BRADENTON, Fla. — Standard & Poor’s Thursday changed its outlook on the A rating it assigns to Atlanta’s general obligation bonds and other credits to negative from stable, citing concerns about the city’s weak liquidity and internal fund borrowing practices.

“Over the past few years, the city’s general fund has relied on liquidity from the Department of Watershed Management to cover operating deficits in several of the city’s other funds, including sanitation and [emergency 911], and reported receivables from these funds without a clear repayment plan,” Standard & Poor’s credit analyst John Sugden-Castillo said in a report. “Furthermore, the city has relied on short-term cash flow borrowing across fiscal years to bolster its cash position.”

Joya De Foor, the city’s chief financial officer, said she was disappointed by the action and disagreed with the agency’s report.

“We feel there are some factual errors and we look forward to correcting them with Standard & Poor’s,” she said.

In fiscal 2009, Atlanta posted a $2.7 million operating deficit. Revenues were $87 million below budget, according to Castillo.

The city implemented a hiring freeze, furloughs, and other measures resulting in $64 million in cuts, but the budget suffered from structural imbalance. The unreserved fund balance declined to $4 million, or 0.9% of expenditures at the end of fiscal 2009.

In fiscal 2010, revenues were increased, partly through a property tax increase, and expenditure reductions continued. At the end of fiscal 2010, the unaudited unreserved fund balance was expected at $69 million, or 14%, and the city’s cash was expected to be $117.9 million — $37.9 million after netting out $80 million of tax anticipation note proceeds.

“While Atlanta’s income statement seems to have improved, the city’s liquidity continues to be weak, in our view,” Castillo said.

In addition, Atlanta has entered into a memorandum of understanding with the watershed department to establish a repayment plan for amounts borrowed by various governmental funds. As of June 30, 2009, the amount owed was $118.043 million, Standard & Poor’s said.

De Foor said the city is paying that obligation.

“The city’s failure to address and resolve the issues that resulted in weak liquidity, high levels of receivables from other funds, and cash flow borrowing across fiscal years could result in a downgrade,” Castillo said. “In addition, an operating deficit in fiscal 2011 could also result in a downgrade given the city’s limited liquidity.”

The change in outlook came in conjunction with Standard & Poor’s assigning of its rating on the upcoming sale of $135.5 million of refunding and revenue improvement bonds by the Atlanta and Fulton County Recreation Authority. Proceeds will be used for improvements at Philips Arena, home to the National Basketball Association’s Hawks, and the Atlanta Thrashers, a National Hockey League expansion team.

Standard & Poor’s rated the arena bonds A with a negative outlook and noted that the authority’s bonds are secured by full faith and credit pledges of the city and county, with Atlanta obligated to pay two-thirds of debt service if necessary and Fulton County paying the other one-third.

De Foor said the arena operator is responsible for payment of debt service on the authority’s bonds. The city and county are providing backstops, she said.

In addition to the A rating on the city’s GOs, the negative outlook applies to the A ratings of other credits, including Atlanta’s Downtown Development Authority, Public Safety and Judicial Facilities Authority, Solid Waste Management Authority, and Urban Residential Finance Authority.

As of 2009, the city had approximately $1.1 billion of net direct debt, excluding self-supporting debt from the water and sewer and aviation enterprise funds.

In March 2009, Standard & Poor’s lowered Atlanta’s GO rating two notches to A from AA-minus due to operating deficits and declining reserves. At that time, Standard & Poor’s said the outlook was stable.

The city is preparing to sell next week up to $800 million of senior and subordinate general revenue and passenger facility bonds for Hartsfield-Jackson Atlanta International Airport. While a rating by Standard & Poor’s has not been released for next week’s sale, the senior-lien bonds are currently rated A-plus and the subordinate bonds are rated A with a stable outlook.

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