As two more Northern California cities consider joining Vallejo by filing for bankruptcy, Napa reports it is planning for harder times ahead.

Between July and September, sales tax collections in the city were 23 percent below expectations, with the possibility of steeper declines this quarter, Napa City Manager Mike Parness said.

With property tax, the city’s largest source of revenue, also expected to weaken, city staff will be developing strategies for cutting expenses if necessary in 2009, Parness said.

Selective hiring freezes and project delays are two ways the city can compensate for reduced revenue if the economic climate worsens, he said.

“We are not immune to the downturn in the economy,” Parness told the Register editorial board last week.

Fortunately, the city’s third-largest source of revenue — the hotel bed tax — is performing far better than expected, Parness said. The city garnered 15 percent more transient occupancy tax than budgeted in the last quarter.

Also, the city plumped up reserves over the past two years, giving it a financial cushion to handle a mild economic downturn, Parness said.

“We are monitoring the situation very closely,” with the City Council to get an update in January, Parness said.

The council will have the option of using reserves to compensate for any revenue losses, cutting expenses or a combination of the two, he said.

One wild card is what the state of California will do to solve with its own budget crisis, Parness said. With the state running billions of dollars in the red, dollars could be pulled from local government to pay for state services, he said.

Unlike cities that are facing severe financial hardship, Napa has not depended on residential development to balance its budget, Parness said. Construction has plunged over the past year, hurting fast-growth cities. Eroding property values are also a bigger issue in newer cities, he said.

Vallejo became the poster child for municipal distress when it filed for bankruptcy protection in May. The Vallejo council blamed high personnel costs and the depressed housing market.

Two other Northern California cities, Rio Vista and Isleton, announced earlier this month that they are considering bankruptcy to solve financial problems.

Napa received $961,000 in sales tax in July-September quarter, which was $291,000 less than expected. Hotel tax revenues were up $190,000, or 18 percent.

City departments spent $1.45 million less in the first quarter than was budgeted.

Excluding the property tax, which doesn’t begin to flow to the city until this quarter, city revenues in the first quarter were down a total of $122,000, or 17 percent.