S&P Global Ratings has lowered the bond ratings for the city of Los Angeles, which is trying to close a nearly $1-billion budget deficit.
On Friday, the credit rating agency downgraded its long-term rating for the city’s general obligation bonds to AA- from AA.
It also lowered the rating for the Municipal Improvement Corp. of Los Angeles’ lease revenue bonds, which are used to purchase city equipment such as fire trucks, to A+ from AA-.
“The downgrade reflects the city’s weakening financial position and an emerging structural imbalance,” S&P Global Ratings wrote in announcing the changes.
S&P said it was concerned about the rapid deterioration of the city’s reserve fund, which is supposed to remain at 5% or more of the general fund.
To close a gap in the 2024-25 budget, city officials drew on the reserve fund, which fell to 3.22% of the general fund.
S&P said the bond ratings could decrease further if the city does not quickly make adjustments to the management of its budget.
The bond rating downgrades came days after Mayor Karen Bass outlined the city’s stark economic situation in her proposed budget for 2025-26, which includes laying off about 1,650 city workers.
Bass described the possible layoffs as “a decision of absolute last resort,” traveling to Sacramento on Wednesday to seek state money to save the jobs.
Lower bond ratings typically translate to higher interest rates, which will make it more expensive for the city to borrow money.
S&P said it also based its negative outlook on factors such as “heightened litigation risk, limited flexibility to unilaterally reduce personnel costs under current labor contracts, and slowing economic growth, notwithstanding any additional lasting economic and revenue impacts from the wildfire events across Los Angeles County in January 2025.”
Bass said the steps she is taking to balance the budget should assuage some of the rating agency’s concerns.
“This announcement was unfortunately expected given the downturn and turbulence in the economy, and in the context of decades of inefficiencies that have been built-in to the way the city operates,” she said in a statement. “Protecting our bond ratings is a key reason why I pushed for fundamental reforms in the 27 months that I’ve been mayor.”
S&P noted that Bass’ 2025-2026 proposed budget “identifies potential structural reforms, which we consider to be an important step toward correcting the fiscal imbalance.”
