S&P Global Ratings has downgraded the bond ratings for the city of Los Angeles as it faces a significant budget crisis. This decision comes amid efforts to close a nearly $1 billion budget deficit. On Friday, the credit rating agency lowered its long-term rating for the city’s general obligation bonds from AA to AA-. It also reduced the rating for the Municipal Improvement Corp. of Los Angeles’ lease revenue bonds from AA- to A+.
The downgrade highlights concerns about the city’s financial stability and an emerging structural imbalance. S&P Global noted that the city’s reserve fund has rapidly deteriorated, falling below the 5% threshold of the general fund to just 3.22%. This decline prompted city officials to tap into the reserve fund to address the budget shortfall for the 2024-25 fiscal year.
S&P warned that the bond ratings could drop further if the city does not make swift adjustments to its budget management. This downgrade follows Mayor Karen Bass’s recent budget proposal for the 2025-26 fiscal year, which includes laying off about 1,650 city workers. Bass characterized these layoffs as a last resort and is actively seeking state funding to prevent them.
The mayor’s plan aims to address the city’s financial challenges and restore confidence in its fiscal management. She acknowledged that the downgrade was anticipated given the current economic climate and long-standing inefficiencies within the city’s operations. Bass emphasized the importance of protecting the city’s bond ratings and is advocating for necessary reforms to correct the financial imbalance.
Lower bond ratings typically lead to higher interest rates, making it more expensive for the city to borrow money. Factors contributing to the negative outlook include increased litigation risks, limited flexibility to reduce personnel costs under existing labor contracts, and slowing economic growth. The impacts of recent wildfires in Los Angeles County also remain a concern for the city’s financial outlook.
As the city grapples with these challenges, the focus remains on implementing effective budgetary reforms and securing the necessary funding to maintain essential services and employment levels.