Los Angeles’ bond rating downgraded

Just when Los Angeles officials thought they had turned a corner in improving the city’s recession-riddled financial standing, a major Wall Street rating agency Tuesday downgraded its bonds.

Analysts at Moody’s Investor Service Inc. said their one-notch downgrade reflects the city’s modest revenue forecast and mounting employee costs. The Aa3 rating, which is on par with assessments recently given by other rating firms, means taxpayers may have to pay higher interest for about $500 million in bonds that city officials are planning to sell later this month.

But within Moody’s report was a kernel of good news: The agency raised its rating of the city’s future financial outlook from negative to stable on expectations that officials will “capably manage” the fiscal challenges.

The report comes less than two weeks after city officials secured record-low interest rates for $1.3 billion in short-term loans — a deal celebrated as some of the first good financial news to hit Los Angeles in years.

City Councilman Bernard C. Parks said that in light of those favorable rates, the Moody’s downgrade “came as a surprise.” Parks, chairman of the council’s Budget and Finance Committee, said the downgrade reinforces the importance of monitoring budgets, increasing the city’s reserve fund and finding ways to raise revenue.

But the Moody’s analysts said the city’s ability to get new revenue is limited, in part because California cities cannot raise taxes without voter approval. Because of that, “Los Angeles is in a more difficult position compared to most of its large-city peers nationwide, even those with similar economic challenges and modest financial reserves,” the analysts wrote.

City Administrative Officer Miguel Santana said the firm’s downgrade brings it in line with other rating firms, including Fitch and Standard & Poor’s, and was therefore not a shock.

He said the report’s focus on the rising pension costs of employees highlights the urgent need for lawmakers to make structural changes to the way the city does business.

Despite a series of cost-cutting measures in recent years, including a 13% reduction of its workforce and voter-approved pension reform, Los Angeles still faces a projected deficit of almost $200 million in the coming fiscal year.

Closing that gap will depend on lowering employee costs, Santana said, and one way to shave staff positions is to hand over control of some city services to nonprofits and private businesses.

Santana pointed to a proposal that would privatize management of the Los Angeles Zoo. That option will be heard by the council’s Arts, Parks, Health & Aging Committee next week.

“Ultimately the best pension reform is having less people relying on the pension system,” Santana said.

kate.linthicum@latimes.com