Report Says L.A.’s Credit Rating May Survive Secession

A leading investors’ service reported Thursday that the secession of the San Fernando Valley would not immediately hurt Los Angeles’ credit rating, but identified long-term threats that could.

The report by Moody’s Investors Service suggested that over the long run, a new city in the San Fernando Valley might balk at a requirement that it pay millions of dollars in “alimony” to Los Angeles, putting upward pressure on the cost of borrowing money for Los Angeles.

Both sides in the heated political debate over secession said Thursday the report bolstered their arguments.

Moody’s downplayed the effect of secession on the Los Angeles economy. Even with the loss of the Valley--which accounts for 30% of L.A.’s general fund revenue and 37% of its property taxes--Los Angeles “would remain a fundamentally strong credit in terms of its economy, political position, and revenue base,” the report states.

While a new Valley city may assume responsibility for some of Los Angeles’ debt, the report said that “even assuming the worst case--that the new smaller Los Angeles would retain responsibility for all outstanding debt--most of its debt ratios would still compare favorably to those of other major cities in the country.”

Los Angeles enjoys a relatively high credit rating thanks to its large and diverse tax base, strong economy and history of prudent budgeting.

Moody’s rating of the city’s general obligation bonds--supported by voter-approved property taxes--is Aa2, the third-highest possible. In general, the higher the rating, the easier it is to borrow money.

The rating for the city of Los Angeles has remained stable since December 1996, when it dropped a notch to the present level after voters approved Proposition 218, which limited the city’s ability to raise cash by requiring voter approval for new taxes. Overall, the city would likely remain on solid financial ground even without the Valley, said Moody’s analyst Eric Hoffmann.

But the transition period during a city breakup could prove shaky.

“We think that the city really does face some potentially serious risks during the transition,” Hoffman said. “The seriousness of these risks would really depend on how the city budgets, prepares for and funds the transition costs. You can always manage away risk if you do it well, but it will be tricky.”

The analysts expressed concern about whether the new Valley city would be able to make the projected $68.4-million yearly payments to Los Angeles, required by the state to ensure that L.A. is not harmed by the split.

The payments would represent an estimated 6.5% of annual expenditures for a new Valley city that will probably be financially challenged and pressured to make good on voter expectations for better services, the report said.

Moody’s also cited costly financial variables during the transition, including the cost of modifying information systems and the cost of negotiating changes to labor agreements.

“It could weaken the city’s credit, but we’re not talking about bankruptcy or default or anything like that,” said Kenneth Kurtz, another Moody’s analyst studying the potential effect of secession. “You’re miles away from anything like that.”

Jeff S. Brain, president of the pro-secession group Valley VOTE, was pleased to hear Moody’s assessment that secession poses no immediate threats, but he disagreed with the long-term analysis.

“Los Angeles will not lose money, because we will make our [payments],” he said. “We’ll have a strong tax base to make that payment. Los Angeles will not be harmed.”

With Valley cityhood, he said, “Los Angeles will have to deal more efficiently with their operations.”

Reaction from City Hall leaders was muted. The government was in the throes of transition Thursday, with many officials busy settling into new jobs or offices.

A spokesman for City Council President Alex Padilla, who opposes secession, said the Moody’s report shows why a breakup would be unwise.

“Both Council President Padilla and Mayor [James] Hahn have made it clear, in no uncertain terms, that keeping the city together is a high priority,” said David Gershwin, the spokesman for Padilla. “Facts and figures coming out of New York seem to bolster the case as to why secession may not be all it’s cracked up to be.”

Julie Wong, a spokeswoman for Hahn, said the mayor was more focused on delivering city services and jump-starting neighborhood councils than worrying about how a breakup might damage credit.

In addition to Moody’s, Fitch and Standard & Poor’s also issue credit ratings for the city, said Natalie Brill, the city’s debt management chief.

In March, Fitch analysts said that while secession should not threaten payments to bondholders, “removal of a portion of the existing tax and employment base could weaken Los Angeles’ overall credit profile.”

An S&P; spokesman said the company has never issued an analysis of the effects of secession.