Standard & Poor’s last week lowered Surprise, Ariz.’s issuer rating to A from AA and assigned a negative outlook.
The action came after the city said years of financial miscalculations resulted in a $16 million budget gap.
Findings in an outside audit for fiscal 2011 required Surprise to make cash transfers between city funds that resulted in a $3 million deficit in fiscal 2012, which ends June 30.
The city also drained its rainy-day fund, which by policy is required to hold at least $13 million.
Standard & Poor’s analyst Jen Hansen said ongoing audits may require additional adjustments, deepening the city’s woes.
“General fund reserves and cash are both significantly reduced as a result of pending audit adjustments for Surprise,” Hansen said. “We believe significant new audit adjustments may continue to adversely affect the city’s financial position.”
Surprise is in Maricopa County, about 24 miles northwest of downtown Phoenix.
City manager Chris Hillman said officials had expected the downgrade. The lower rating does not affect city operations, he said.
“Surprise is open for business and moving forward,” Hillman said. “Our revenue streams are strong.”
Hillman said the city will reduce spending in the fiscal 2013 budget, which takes effect July 1, and will develop a two-year plan to restore the emergency fund by the beginning of fiscal 2015.
Budget cuts will include staff reductions, he said, with many employees being offered voluntary severance packages.
“The mayor and council are committed to keeping residents in the loop as we fix our finances once and for all,” Hillman said.
Rebuilding the reserve by 2015 will require cuts of $4 million in fiscal 2013 and 2014, Hillman said.
The City Council is also considering an increase in the property tax rate to bring in an additional $1 million a year.
Chief financial officer Scott McCarty told the council last week that the city has no outstanding general obligation debt and should feel little effect from the downgrade, though it could raise the cost of issuing new debt or refinancing outstanding revenue debt.
McCarty said Fitch Ratings is reviewing its AA-minus rating. Fitch lowered Surprise’s rating to AA-minus from AA in September 2011.
Audits are under way to determine if the city properly used revenue from development agreements and impacts fees since fiscal 2000, he said. Results are expected by late 2012.
Surprise is working its way out of its financial problems, McCarty told the council.
“We are not broke,” he said. “We anticipate revenues increasing this year and in coming years.”
