Moody's Investors Service said it has upgraded the city of Los Angeles' general obligation bond rating to Aa2 from Aa3.
The rating was placed on review for upgrade on October 9, 2012, as part of Moody's review of 32 California cities' ratings.
Moody's affirmed its existing ratings on the city's unsecured, general fund-backed obligations, including its various issues of judgment obligation bonds, lease revenue bonds (LRBs) and certificates of participation (COPs). The judgment obligation bonds and the city's real property lease-backed LRBs and COPs are rated A2. The city's equipment lease-backed LRBs and COPs are rated A3. The outlook on all of these ratings is now stable.
The GO bond rating upgrade reflects a change in Moody's estimate of the likelihood of default on a California local government's GO bond relative to obligations paid from the city's general resources as well as factors specific to the city of Los Angeles' tax base and GO bond structure.
Despite the last few years' extreme housing market volatility, the assessed valuation of Los Angeles' property tax base has proven quite stable and is now on an upward track. Assessed valuation growth in the past two fiscal years has more than compensated for the slight declines that occurred in the prior two years. The city's direct GO debt burden on this property tax base is low, and the debt is structured conservatively with 20-year final maturities and level annual retirement of principle.
Absent additional borrowing, the tax rate to support the city's GO bonds would decline over time even in the absence of additional assessed valuation growth.
The affirmation of the city's other ratings, and the resulting widened "notching" between the city's GO and general fund-backed obligation ratings, reflects both the difficult operating environment for California cities generally and the specific challenges that Los Angeles faces in balancing its general fund budget.
Despite significant general fund budget cuts in recent years, the city continues to have a substantial structural deficit. This is driven by deferred labor cost increases, an above average general fund pension burden compared to most highly rated cities nationwide, and the relative weakness of the economic recovery compared to projected expenditure growth.
While the local economy is improving, projected expenditure growth is likely to exceed revenue growth by a substantial margin in fiscal 2014 and 2015. Closing this gap will likely be difficult, especially if the economy continues its slow expansion, since the city has already made substantial cuts from its projected baseline budget expenditures over the last several years.
