Secession Casts Pall on L.A.’s Credit

Citing uncertainty caused by the secession campaign, a leading bond firm on Thursday changed its forecast for Los Angeles’ credit standing from stable to negative, an indication that investor ratings for the city could drop after a municipal breakup.

The outlook report by Fitch Ratings does not lower the higher-than-average AA rating on $840 million in city general obligation bonds. But it warns investors that Los Angeles could have more trouble paying its debts if the San Fernando Valley, harbor area or Hollywood secedes.

“We believe that if secession occurred it would create much uncertainty regarding the city’s credit quality,” said Amy S. Doppelt, managing director for the firm.

Doppelt said the report charts the direction a bond rating would likely take over one to two years but added it does not mean a downgrade is inevitable. Much depends on whether voters approve secession and, if approved, how well the new and old cities address any financial problems that result, she said.

If Los Angeles’ bond rating is eventually lowered--a prospect secession supporters discount--the city could be charged millions more in interest costs on borrowed money because it would be considered a higher debt risk. The city borrows by issuing bonds.

City officials said they could not precisely estimate the cost of a lower bond rating.

Mayor James K. Hahn called on the Local Agency Formation Commission, which is considering placing the three secession proposals before voters in November, to examine how much harm a lower bond rating would cause Los Angeles.

“Even before this is on the ballot it is already hurting Los Angeles,” Hahn said. “Clearly, Fitch is not buying LAFCO’s analysis of how Los Angeles is going to be hurt by secession.”

LAFCO Executive Director Larry Calemine has determined that the Valley would do well financially as an independent city, without inflicting fiscal harm on the rest of Los Angeles. He has made a similar, preliminary finding for Hollywood cityhood.

Calemine has concluded that the harbor area would not survive financially on its own, though he is still examining that question. The LAFCO board has yet to adopt Calemine’s financial reports.

Richard Close, chairman of the secession group Valley VOTE, said the Fitch forecast is premature because the terms of a breakup have not been completed. Those terms will include the amount of money a breakaway city would pay Los Angeles in so-called alimony.

Close said state law requires Los Angeles and any new city to honor all debts after a secession.

Others on Wall Street are taking a wait-and-see stance.

Moody’s Investor Service has maintained its “stable” outlook on Los Angeles, though it is watching LAFCO’s actions closely.

“If secession happens, it won’t be good for the city’s credit quality, but it won’t necessarily result in a downgrade,” Moody’s Eric Hoffmann said.