State auditors say Castle Rock’s finances are so shaky the city is at risk of not having enough to pay its bills if things don’t change, adding that city officials haven’t cut enough to balance the books.

The city’s “financial condition continues to decline,” auditors wrote in their review of the 2007 and 2008 budgets. Of particular concern, they said, was the loan city officials took from other city funds to balance the 2009 general fund budget. The audit, previously given to the city, was released Monday.

“The city is at risk of not being able to meet its operating expenses, and repayment of the inter-fund loan is unlikely,” the audit report states. “The city has relied on fund reserves to cover expenditures rather than take the necessary actions to limit spending.”

The city spent $435,778 more than it took into its general fund four of the last five years, the audit report states. The overruns have been made up, at least in part, by using a portion of each year’s cash reserves.

The cash balance left over at the end of each year — used to pay bills and unexpected costs until tax revenues come in — has declined each of the past four years. It was $582,681 in 2005 and $209,441 by 2008 — a 64 percent decrease.

The city, in its official response to the audit, said it agrees with the concerns and the council “has made a commitment to work toward reducing expenditures and to build up reserve balances.”

Mayor Barbara Larsen said Monday that this is the first time in the 13 years she’s been in city government that state auditors found something wrong. The audit noted a problem with the city’s on-going finances, not it’s record-keeping.

City officials will meet this week to determine the status of this year’s budget and figure out how much needs to be cut. The City Council last month decided against its previous plan to use the loans to balance the budget. Larsen said they were always uneasy with the loan plan, and the auditor’s comments made it even more unappealing.

Without including the loans from other city funds, the 2009 general fund budget would be $12,000 in the red, the audit report states. The state told city officials they may need to cut $300,000 from the $1.3 million budget to put Castle Rock’s 2009 finances back in the black and provide enough of an ending cash balance to start 2010.

“We’re working as good as we can with what we’ve got,” Larsen said. “I think they’ll just take it as it comes and see what we can do with it.”

“I asked the auditor how we’re supposed to keep up with the costs of inflation and she said ‘you need to cut,’ ” Councilman Greg Marcil said last month.

The city also is running a $250,000 police levy to help pay its 2010 expenses. The levy is on the Aug. 18 primary ballot. If it fails, cuts to the 2010 budget would need to be deeper, city officials said.