Annapolis will not be able to pay employee salaries for the next three months if new revenue isn't generated, the city's finance director said.

Annapolis is poised to run a $3.8 million deficit by the end of September, Finance Director Tim Elliott told the city council at a budget briefing.

"It's very stressful right now figuring out our cash flows," Elliott said, just one month into the new fiscal year's $75.1 million budget. "It's very tight. I'm sorry I don't have better news, but I think we need to be honest about it and deal with it."

Department overspending and a slight upswing in payroll expenses is driving the city's debt, Elliott said.

Payroll costs are increasing by roughly $100,000 -- to a total $1.7 million -- because of accrued vacation compensation the city owes recent retirees.

"It could mean in the fall we might not be able to make payroll," Elliott said, adding that the city's reserves also are in danger of shrinking over the next couple years.

The city council members, called "aldermen" in Annapolis, recounted borrowing $3 million in May and $4 million in June to shore up the city's cash flow.

"What do we do? If this picture holds true, what are we gonna do?" Alderman Ross Arnett asked.

Elliott said "there are options" but provided no details when Arnett pressed him.

"I'm counting ... I'm hoping we can secure some revenue," he said. "The real concern is getting to the second half of the year."

As the city hunts for more revenue, a number of cash-happy department heads are draining the city's purse by overspending their budgets, he said.

Alderwoman Sheila Finlayson called the mismanagement "unacceptable" and asked Mayor Josh Cohen how the agency chiefs -- whom he appointed -- can get away with overspending.

"That is something that we are going to work out during this fiscal year," Cohen said. "We can say conceptually that if a department overspends their budget than that department will be held accountable. So, exactly ... what does that mean? ... That's something that we're still going to work out."

Finlayson urged Cohen to address the overspending more aggressively.

"We're running out of time. ..." she said, but Cohen cut her short by calling for a photographer to take a photo, after which he wrapped up the meeting.

Annapolis' financial problems were first reported by the Annapolis Capital Punishment blog.

hpeterson@washingtonexaminer.com