SAN FRANCISCO - Standard & Poor's yesterday downgraded Los Angeles County's 2009-2010 tax and revenue anticipation notes to SP-1 from SP-1-plus on weakening cash flows and possible state aid cuts.
The agency also revised the outlook on the biggest U.S. county's AA-minus issuer credit rating to negative from stable. The outlook also applies to the county's lease revenue and pension obligation bonds.
The ratings actions came after Los Angeles County revised the official statement for the upcoming budget year's Trans to show that California Gov. Arnold Schwarzenegger's proposal to close a $24 billion budget deficit could blow a big hole in the county budget. Among other things, the governor proposed borrowing local tax revenues and eliminating the CalWorks welfare program.
"The downgrade on the short-term Trans follows the release of a supplement to the 2009-2010 Tran preliminary official statement disclosing a county projection of a possible additional $417 million negative cash effect on the county's general fund," said Standard & Poor's analyst David Hitchcock.
The biggest hit to the county would come from the elimination of CalWorks, the state program that provides temporary financial assistance and employment services to families with children. Elimination of CalWorks would increase demands for general assistance, which is a county program that provides cash payments of just over $200 a month to very poor adults who don't qualify for other social programs. The county may also suffer a state raid on up to 8% of its property tax revenues, though the state is required to pay that money back with interest over three years.
Glenn Byers, Los Angeles County's director of public finance, said Standard & Poor's shouldn't have cut the county's rating based on a proposal - the elimination of CalWorks - that's probably not going to pass the Democratic-controlled Legislature.
"I think they got it wrong," Byers said. "They are looking at a worst-case scenario that is an oversimplification of the state and county budget relationship."
Schwarzenegger has proposed closing the budget deficit primarily with spending cuts. Democratic lawmakers say they know the state will have to make deep reductions, but they have pledged to oppose the most draconian cuts to the state's social safety net. It's still unclear what will emerge from the Legislature this month.
"Standard & Poor's believes that there is a significant possibility that California could enact a substantial portion of the governor's proposed cuts," the agency said in a release.
Los Angeles County's fiscal 2010 budget assumed a $52.8 million ending cash balance for the year, after paying off the $1.1 billion of Trans. The county has since updated its projections to include an unanticipated $173.3 million improvement in its cash position in May. That means it now projects a $226.1 million ending balance before changes in the state budget. If the state punched a $417 million hole in the budget, the county could end the year with a $190.9 million deficit.
But Byers said the county would not allow that to happen.
If the governor's proposal to eliminate CalWorks were passed by the legislature, the county would have to adjust its budget to achieve balance, he said. It wouldn't simply keep spending at a pace it could no longer support.
The county plans to sell the Trans as soon as all three rating agencies react to the state budget updates to the county preliminary official statement. Fitch Ratings has reaffirmed its F1-plus rating on the deal. Moody's Investors Service has not yet released its revised report. It previously rated the deal MIG-1.
