DALLAS - Financial accounting problems brought Surprise, Ariz., its second downgrade in a week, as Fitch Ratings lowered the Phoenix suburb’s implied unlimited tax general obligation rating to A-plus from AA-minus.
Tuesday’s action follows a three-notch Standard & Poor’s downgrade to A from AA. Both agencies have a negative outlook on the city. Fitch previously lowered Surprise’s rating to AA-minus from AA in September 2011.
Mayor Sharon Wolcott said she expected the Fitch action in the wake of the Standard & Poor’s downgrade.
“It is a pill we have to swallow, but we have strong revenues, are open for business, and our day-to-day services are unaffected,” Wolcott said.
Fitch also revised its outlook for the city to negative from stable, indicating it could drop the rating further if the city’s reserve funds and financial condition worsen.
“The downgrade and outlook revision reflect continued erosion of financial flexibility, as fiscal 2011 general fund reserves were again used to satisfy development fee and related obligations pursuant to the city’s discovery of accounting errors dating back 10 years,” wrote Fitch analyst Rebecca Meyer. “The negative rating action is also based on a fiscal 2011 audit opinion that is expected to be qualified due to uncertainty as to the impact on results of previous years’ financial transactions.”
At the same time, Fitch also downgraded to A-plus from AA-minus $35.1 million of Surprise Municipal Property Corp. excise tax revenue refunding bonds, Series 2003.
Surprise faces a $3 million deficit at the end of the fiscal year. The city’s rainy-day fund is gone. Under more favorable conditions, the two-month reserve would amount to $13 million.
City leaders concede that more problems could surface in the process of sorting out the accounting errors. The city will conduct two additional audits over the next eight months.
Wolcott said the city is trying to rebuild its reserves within two years.
Located in the West Valley area west of Phoenix, Surprise nearly tripled its population to 117,517 from 30,848 between the 2000 and 2010 censuses. Only the Maricopa County town of Gilbert grew faster.
The city was founded in 1938 by Flora Mae Statler, who said she “would be surprised if the town ever amounted to much,” which led to its name.
The city is the spring training home of Major League Baseball’s Texas Rangers and Kansas City Royals. The city is also partnering with a company called Westcor to develop the largest regional shopping mall in Arizona known as Prasada. Under a 2007 agreement, the city will assume ownership of the infrastructure and reimburse Westcor for its $240 million cost by rebating sales taxes generated by Prasada retailers.
