, we will move prudently to restore city service levels at a rate we can afford.

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Douglas A. Selby

City Manager