City’s credit outlook downgraded to ‘negative’

One of the nation’s top financial credit services Wednesday issued a negative outlook for Los Angeles, which is struggling with a $212-million deficit. The move could lead to a lower credit rating for the city and ultimately increase its cost for borrowing money.

Moody’s Investors Service reduced its opinion of L.A.'s finances from “stable” to “negative” because city officials delayed addressing the budget shortfall -- expected to grow to $485 million in 2010-2011 -- and have proposed tapping reserves to balance the books.

Moody’s also expressed concerns about some City Council members’ opposition to a plan to cut 1,000 city jobs before July.

“It is, unfortunately, one of the plan’s few immediate, tangible cost-saving elements, and delaying its implementation will, while preserving jobs, potentially weaken the city’s long-term credit quality,” the rating agency said in a statement.

The city’s top financial analyst, City Administrative Officer Miguel Santana, said the message being sent by Moody’s is clear: “They are concerned about the state of affairs, and they clearly indicated they want action.”

In November, L.A.'s credit was downgraded by Fitch Ratings, which determined that Mayor Antonio Villaraigosa and the council failed to take adequate action to address the fiscal crisis. The nation’s other major rating agency, Standard & Poors, has not made any public announcement regarding Los Angeles.

Council President Eric Garcetti said he was disappointed by the negative credit watch, but said the council is moving forward on all of the remedies that Moody’s prescribed: adopting a three-year budget plan, rebuilding reserves and balancing this year’s budget.

Villaraigosa spokeswoman Sarah Hamilton said the Moody’s outlook adds credence to the mayor’s call for cutting jobs, eliminating some city services and raising revenue by leasing out assets.

“The Moody report completely validates the mayor’s plan to balance the budget and the urgency with which he’s urging the council to act,” she said.

Moody’s also expressed concern about the mayor’s primary plan for closing the current year’s $212-million deficit: tapping into the city’s $230-million reserve fund, and later replenishing it with the proceeds from auctioning off long-term leases of 10 city parking garages, which could raise up to $200 million.

“Whether such a transaction can be completed on a timely basis is questionable, particularly in the current economic environment,” the report stated. “The city optimistically projects that this transaction would be completed before the end of the current fiscal year, or in the first quarter of fiscal 2011.”

Moody’s also stated that if the city resorts to “one-time measures” to address the budget shortfall, rather than fundamental changes that will produce ongoing savings in the years ahead, L.A.'s credit rating could face a steeper downgrade.Because the city collects tax revenue intermittently throughout the year, it depends on short-term loans to pay bills. If its credit rating is lowered, the city would probably have to pay a higher interest rate on money it borrows, adding to its already precarious finances.

The impact of the credit watch could be felt within the next few months, when L.A. also expects to issue a $70-million bond to pay for various legal judgments against the city, Santana said.