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The letter to all staff confirmed the council faced cuts that would "almost certainly" affect council services, as the organisation strove to address a looming budget shortfall.
The shortfall came from a $5 million reduction in the dividend forecast from Dunedin City Holdings Ltd (DCHL) to the council each year, which would drop from $23.2 million to $18.2 million annually, beginning in 2012-13.
That was part of an $8 million overall reduction in DCHL annual dividends, with Dunedin Venues Ltd also set to miss out on $3 million annually.
When contacted yesterday, Mr Stephens said the letter, sent to all staff last Wednesday and leaked to the Otago Daily Times, was "an internal document and not meant for publication, and, as such, confidential".
In it, he warned staff the $5 million reduction in DCHL dividends to the council would, if translated into rates, push next year's forecast 7.4% rates increase up by 4.5%, to 11.9% in total.
Councillors had indicated that was "unacceptable" during a workshop on July 28, and instead wanted a 5% rates increase for 2012-13, he said.
That 6.9% gap between the two figures coincidentally equated to $8 million, which was "by any standards ... a large sum to remove from our expenditure", Mr Stephens said.
"We have in the past produced the occasional white rabbit but none this big."
The letter also acknowledged councillors recognised the challenge, and that service cuts would result in "pressure from the community".
Councillors had given no indication where changes should be made, and no decisions had yet been made, but some targets were already identified, Mr Stephens said.
Council operating expenditure included a forecast 3% increase for 2012-13, allowing for inflation.
"We would like to reduce that to zero."
Capital expenditure guidelines had also already been toughened, with "no new capital and, if at all possible, a reduction" required, he said.
Natural attrition would be used "wherever possible" to manage "any staff reductions that this might impose on us".
Mr Stephens also appealed to staff to come forward with their own ideas, even "anonymously ... in a plain envelope" if need be.
"At this stage, no idea is too crazy."
The letter came after Dunedin Mayor Dave Cull, outlining the dividend problems last week, said a mix of spending cuts and revenue-boosting initiatives would have to be considered, and "tough decisions" made.
Cr Richard Thomson also predicted council services would be cut and job losses within the organisation would "inevitably" follow.
Mr Cull would not comment on Mr Stephens' letter, saying it was between the acting chief executive and his staff, and declined to discuss the council's "confidential" briefing either.
He said councillors and staff were working to identify options to address the budget shortfall, which would be considered after new council chief executive Paul Orders arrived next month.
Mr Cull cautioned against taking a "simplistic" approach to "slash staff", but said some spending for the rest of this financial year could be deferred and carried forward to ease the pressure on next year's budget.
Any significant decisions would be finalised as part of next year's council long-term plan hearings, he said.
"I think we'll be starting to look at transformational change that alters the way we do things, in order to get more efficient at what we do."
Mr Stephens ended by warning staff to brace for more political statements, newspaper headlines and letters to the editor.
"There will be a lot ... my suggestion is that you should do your best to ignore them. We have a job to do."