L.A.'s bond ratings reduced by S&P amidst financial turmoil in the city's budget.
L.A.'s Grim Financial Picture: Budget Cuts, Layoffs, and Bond Rating Deterioration
The city of Los Angeles is in deep financial trouble, with S&P Global Ratings downgrading its bond ratings due to a nearly $1-billion budget deficit. On Friday, the credit rating agency lowered the long-term rating for the city's general obligation bonds to AA- from AA, and also downgraded the rating for the Municipal Improvement Corp. of Los Angeles' lease revenue bonds to A+ from AA-.
The downgrade comes in response to the city's weakening financial position and an emerging structural imbalance. S&P Global Ratings is worried about the rapid deterioration of the city's reserve fund, which is intended to remain at 5% or more of the general fund. City officials drew on the reserve fund, leaving it at only 3.22% of the general fund. S&P warns that the bond ratings could decrease further if the city does not quickly make adjustments to the management of its budget.
Mayor Karen Bass' proposed budget for 2025-26 includes several cost-cutting measures, such as layoffs for approximately 1,650 city workers, a quarter of them civilians at LAPD. Bass describes these potential layoffs as "a decision of absolute last resort," and is seeking state money to save these jobs.
The lower bond ratings typically translate to higher interest rates, making it more expensive for the city to borrow money. S&P also factored in "heightened litigation risk, limited flexibility to unilaterally reduce personnel costs under current labor contracts, and slowing economic growth" when issuing its negative outlook. Bass believes that the steps she is taking to balance the budget should alleviate some of the rating agency's concerns. In a statement, she says, "Protecting our bond ratings is a key reason why I pushed for fundamental reforms in the 27 months that I’ve been mayor."
Mayor Bass' budget proposal introduces several structural reforms to address Los Angeles' financial challenges and mitigate risks of further bond rating downgrades. These include:
- Workforce consolidation: Eliminating 2,700 city positions, potentially resulting in 1,600 layoffs, while maintaining sworn police officer levels but targeting civilian LAPD roles.
- Department consolidation: Merging four city departments into one and dissolving the Health Commission to align services with county-level operations.
- Operational reforms: Adding 227 positions focused on paramedics and rapid-response vehicles to improve emergency capabilities.
- Budget flexibility: Addressing S&P's concerns about labor contract restrictions by seeking reforms to personnel cost management.
- Economic and disaster resilience: Acknowledging the impact of January 2025 wildfires on the city's finances, and proactive measures to prevent further bond rating declines that could increase municipal borrowing expenses.
In her proposed budget, Bass identifies these structural reforms as critical for correcting the fiscal imbalance. However, S&P continues to emphasize the risks from litigation and slowing economic growth.
Further Reading
- Cuts to LADOT could hurt Olympics and safety goals, department warns
- In Sacramento, Mayor Bass seeks state money to close nearly $1-billion budget gap
- In State of the City speech to a battered Los Angeles, Bass strikes hopeful tone
- Capitalizing on the proposal, Mayor Karen Bass aims to implement structural reforms in Los Angeles, addressing issues like workforce and department consolidation, operational reforms, budget flexibility, and economic and disaster resilience.
- The proposed measures in Los Angeles are intended to correct the fiscal imbalance, focusing on reducing staff through layoffs, merging city departments, improving emergency response capabilities, and reforming personnel cost management.
- Despite these reforms, S&P Global Ratings remains apprehensive about the city's financial future, citing ongoing concerns regarding litigation risk and slowing economic growth.
- City officials are grappling with a downgraded bond rating, which may result in higher borrowing costs due to the increased interest rates.
- The downgrade in bond ratings has stirred concern in the general news, finance, industry, politics, and beyond, as it might impact the entire state of California, particularly the bustling city of Los Angeles and its strategic economic sectors.
- Sacramento is also facing a significant budget gap, prompting Mayor Bass to seek state funding to address the issue, highlighting the intricate connection between the economies of Los Angeles and the state capital.
