LOS ANGELES — Standard & Poor's revised Los Angeles’ outlook to stable from positive Friday citing uncertainty arising from two class action lawsuits challenging the city's power revenue fund transfers.
The power revenue fund transfers from the Los Angeles Department of Water and Power are $250 million annually, or 5% of expenditures, on the city’s $500 billion budget, but the potential liability of the lawsuits is up to $1.3 billion, said S&P analyst Jennifer Hansen.
The rating action comes ahead of the city’s plans Nov. 2 to sell $298.1 million in taxable lease revenue refunding bonds through the Municipal Improvement Corporation of Los Angeles. General obligation bonds were affirmed at AA-minus and lease revenue bonds at A-plus.
Citing Proposition 26 passed by California voters in 2010, Patrick Eck, a Los Angeles resident, filed a lawsuit in April claiming that the city is overcharging city residents taxes by 8% and disguising the additional taxes as a fee through the transfer. He further contends that the proposition requires government entities to use fees charged for the stated purpose – and that the surplus LADWP revenues currently being transferred to the city’s general fund should be returned to ratepayers.
S&P’s ratings committee was concerned that an adverse ruling in the lawsuit could result in up to $1.3 billion in repayments to utility users in addition to the $250 million budget gap from the loss of income from the annual transfer, Hansen said.
“We aren’t saying it will, but with the uncertainty around the lawsuit, the committee felt more comfortable with a stable outlook as opposed to positive in two-year outlook time frame,” Hansen said. “We all know lawsuits of this magnitude are generally not resolved quickly.”
The city has made significant progress in reducing its liabilities and resolving litigation, said City Administrative Officer Miguel Santana.
While it still faces litigation over the LADWP transfer tax, it has been able to resolve other lawsuits including one challenging a new pension tier adopted in 2013, Santana said.
Citing the AA-minus rating and stable outlook, Santana called S&P’s report “a demonstration that the hard work the city has engaged in is paying off.”
The city forecasts a potential year-end shortfall of $62.6 million and a potential structural deficit of $89.9 million for fiscal 2016-17, but the city has posted surpluses for the past three years despite projected deficits, Hansen said.
The city’s reserve fund at July 1 at $442.5 million was 8.18% of the general fund budget, higher than the anticipated $313.4 million, according to the CAO’s first financial report for the 2015-16 fiscal year budget, released Oct. 23.
Fitch Ratings Monday maintained a stable outlook as it affirmed the city’s AA-minus rating on GOs and A-plus on lease obligation bonds.
“There are still challenges that lie ahead,” Santana said. “While the economy is doing well and revenues are growing in a significant way, we still need to take a cautious approach.”
The city was able to settle litigation with city workers over a separate pension tier established for city employees in 2013. The new pension tier raised the retirement age from 55 to 65 and increased employee contributions to pensions and retiree medical benefits.
Under the agreement, the new tier will not be retroactive. It also reduces the amounts that new employees will have to contribute and sets the retirement age for the new tier at 63, not 65.
The anticipated $89 million structural deficit for the fiscal year 2016-17 budget doesn’t take into account the pension changes, according to Santana’s report.
