Aug. 21 (Bloomberg) -- Southampton, New York, playground to the affluent, may lose its AAA from Standard & Poor’s over money transfer snafus that may have concealed a weaker financial position than the rating reflects.

S&P put the town of 59,813 people, located on Long Island’s southeastern end, on rating watch for a possible reduction with “negative implications,” S&P said in a news release yesterday. Moody’s Investors Service, which assigned the town Aa1, is reassessing its evaluation, Tamara Wright, Southampton’s comptroller, said in an interview.

The rating watch listing “reflects what we believe might be material discrepancies” that could lead to “a much weaker overall financial position than had been represented to us by the town in the past,” S&P wrote.

Lower ratings may raise the cost of borrowing. The town had $109.5 million of publicly held debt at the end of 2008, according to its financial report. It borrowed $40 million this year to preserve open space.

“Nothing has come up to make one suspect that money is missing or stolen,” Wright said. “The problem is that money in the general fund may already be spoken for even though it hasn’t been spent, and the town will have to find a way to either undo its past transfer resolutions or raise more revenue.”

Fund Transfers

The town asked the state comptroller’s office to audit its finances after an investigation raised questions about whether transfers for construction projects took place as scheduled earlier this decade, Wright said. If the transfers didn’t occur, they may reduce the value of the general fund surplus, which is what concerns Moody’s and S&P. “The rating agencies feel the money should be in the general fund,” she said.

The town’s “worst case scenario” estimates that between 2005 and 2007, about $10 million may have been authorized for transfer from the town’s general fund to its capital fund for projects such as building construction and repair, yet never spent, Wright said.

That money would still be owed by the operating fund to the capital fund under state law, meaning the town would have less money in its treasury than officials had assumed when drafting Southampton’s current $82 million budget, she said.

The town’s 2008 financial statement, due in June, won’t be completed until the forensic audit of town finances is completed, Wright said. The state’s review won’t begin until October, after Southampton completes its own forensic audit to reconstruct what occurred, she said.

Rich and Famous

Robert Whalen, spokesman for state Comptroller Thomas DiNapoli, confirmed that the audit will take place, saying town officials contacted his office requesting it. He refused to discuss details.

Southampton, a seaside retreat of multimillion dollar houses and trendy restaurants, is home to Cooper’s Beach and the Shinnecock Hills Golf Club, which hosted the 2004 U.S. Open golf tournament. Its residents have included fund manager and philanthropist George Soros, the late CBS News producer Don Hewitt and Hollywood celebrities Renee Zellweger, Michael J. Fox, Matthew Broderick and Sarah Jessica Parker.

The town’s Web site reported July 17 that its outside forensic accountant, FTI Consulting, found its police department fund created a deficit of about $8 million, including a $4.6 million current deficit plus $3.4 million paid from its general fund in 2007 to cover cash shortfalls from 2003 through 2007.

While unrelated to questions regarding transfers between the general and capital accounts, the under-funded police department further “complicates the town’s fiscal situation,” and may require increased taxes to cover police expenses, Wright said.

Cautious Move

S&P municipal credit analyst Armen Hratchian said in an interview the firm decided to place a credit watch on the town, rather than downgrade it, more from caution than from any specific finding about its finances.

“We understand they did this external audit, and then the town requested that the state comptroller come in and examine their books before they publish their 2008 audit,” he said.

Hratchian added: “We don’t have a lot to say other than there’s uncertainty about the accounting issue overall, and we are taking a credit-watch approach, expecting they will have something to tell us in two to three months.”

To contact the reporters on this story: Darrell Preston in Dallas at dpreston@bloomberg.net; Henry Goldman in New York at hgoldman@bloomberg.net.

Last Updated: August 21, 2009 14:05 EDT