The city of Los Angeles has encountered a significant setback as S&P Global Ratings recently decided to lower its bond ratings. This move comes as the city grapples with an almost $1-billion budget deficit. The credit rating agency adjusted both the long-term rating for general obligation bonds and the lease revenue bonds issued by the Municipal Improvement Corp. of Los Angeles. Concerns about the city's financial stability, reserve fund depletion, and structural imbalances were cited as reasons behind the decision. Additionally, the potential for further downgrades looms if urgent budgetary adjustments are not implemented.
On Friday, S&P Global Ratings announced the reduction of Los Angeles' long-term bond rating from AA to AA-. Simultaneously, the rating for the Municipal Improvement Corp.'s lease revenue bonds dropped from AA- to A+. These bonds play a crucial role in funding essential city equipment like fire trucks. According to S&P, the downgrade primarily reflects concerns over the city's deteriorating financial health and emerging structural issues. One major worry is the rapid decline in the city’s reserve fund, which traditionally maintains at least 5% of the general fund but now stands at only 3.22%.
Mayor Karen Bass recently presented her proposed budget for 2025-26, revealing the dire economic situation facing the city. Her plan includes laying off approximately 1,650 municipal employees, a measure she described as a last resort. In an effort to prevent these job losses, Mayor Bass visited Sacramento to seek state assistance. Lower bond ratings often lead to higher interest rates, increasing borrowing costs for the city. S&P also highlighted additional risks such as litigation, limited flexibility in reducing personnel expenses due to labor contracts, and slowing economic growth.
Bass emphasized that the steps she is taking aim to restore fiscal balance and ease some of the rating agency’s apprehensions. She acknowledged the downgrade was anticipated given current economic conditions and decades of inefficiencies in city operations. Protecting bond ratings has been a priority since she became mayor 27 months ago, driving fundamental reforms. S&P noted positively that Bass’ proposed budget identifies potential structural changes, marking a vital step towards addressing fiscal imbalance.
As Los Angeles navigates this challenging period, it remains imperative to implement effective strategies that bolster financial resilience and maintain public trust. With the potential for further downgrades looming, immediate action will be critical in stabilizing the city’s financial future and ensuring sustainable progress moving forward.
