City’s Bond Rating Is Downgraded a Notch : Economy: The recession and municipal budget pressures are cited by Moody’s.
A Wall Street rating firm has downgraded its assessment of Los Angeles city bonds, potentially driving up the city’s cost of borrowing money and reflecting skepticism in financial markets about its ability to make a robust recovery from the recession.
Moody’s Investors Service announced Monday that Los Angeles was losing its highest rating, triple-A, because of the recession and a variety of pressures on the municipal budget.
“While Los Angeles has shown resiliency during past recessions, a local recovery does not appear likely before 1994,” the ratings service said. “Even so, a sluggish rebound is expected, at best.”
The downgrade removes Los Angeles from a select list of half a dozen large U.S. cities with the top triple-A rating. But the downgrade to the second-highest rating of AA1 leaves Los Angeles ahead of most other public entities, including the state of California, Los Angeles County and San Francisco city and county.
Los Angeles Mayor Richard Riordan--elected in part on a pledge to bring private sector business acumen to City Hall--issued a statament promising to carry on with his vow to revitalize the local economy and improve public safety by hiring more police.
While many of the factors cited by the firm were beyond the control of the city or Riordan, Moody’s said the push to add more police will “exert pressure” on the budget and is a “peripheral” factor in the downgrade.
Los Angeles city officials said they are hopeful that a long-term reputation among investors for financial stability will override the new rating and permit the city to continue to receive the lowest interest rates on its bonds.
“This has been expected for some time and it probably won’t mean anything,” said Keith Comrie, city administrative officer. “We are clearly still (ranked) way up there as a superior investment grade.”
One bond market observer projected, however, that the city could pay as much as a quarter-point more in interest, potentially adding millions of dollars in financing costs over many years.
More than $178 million in city bonds are scheduled to be sold today to pay for seismic improvements of roads and bridges, installing sprinklers in city buildings and building libraries and police stations.
If the city is forced to pay an additional quarter-point in interest, that could mean an additional $446,000 in interest expense per year over the up-to-20-year life of the bonds, said Zane Mann, who edits a newsletter on California municipal bonds.
The actual outcome for the bonds is complicated by other market factors. For example, the state obtained better interest rates over the last year because of declining interest rates, even though Moody’s twice downgraded its bond rating.
Average investors will not be affected by the downgrade unless they try to sell their bonds before their maturity date.
City officials have long boasted of their top mark from the investment rating service, saying it reflected strong management during difficult economic times.
City Councilman Zev Yaroslavsky, who chairs the council’s Budget and Finance Committee, said the downgrade reflected economic factors beyond the control of city government.
“It’s never nice to be downgraded, but I think it was inevitable,” Yaroslavsky said. “There is no question that the economy of this region is very weak and that reflects on our revenue base.”
Diane Schenkman, Moody’s supervisor of ratings for the Far West, agreed that Los Angeles has handled recent financial woes “prudently and conservatively.”
The ratings service said Los Angeles bonds remain a solid investment because of the city’s position as the “economic center of the western United States.” It praised the city for maintaining a low level of debt in comparison to its total revenue.
The lower rating, instead, reflected general economic conditions. Moody’s said the downturn has gone beyond a standard recession and represents “a structural change in the composition of the city’s economic base.” It cited the loss of defense industry jobs as a primary example.
Moody’s also noted that the problem of a diminishing tax base has been exacerbated by a repeal of a statewide snack tax, the reduction in state support for local governments and a court ruling invalidating taxation of banks and savings and loans.
At the same time, Moody’s noted, there is pressure to increase spending because the city has let employees go without a pay raise and left many jobs vacant.