Standard & Poor's Corp. down-graded Maricopa County, Ariz.'s, general obligation rating to A from AA last Thursday, affecting $176.03 million in outstanding long-term debt.
In a signal that the county's troubles might not be over, Standard & Poor's simultaneously placed the GO rating on CreditWatch with negative implications.
The rating agency also affirmed the SP-1-plus designation on the county's $100 million in outstanding tax anticipation notes. The affirmation reflected Maricopa's decision on May 20 to fully fund the more than $102 million redemption account for the notes, via a combination of property tax receipts and interfund borrowings, a Standard & Poor's press release said. The Tan rating was not placed on CreditWatch.
The decision to fund the redemption account was "necessary to assure investors and the rating agencies that those notes would be repaid," said Deborah Larson, the county's chief financial officer. "We saw it as an aggressive move, and a positive step to take in order to maintain the [SP-1-plus] rating."
Larson said the county was "a little surprised at the severity" of the downgrade, but acknowledge that "the county does not look like a double-A credit."
In placing the GO rating on CreditWatch with negative implications on the heels of the three-notch down-grade, Standard & Poor's cited "the county's continued need for external lending to support general fund cash flow and a lack of an adopted budget workout plan to ameliorate" the projected $60 million budget deficit for fiscal year 1995. The county's fiscal year starts July 1.
The county is preparing a "comprehensive business plan for the Board of Supervisors to consider by the end of June," Larson said.
"Given the magnitude of the issues facing the county, this plan must span several years and tackle the toughest of challenges," said interim county administrator Barbra Cooper. "The depth and momentum of activity must continue if the county is to remain a viable service provider."
Maricopa County's financial situation has been "worsening" since fiscal 1990, the Standard & Poor's release said, "complicated by declines in assessed value and administrative problems stemming from the introduction of a new computerized accounting system."
Failure by the county to develop a "credible deficit and cash management plan by the end of July could result in a downgrade to the BBB category," Standard & Poor's said.
To solve near-term problems, the county needs to address several issues, including settling on a budget, receiving reapproval for bank lines of credit, and successfully completing a planned refinancing, said Stephen Eaddy, associate director at Standard & Poor's.
But the county really needs to "for-go any band-aid solutions and create a financial plan that will carry them through the long term," Eaddy said.
The county expects to refund around $26 million of GO bonds in the first half of June, Larson said.
Last week's rating action followed an announcement by Moody's Investors Service on May 6 that it had placed the county's Aa rating under review for possible downgrade.
Christopher Mushell, an assistant vice president at Moody's, said Friday that the agency is holding off on further rating action until the budget plan is submitted and the refinancing is completed.
A great deal of the county's fiscal woes can be traced back to its previous management team, Mushell said. The county's new management, which came in at the start of fiscal 1994, has been "much more proactive in trying to clean up the situation," he said.
Larson said the new team's initial action was to bring in a series of auditors to "scour the county's financial operations, which confirmed suspicions that some operations were less than cohesive and consistent."
She said the process will continue in the coming months, but that management's priority is to "aggressively pursue the business plan."
