S&P Global Ratings has downgraded the bond ratings for the city of Los Angeles, a move that adds to the city’s financial challenges as it faces 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-. The rating for the Municipal Improvement Corp. of Los Angeles’ lease revenue bonds, which fund city equipment purchases, was also reduced from AA- to A+.
The downgrade reflects concerns about the city’s financial stability and an emerging structural imbalance in its budget. S&P highlighted the rapid decline of the city’s reserve fund, which is intended to remain at 5% or more of the general fund. Recently, city officials used funds from this reserve, causing it to drop to just 3.22%.
The bond rating changes came shortly after Mayor Karen Bass presented her proposed budget for 2025-26, which includes plans to lay off around 1,650 city employees. Bass described these layoffs as a last resort and is actively seeking state assistance to prevent them.
Lower bond ratings typically lead to higher interest rates, making it more expensive for the city to borrow money. S&P also pointed to increased litigation risks and limited flexibility in adjusting personnel costs due to existing labor contracts, along with slowing economic growth, as additional factors influencing the negative outlook.
Bass acknowledged the downgrade was expected given the current economic conditions and the longstanding inefficiencies in the city’s operations. She expressed hope that her proposed budget reforms would help address the fiscal imbalance and stabilize the city’s finances. S&P noted that these potential reforms are a crucial step towards improving the city’s financial situation.