SAN FRANCISCO — Fitch Ratings downgraded $3.4 billion of Los Angeles debt because policymakers in the second-biggest U.S. city have failed to balance its budget and plan to drain its reserves.
The rating agency downgraded the city’s general obligation, solid-waste revenue, sanitation equipment-charge revenue, and landscape and lighting assessment district bonds to A-plus from AA-minus.
Fitch reduced the city’s judgment obligation bonds, municipal improvement corporation certificates of participation and lease revenue bonds, and convention center lease revenue bonds to A from A-plus.
“The downgrade reflects the anticipated drawdown of general fund reserves to a very low level and the likelihood that it will take the city some years to rebuild those reserves,” analysts Amy Doppelt and Alan Gibson said in a report. “Fitch expects financial improvement to accompany economic recovery, although even with revenues returning to growth mode, greater political willingness will be needed to adhere to adopted and prudent fiscal policies to create meaningful results.”
The move makes Fitch the first of the three major rating agencies to take away Los Angeles’ double-A level ratings.
Moody’s Investors Service downgraded the city’s GO rating to Aa3 from Aa2 earlier this month. It kept a negative outlook on the debt. Standard & Poor’s put the city’s AA-minus GO rating on negative CreditWatch.
Fitch cut Los Angeles’ GO ratings to AA-minus in November, citing a $98.1 million budget deficit.
The agency took action again after deficit projections rose and political standoffs between Mayor Antonio Villaraigosa and the City Council — first over job cuts and then over electric utility rates — showed just how difficult it is going to be to return the general fund to balance.
Los Angeles now projects a $148.9 million budget deficit this year.
A dispute over electric rates at the Los Angeles Department of Water and Power earlier this month threatened a planned $73.5 million transfer to the general fund from the utility, and prompted a warning from city Controller Wendy Greuel that the city could run out of cash next month.
While it now appears the transfer will go ahead as planned, “Fitch views that dispute as further demonstration of the political nature of budgetary actions,” the analysts said. “The dispute calls into question a general fund revenue previously viewed as predictable.”
Even with the transfer, the fiscal 2009-10 deficit will require the city to draw down reserves to about $140 million, or 3.2% of the city’s $4.4 billion general fund budget.
Los Angeles plans to privatize its parking garages and use a $100 million-plus up-front payment it expects to receive from that deal to replenish reserves, but city finance officials also expect to borrow to finance another operating deficit next year. Recent projections showed the budget gap at almost $500 million.
City finance officials declined to comment on the downgrade yesterday. Villaraigosa plans to release his fiscal 2010-11 budget proposal today.
Fitch said Los Angeles’ difficulty budgeting is offset somewhat by a “large, diverse economy” and an “affordable” debt burden.
With 3.8 million residents, Los Angeles is more populous than about half of all U.S. states and continues to grow. Its economy has been hit hard by the recession.
The city’s unemployment rate fell to 13.6% in February from 14.4% in January, according to the Bureau of Labor Statistics. The jobless rate is up from 11.9% in February 2009 and has more than doubled since late 2007.