LOS ANGELES — Amid a recent downgrade and talk of financial woes, Los Angeles will roll out almost $500 million of general obligation bonds this month.

Despite the recent negative headlines, the bonds should still sell well, thanks to decent ratings and a tepid market.

“Los Angeles is one of the biggest issuers in California, but there has been a lack of supply in the market place. Yields have continued to be pretty low,” said Alexander Anderson, a portfolio manager for Envision Capital Management in Los Angeles. “From an institutional buyer’s standpoint, there is always money to be spent there, but credit quality is also an issue.”

The nation’s second-most populous city will competitively sell two tranches of GO bonds, for $117 million and $380 million, later this month. The smaller piece of the deal will pay to clean up water pollution, while the larger slice will refund outstanding bonds.

Natalie Brill, head of debt management, said the city is going to market before the end of July so officials can get the debt service onto the Los Angeles County assessor’s tax roll by mid-August. She said the city expects $30 million in present-value savings from the refunding.

Moody’s Investors Service Tuesday downgraded the city one notch to Aa3 from Aa2. The new ratings will apply to the upcoming sale.

Brill said she does not expect the negative rating action to affect the sale.

Moody’s analyst Eric Hoffmann said the downgrade is mainly a combination of tight finances and increased labor costs. The rating agency revised the city’s long-term outlook to stable from negative.

Los Angeles has been dogged by talk that rising employee costs, specifically pension and retiree health benefits, could led to insolvency.

Officials have strongly countered the concerns, saying that though times are tough, the city is working hard and will rein in the costs.

The downgrade brings Moody’s rating in line with the AA-minus from both Fitch Ratings and Standard & Poor’s.

Anderson said a downgrade equal to other ratings would likely have less of an impact since it is unlikely to trigger selling by institutions that have strict credit parameters.

The largest piece of the sale, the Series B bonds, will go mostly toward refunding and will be bid on Thursday. The bonds will have terms from 2012 to 2023 and principals ranging from $8.6 million to $55.1 million.

The issue will help refund bonds sold from 1999 through 2004, according to the preliminary official statement. Each bid must come in between 99% and 106% of the bonds.

Proceeds from the smaller piece, the Series A bonds, will be used mainly for projects to help prevent storm-water pollution.

It will be bid Tuesday with terms from 2012 through 2031 and in principals of $5.85 million. Bids must be between 100.5% and 103%, the POS said.

The water bonds are being issued in response to an election in November 2004 in which more than two-thirds of voters approved $500 million of GO bonds for storm water pollution-abatement projects.

Public Resources Advisory Group and Acacia Financial Group are co-financial advisers on the deal. Nixon Peabody LLP is bond counsel.

Even though the bonds may sell well, Los Angeles is still facing a difficult financial situation.

Hoffmann said in a report Tuesday that five consecutive years of deficits have significantly reduced the city’s general fund balances, and the very slow economic recovery will likely mean revenue growth will lag rising costs.

Los Angeles closed a $492 million budget gap in fiscal 2011 and a $336 million hole in its fiscal 2012 budget. It closed about half its budget gaps with one-time solutions, according to Moody’s.

Nevertheless, the city has made significant progress bringing costs in line with its reduced revenue, Hoffmann noted.

Earlier this year, Mayor Antonio Villaraigosa signed a $6.9 billion budget that filled the budget gap mainly by cutting police and fire services, but which avoided further layoffs of city employees.

The city laid off more than 4,000 employees and closed or merged departments over the last several years to help control the burgeoning budget.

Los Angeles has also implemented a three-year road map and has worked to stabilize its reserve funds. The current reserve fund balance is $193 million, or 4.43% of the adopted budget

However, Hoffman said rising pension and retiree benefits costs will add pressure on the general fund for the foreseeable future.

Moody’s said Los Angeles faces a projected budget gap of almost $200 million in fiscal 2013 as expenditures rise $658 million in the next three years driven by $328 million in rising pension costs.

In fiscal 2001, the city funded pensions at 108% for general employees and 119% for police and fire personnel.

In fiscal 2010, the funding of the pension system fell to 76% for general employees and 92% for public safety workers.

The city predicts general revenue will increase 2.2% in fiscal 2013 and 3.2% in each of the following fiscal years, totaling just $398 million in additional revenue or 59% of the additional costs, according to the rating agency.

Nationally, Los Angeles’ tax base is second only to New York City’s.

Former Mayor Richard Riordan has warned that Los Angeles, like many cities and states, faces a dramatic increase in employee pensions and health care benefit costs over the next several years that could lead to insolvency. Riordan was mayor from 1993 to 2001.

He said new employees still are on defined-benefit plans that the city can’t afford, especially since it estimates its costs based on an annual investment return rate of 8% for the pension systems, a figure he believes is too high.

Riordan has come under fire because his administration negotiated some of the retirement benefit packages that the city is now trying to roll back.

Hoffmann noted that Los Angeles, like all California cities, cannot raise taxes without voter approval and that inflexibility contributed to the downgrade.

The city’s GO bonds are secured by a dedicated, voter-approved property tax levy.

Because of the state’s Proposition 13, passed in 1978, base property tax rates are fixed at 1% and property assessment growth is capped at 2% annually until a property is sold, at which time it is assessed at the new sale price. Any other taxes cannot be raised or implemented without voter approval.

Los Angeles has $1.3 billion of outstanding GOs and $1.9 billion of capital lease obligations. Moody’s said that combined, the outstanding debt represents 0.8% of the city’s 2011 assessed valuation, which is about 30% below the agency’s 2010 national median for cities at the Aa3 rating level.

The city’s GO debt service is expected to be $167 million for fiscal 2012 and to decline to $90 million through 2022 in the absence of additional general obligation issuances, according to Moody’s.

After the current deal, analysts said the city will only have $53 million of unused GO bonding authority.

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