Lynnwood’s budget problems are bleak, according to an accountant hired by the police union to review the city’s books.

“This is the worst financial statement I’ve ever seen,” Timothy Reilly told the City Council last week. “I was employed by the city of Vallejo when they filed bankruptcy; they were not as bad as this.”

Reilly said that at the end of last year, the city’s general fund was technically insolvent, meaning its liabilities exceeded its assets (by $115,000 in this case.)

He said the city’s budget projections were overly optimistic last year, especially because sales tax (the city’s most important revenue generator) started declining in 2008 due to the recession. In 2009, sales tax revenue dropped $3 million while expenses grew $3.8 million.

“In our opinion, the city of Lynnwood’s financial position is extremely weak,” Reilly’s report said.

City officials have been trying to find ways to cut the budget and bring in more money. They approved new utility taxes in April, and are considering adding a $20 tax to vehicle registrations. They also trimmed the budget twice last year – a 3.5 percent cut in the middle of 2009 and an additional 1.6 percent at the end of the year. More cuts are expected.

Last month a different financial consultant hired by the city said Lynnwood faces a budget shortfall of up to $4.8 million.

The city’s budget talks have become heated at times. Finance Director John Moir resigned in March after storming out of a meeting.