Standard & Poor’s revised its outlook to negative from stable on Los Angeles’ solid waste resources bonds and affirmed its AA long-term rating ahead of a combined refunding and new money competitive sale of $153 million on Feb. 4.
The city will sell $71.7 million series 2013A solid waste resource revenue bonds and $80.7 million series 2013B solid waste resources refunding revenue bonds.
“The outlook revision reflects our view of the city’s projected increase in operating costs and mostly debt-financed large capital improvement program,” said Standard & Poor’s credit analyst Paul Dyson on Thursday.
The capital improvement program will require additional bond issuances in fiscal years 2016 and 2018, the combination of which will result in reduced liquidity and debt service coverage on a net revenue basis, possibly to less than one times by fiscal 2016, according to the S&P report.
“We believe these factors could result in financial challenges, especially given the city’s desire to avoid fee increases until fiscal 2019, despite what we consider to be good rate flexibility,” Dyson said.
The series 2013A bond proceeds will fund the acquisition of equipment, the purchase of 220 vehicles, and new construction and facilities improvements, according to the S&P report.
The series 2013B bond proceeds will refund the city’s series 2003A, 2003B, and 2004A bonds, the report said.
The AA rating reflects the city’s historic willingness and ability to adjust fees to cover debt service and operating costs, a high collection rate, and strong collection methods, according to the S&P report.
Analysts also cited good liquidity with an estimated $143 million system fund balance for fiscal 2012, equal to 234 days of operating expenses.
Fitch Ratings affirmed the bonds’ AA-minus rating, with a stable outlook, on Thursday.
Fitch also affirmed AA-minus ratings on other Los Angeles debt including the city’s $1.2 billion in outstanding general obligation bonds, $255.1 million in sanitation equipment charge and solid waste resources revenue bonds and $22.2 million in landscaping and lighting district bonds.
The city’s challenges include four-year financial projections that indicate a significant structural imbalance despite cost control measures which have reduced, but not closed, the gap, Fitch said.
Fitch analysts said, however, that if a March 5 ballot measure to increase the city sales tax rate passes, it would be considered a credit positive if it results in reduction of the city’s structural budget imbalance.
The sales tax measure is expected to bring in $105 million in fiscal 2013 and $211 million per year after that, according to the report.
Fitch anticipates, however, that there will be considerable pressure to use at least some of these additional general fund revenues for service cut restoration and deferred infrastructure needs.
“The city’s challenging political and labor relations environment can hinder its ability to respond swiftly to budgetary pressures,” according to Fitch.
Moody’s Investors Service upgraded the city’s GO bond rating to Aa2 from Aa3 Wednesday.