SAN FRANCISCO — Standard & Poor’s downgraded Los Angeles late Monday, citing slow action to resolve the city’s budget deficits this year.
The agency cut the city’s general obligation bond rating to AA-minus from AA, affecting $1.3 billion of debt. It also dropped $1.9 billion of appropriations-backed debt to A-plus from AA-minus.
Los Angeles, the nation’s second-most populous city, faces a $212 million budget gap for the fiscal year, which ends June 30. It plans to close the hole largely by spending its reserves down to about $25 million.
The city faces a $485 million gap next year.
The City Council and Mayor Antonio Villaraigosa slashed the city’s workforce this month, but the moves came too late to sustain its ratings. Fitch Ratings cut the city’s GOs to AA-minus in November, and Moody’s Investors Service last week changed its outlook on the city’s Aa2-rated GOs to negative.
“We really do think that management has the ability to preserve credit quality, even when times are very tough, but that involves making difficult decisions on a timely basis,” Standard & Poor’s analyst Ian Carroll said in an interview. “In 2010, they had their opportunity to make mid-year cuts and they let it pass.”
The result is the rapid depletion of strong reserves Los Angeles had going into the economic downturn.
The city began the recession with an unreserved general fund balance of almost 10% of expenditures, but it has posted an operating deficit every year since Villaraigosa took office in 2005, when the reserves were 15% of expenditures.
The city began the current fiscal year with a $320 million hole in its budget, which was officially balanced on the assumption of big cuts in labor costs and a windfall from privatization of the city’s parking garages.
While the city garnered big concessions from workers, the give-backs were smaller and took longer to negotiate than assumed.
The parking privatization has not happened yet, and general revenue was significantly less than expected.
The city’s reserve is now projected to fall to 0.6% of expenditures this year, down from 4.7% expected when this year’s budget was approved.
“A $25 million reserve is, in our opinion, inadequate for a city of this size and reinforces our view that budget decisions came too late,” Carroll in said his report. “We consider this slowness to act inconsistent with the AA rating.”
The City Council approved 4,000 job cuts this month, and officials are working to implement a three-year financial plan that they say would return it to fiscal sustainability. The plan includes privatization and reductions in services along with the job cuts.
Los Angeles will return the budget to structural balance in fiscal 2012, but it will need to borrow to get through next year, according to city financial officer Miguel Santana. He plans to rebuild the reserve by issuing judgment obligation bonds, sweeping available funds to the reserve, and privatizing the parking garages.
“We remain confident that we have laid out a plan to cut costs, strengthen our reserve fund, and put the city back on a path of fiscal sustainability,” Villaraigosa said in a statement after the downgrade. “This decision only strengthens our resolve and fuels the urgency with which we will implement the plan.”
While analysts have expressed confidence in the three-year plan, they have also said the city has a steep hill to climb over the next couple of years.
Los Angeles’ deficit is projected to rise to $484 million next year, pushing the two-year total to $696 million. The 4,000 job cuts approved this month would shave $260 million from the total.
The budget-balancing act gets tougher in the out-years of the forecast, as pension contributions are projected to surge by 86% to make up for stock market losses in the retirement fund.