DALLAS -- Canton, Ohio, was slapped with a two-notch downgrade over its ongoing budget struggles.
S&P Global Ratings downgraded the city's limited tax general obligation bonds to A-minus from A-plus. The outlook is negative.
"The downgrade reflects our view of the city's inaction to make timely budget adjustments to prevent a rapid deterioration in reserves, which has resulted in very weak budgetary flexibility, and reflected in a negative available general fund balance," S&P analyst Benjamin Gallovic said Tuesday. "In our view, the very weak budgetary flexibility constrains the rating."
The city started 2016 with a $5.1 million deficit and after taking steps to restore fiscal balance in 2016, still faced a potential $1.4 million shortfall in 2017.
Canton addressed the large structural deficit in the 2016 budget by cutting expenses and raising additional revenue. Expenditure cuts, which exceeded $5 million in total, included a reduction in staff, lower overtime spending, and furlough days. The city increased court fees, and other fines and charges.
S&P said it could lower the rating if the city can't maintain structural balance over the next two years or if the available general fund balance deteriorates any further.
"The negative outlook reflects our view that there is at least a one-in-three chance that we could lower the rating further in the two-year outlook horizon," said Gallovic. "In our opinion, the city's credit quality is more vulnerable given recent budgetary pressures, a negative available fund balance, and a weak underlying economic base."
Canton ranked second among cities in Ohio with critical financial indicators, according to an online database unveiled by state auditor Dave Yost last week. The database ranks cities in the state base on 17 financial indicators. The indicators such as assets, general fund balance and the ratio of expenses to revenue were based on trends found in cities and counties previously declared by the state to be under fiscal caution, fiscal watch or fiscal emergency.
The city's financial position has deteriorated over the past three years during which it saw consecutive operating deficits in its general fund. The gaps have been the result of both structural and one-time issues. S&P said that between 2012 and 2015, general fund revenues were essentially flat, while recurring expenditures grew by an estimated 14%.
Canton has also been squeezed by a lag in income tax, which made up 62% of general fund revenue and 47% of total governmental fund revenue in 2015. From 2012 to 2015, Canton's income tax revenue only increased at an annual average of 1.7%.
"We don't view upward potential as likely in the next two years, but if the city makes substantial budget adjustments that allow is to rapidly rebuild its fund balance, we could raise the rating," S&P wrote.
Canton officials did not immediately respond to request for comment on the downgrade.
Canton has an estimated population of 72,240 and is in Stark County, 24 miles south of Akron, and 60 miles south of Cleveland. The city has historically issued rolling short-term notes to finance capital needs, but is considering bundling the notes together and issuing long-term bonds to take out the notes. It has no alternative financings such as variable-rate or privately placed debt.
