SAN FRANCISCO – Citing a weak economy, diminished reserves, and the possibility of sizable future budget deficits, Fitch Ratings Tuesday afternoon downgraded Los Angeles general obligation bonds to AA-minus from AA. The city’s outlook remains negative.

The action affects $1.5 billion in outstanding GO bonds.

At the same time, Fitch downgraded to A-plus from AA-minus about $1.5 billion lease revenue bonds, certificates of participation, and judgment obligation bonds.

Fitch noted the city’s “meaningful response” to its current year budget gap, which was whittled from more than $405 million to $98 million. Without actions to close that remaining deficit, the city will have to draw down more of its reserves, which is one of the factors in the downgrade, according to Fitch.

The city is also facing large structural deficits in the out years, starting at $408 million in fiscal 2011, “a high 9% of general fund spending” according to Fitch, and rising to $1 billion by fiscal 2014.

City officials have said pension reform is a necessary part of returning to fiscal balance, something that the rating agency notes is likely to be difficult to achieve.

“Fitch also believes that the city’s economic decline, as evidenced by high unemployment, sales tax weakness, assessed value losses, and high home foreclosure and negative amortization mortgage exposure, will impede financial recovery,” it said in a news release.

The ratings action comes ahead of the planned issuance of $131.5 million in Municipal Improvement Corporation of Los Angeles lease revenue bonds, rated A-plus, which is even with outstanding city lease revenue debt after the downgrade.

That deal is expected to include $21.5 million in recovery zone economic development bonds, according to Fitch, with the balance coming as tax-exempt debt.

In addition to the GO downgrade to AA-minus, the Fitch action affects MICLA lease revenue bonds, Los Angeles judgment obligation bonds, MICLA certificates of participation, and Los Angeles Convention and Exhibition Center Authority lease revenue bonds, all dropped to A-plus from AA-minus.

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