LOS ANGELES — Kroll Bond Ratings Agency assigned its AA rating to Los Angeles' general obligation bonds Tuesday in its initial rating of the city.
The action affects $991 million in outstanding debt.
Kroll assigned a stable outlook.
"We think it reflects the progress we have been making," said City Administrative Officer Miguel Santana. "It also reflects that the city has some work to do, but we feel it is a fair rating."
Previously, Chicago and Dallas-Fort Worth International Airport were the westernmost municipal credits Kroll had rated.
Rating Los Angeles fits Kroll's efforts to expand its public finance business westward, said Bill Baneky, a senior director.
The ratings reports Kroll has released on larger issuers, as opposed to focusing on smaller municipalities and smaller K-12 credits, attracted the city's interest, Baneky said.
"Both Natalie Brill, (the city's debt manager) and Miguel were interested in their story being told in a different way," Baneky said. "From our standpoint, this furthers our commitment to public finance. It keeps our focus on big, recognizable issuers."
Kroll has been speaking with other West Coast issuers, but declined to mention which cities or states are on its radar.
The fact that the state treasurer's California Debt and Advisory Commission had a Kroll report entitled, "Not All GOs Are Created Equal," on its website for several months probably also helped to generate calls from California issuers, Baneky said.
"I think people appreciate our approach to credits and our understanding of the importance of the credit story," said Karen Daly, Kroll's head of public finance.
Kroll focuses on telling the credit story completely and comprehensively, so that investors who have not previously followed a credit have the information they need to make decisions, she said.
That was a significant factor in Los Angeles hiring Kroll to rate its GOs, Santana said.
When Santana read reports on Midwest credits he wasn't familiar with, he found enough information in Kroll's reports to grasp the situation for each credit.
"I was able to understand the narrative and the issues they are confronting, and the progress they have made," Santana said. "I was also able to understand why they assigned the rating they did."
Santana characterized the expense of hiring a fourth rating agency nominal at $10,000, adding that it is always good to have options.
"Kroll is new, but we are impressed by the thoroughness of their analysis and the accessibility of their write-ups," Santana said. "Their research is extensive. They spent many hours talking to us and going through the various budgets and documents."
He added that Kroll is probably the most thorough rating agency he has dealt with.
Los Angeles has not made a decision as to whether it would have Kroll rate the city's other debt obligations. Santana said that decision would probably be made when they price additional debt.
"Now they will be in the pool," Santana said. "We needed to start with GOs, so they have the most fundamental understanding of the city from reviewing the documentation necessary for this rating."
The AA rating Kroll assigned on the city's GO bonds is higher than the AA-minus assigned by both Fitch Ratings and Standard & Poor's. Moody's Investors Service rates the city's GOs an equivalent Aa2.
Kroll did a good job of evaluating strides the city has made to deal with budgetary pressures and considering the challenges the city confronts, Santana said.
In the report, Kroll analysts said they view the financial condition of Los Angeles as strong based on management of its general fund budget, increased levels of reserves and its strong liquidity over the last several years.
Kroll analysts said they consider the city's improved finances from fiscal year 2009 through fiscal year 2013 to be largely the result of the "city's pro-active budgeting and strict fiscal monitoring practices." The city's reserve levels have increased since fiscal 2010, with total general fund unassigned fund balance increasing to 8.8% in fiscal 2013.
In addition to comprehensive reports - Los Angeles' report stretches to 24 pages - Kroll has chosen to assess the management of municipalities as a key factor in its ratings.
"We really look at the management culture and the demonstrated willingness and ability to maintain strong operations," said Kate Hackett, a Kroll managing director. "It is a matter of emphasis in the position of our methodology," Hacket said.
Kroll analysts also craft the reports in a way that tells a story and makes them readable and accessible, said Karen Daly, Kroll's head of public finance.
The rating agency gave the city high marks for handling both pension and OPEB obligations.
As of June 30, 2013, the city's two pension funds have funded ratios on an actuarial basis of 68.7% and 83.1%, and the city has generally funded the full annual required contributions for its pension funds. Also, the City has actuarially funded its OPEB obligations since fiscal 1990 and has generally made ARC payments for its OPEB obligations.
Kroll views the City's actuarial funding of its OPEB very positively as there are few U.S. cities that do so, Daly said.
Kroll also includes a section in its reports evaluating the atmosphere for municipal bankruptcy in the state where the credit is located. It outlined how California handles municipal bankruptcies in its report and also assessed the odds of Los Angeles declaring bankruptcy.
"Given the strength of the city's management and its strong financial condition, KBRA views the risk that the City will access the process to file for bankruptcy as remote," analysts said.