Los Angeles received its second downgrade within a week as the impacts of January's devastating wildfires and the city's dismal budget picture sink in.
KBRA downgraded the city's general obligation rating to AA from AA-plus Thursday and cut the city's Municipal Improvement Corporation of Los Angeles lease revenue bonds to AA-minus from AA.
The action revised the
"The cost and economic dislocation of the January 2025 wildfires may exacerbate the city's fiscal challenges, particularly if anticipated federal assistance is not realized," KBRA analysts wrote.
S&P Global Ratings
The city and its departments have been the subject of a
Among the city's challenges are increased costs from police and civilian employee labor agreements, which could contribute to projected budgetary structural imbalance through fiscal year 2028, according to KBRA.
In her budget released on April 21, Mayor
KBRA analysts also cited the likelihood of overspending in fiscal year 2026 from litigation, outside counsel costs and liability claims.
Liability payouts, which have averaged about $100 million annually over the past 10 years, are estimated to be $300 million in fiscal 2025-26 and personnel costs are $250 million over budget, budget officials said in a briefing ahead of the mayor's formal budget release.
The city also isn't in a good position to weather deteriorating macroeconomic conditions like declining consumer spending and employment, which KBRA said could pressure general fund revenues, while inflation may continue to contribute to increased labor costs and other general fund spending over the near to medium term.
Despite its current challenges, KBRA noted the city's large and diverse tax base has demonstrated solid growth in assessed valuation in all but two of the last 24 fiscal years.
The city has established financial management practices including quarterly revenue and reserve updates, mid-year budget revisions and limits on the use of one-time general fund revenues for ongoing expenditures that have historically contributed to fiscal stability, the rating agency said.
It also has "consistently addressed rising pension and OPEB contributions, resulting in favorable pension and OPEB funding metrics, which, though contributing to elevated fixed costs, facilitate long-term financial flexibility."
The city, KBRA said, would need to maintain structural balance and a 5% general fund reserve to be eligible for an upgrade.
It could see further downgrades, if it fails to replenish general fund reserves, demonstrates a trend of structural financial imbalance, and/or demonstrates a significant decline in funding pension and OPEB obligations.
