After three years of running deficit budgets, Napa is 12 months away from a financial meltdown, city Finance Director Jed Christensen warned the City Council Tuesday.

By next June, the city will have run through $17 million in reserves in four years, leaving it millions of dollars short of what it will take to maintain current services, Christensen said.

"We are facing some real serious problems," Christensen said. "I hate to be the one to bring the grim reaper into the room."

The city has been living beyond its means for the past three years, depleting nearly all of its reserve funds while waiting for the economy to turn around and fill city coffers with new revenues.

Revenues are up this year, but expenditures are up even more, in part because of $2.4 million in emergency cleanup and repair costs after the New Year's flood, Christensen said.

To survive the current budget year which ends June 30, the council left 30 jobs unfilled last spring and negotiated with most employee unions to impose caps on raises.

Even so, the city may end up burning $6.4 million in reserves to balance its nearly $58 million general fund budget, said city Finance Manager Carol Wilson.

Assuming that another $5 million in reserves are needed to survive 2006-07, there will be no non-emergency reserves left going into the following year, she said.

"It's going to be ugly," said Vice Mayor Kevin Block. "We're looking at service cuts, absolutely. We have to be straight with people."

The gamut of city services and the city's contracts with its unions will all be "on the table," Mayor Jill Techel said. "There are no good choices," she said.

The new Meritage Resort and Vino Bello timeshare resort in south Napa should produce an extra million dollars in city revenue in 2006-07, but that doesn't begin to bail the city out, Christensen said.

Two more city hotels could be operating in another two years, but they won't help the city balance its books in the near term, he said.

"We'd hoped the economic recovery would be quicker and faster and more viable," Christensen told the council.

The city is being hammered by rising employee costs, Christensen said. Medical insurance, pensions and worker's comp costs have soared in recent years, while revenues have lagged far behind.

Despite its financial difficulties, the city has maintained salaries and benefits comparable with other Bay Area cities; the City Council insisting this was the only way to be competitive for employees.

In the short term, the city will have to scale back on services, Block said. "Long term, a vibrant economy is the only way to get out of this structural deficit," he said.

Christensen raised the idea of tax increases to help dig the city out of its financial hole. Staff has proposed a variety of new taxes over the years, but none were seriously discussed by the council.

Block said he is still opposed to new taxes. That's not how the public wants the city to solve its financial problems, he said.

Staff plans to schedule more detailed council budget discussions in coming months, while briefing the employee unions on the city's situation.

By next June, the city could be down to its emergency reserve -- a half-year's property tax totaling nearly $6 million. Until now, that pot of money has been considered off limits.

The New Year's flood illustrates why the city needs an emergency reserve for natural disasters, Christensen said.

The city spent $2.4 million on community cleanup, but so far FEMA and the state have reimbursed the city $555,000, which is $1.5 million less than expected, he said.

State and federal governments are challenging the city's no-bid contracts for the cleanup, Christensen said. The city is arguing that it paid prevailing rates.

Even if the city got back the maximum 94 percent of flood expenses allowed by state and federal disaster programs, it would still be spending $5 million from reserve funds in the year ending June 30, Wilson said.