SAN FRANCISCO — Los Angeles, the nation's second-biggest city, may lose its double-A-level ratings over a 10th of a cent.

That's the per-kilowatt-hour difference between the most recent electricity rate hike proposals from the City Council and Mayor Antonio Villaraigosa's appointees at the Los Angeles Department of Water and Power.

The council wanted to raise rates 0.6 cents per kilowatt hour. The LADWP board was willing to accept 0.7 cents. Until they agree to something, the department says it can't give the city its final $73.5 million contribution to the general fund budget this year, forcing the city to consider liquidating the bulk of its reserves to stay solvent this year.

"This is a council that said 'yes' to an increase," said City Council President Eric Garcetti. "We worked closely and got the business community in Los Angeles to support an increase at the toughest moment for businesses in many years."

Villaraigosa has branded the body "the council of 'no' " and says it is endangering the city's financial health.

The fallout has been painful for Los Angeles. Moody's Investors Service downgraded the city's general obligation rating to Aa3 from Aa2 earlier this week and kept a negative outlook on the debt, citing ongoing trouble balancing the budget and the political stalemate over the electric rate hike.

Standard & Poor's put the city's AA-minus GO rating on CreditWatch with negative implications yesterday.

"The CreditWatch action reflects our assessment of the city's inability to identify cash resources needed to balance the remaining budget gap for fiscal 2010 in light of an estimated $73 million cash shortfall announced by the city controller's office on April 5," said analyst Ian Carroll.

Fitch Ratings downgraded Los Angeles to AA-minus with a negative outlook in November over the city's broader budget crisis and failure to balance its budget this year.

The agency earlier this week pulled its rating on a $720 million LADWP revenue bond deal because of the electrical rate impasse. The sale has been postponed for a few weeks due to the uncertainty.

Controller Wendy Greuel earlier this week said the city would run out of cash by May 5 without the LADWP transfer. Villaraigosa ordered staff to prepare to shut down non-public safety, non-revenue-producing general fund departments two days a week to conserve cash. It is unclear whether existing labor agreements allow that unless the city runs out of money.

Before the latest crisis, Los Angeles was making progress shoring up its reserves and reducing a $212 million deficit. Interim city administrative officer Ray Ciranna earlier this week said he expects cost savings and improved revenue collections would yield a deficit of $160 million, assuming the LADWP transfer. He expected to push the reserve fund to $254 by year-end through transfers of available fund balances.

But without the utility's transfer, reserves could end the year precariously low at $20 million to $30 million. Villaraigosa tried to turn the pressure down Wednesday by asking the utility to transfer at least $20 million while policymakers resolve their differences on rates.

"A deficit of this size, this late in the fiscal year, is simply untenable," the mayor said in a letter to the LADWP board president. "I therefore request that you urgently convene a meeting for the board to discuss ways to create addition power revenue fund surplus through cuts and efficiencies to be transferred to the city's general fund this fiscal year."

Villaraigosa and the City Council expect to bridge the difference on the rate hike at some point, but the standoff reveals deeper policy disputes over control of the nation's biggest municipal utility and the mayor's ambitious effort to cut coal out of the utility's electric portfolio by 2020. It currently gets 44% of its power from the dirtiest fossil fuel.

The utility's rate hike proposal includes two components — a half-cent surcharge LADWP needs to recoup its full electric costs and stay profitable, and a surcharge for environmental projects that are among the mayor's top policy priorities.

Garcetti said the council approved the full solvency surcharge, but not the full request for the new environmental fund. Some council members are worried that the hike is too much to ask of residents who are struggling with a jobless rate of almost 15%. Others are annoyed that they have little control over the city-owned utility.

Garcetti said LADWP comes to the City Council for rate increases without clear, specific plans about how to spend the money. The council can block increases, but not impose a different number on the utility's board.

The result is that the council — which has a whole variety of views about the rate hikes — gets flooded with calls from constituents about rate hikes, which would total 22% over the next year under the latest LADWP rate plan, but can't impose a smaller hike.

Several of Garcetti's council colleagues introduced legislation this week to change that by giving the council more control over the utility's board and to increase transparency at the agency.

Villaraigosa, a Democrat, hasn't taken a position on the legislation. But he said the city can't delay its transition to renewable, clean power, and he has led a high-powered public relations campaign to force the board's hand, recruiting former Vice President Al Gore and other environmentalists to push for the electric rate hike.

When that didn't work, he went to battle with the council.

"The politics of 'no' is no more sustainable than the DWP's over-reliance on coal," Villaraigosa said this week. "Instead of acting in the tradition of past city councils, where progressives put partisanship aside and positioned Los Angeles as a national leader, this council leadership has demonstrated what we've already seen at the national level: they have shown the results of the politics of 'no.' "

Subscribe Now

Independent and authoritative analysis and perspective for the bond buying industry.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.