S&P Dents LA’s Bond Ratings as City Faces Budget Shortfall

S&P Global Ratings has dinged L.A.’s bond ratings as the city wrestles with a nearly $1 billion budget shortfall.

The New York-based credit agency lowered Los Angeles’ long-term rating on its general obligation bonds to AA-, from AA, the Los Angeles Times and Westside Current reported.

S&P also lowered the Municipal Improvement Corporation of Los Angeles’ lease revenue bonds to A+, from AA-. The lease revenue bonds are used to buy critical equipment such as fire trucks.

“The downgrade reflects the city’s weakening financial position and an emerging structural imbalance,” S&P said in a statement.

The agency cited the rapid deterioration of the city’s reserve fund, which fell to 3.22 percent of the general fund — well below the city’s policy minimum of 5 percent — after officials drew from it to balance the 2024-25 budget.

S&P warned that without swift action to correct its budget management, Los Angeles’ ratings could fall further. Lower bond ratings typically translate to higher interest rates, which would make it costlier for the city to borrow money.

The bond rating downgrades came days after Mayor Karen Bass outlined the city’s stark economic situation in her proposed budget for 2025-26, which includes laying off 1,650 city workers as the city struggles to close a nearly $1 billion budget gap.

Last week, the mayor flew to Sacramento seeking a state handout to save city jobs.

Bass said she expected the downgrade given economic headwinds and long-standing inefficiencies in city operations.

“Protecting our bond ratings is a key reason why I pushed for fundamental reforms in the 27 months that I’ve been mayor,” Bass said in a statement. She added that her proposed budget includes structural reforms intended to address the city’s fiscal imbalance, efforts S&P called “an important step” toward recovery.

The city entered its 2025 budget season under a cloud of financial uncertainty after a devastating wildfire and a series of costly lawsuits forced officials to draw heavily from emergency reserves, according to Westside Current,

In early January, S&P and Fitch Ratings issued a credit warning for both the city and its Department of Water and Power.

The warnings reflected concerns about cash flow, reserve stability and mounting legal settlements, which cost the city an estimated $112 million in fiscal year 2023-24, with projections as high as $300 million this year.

At the same time, Los Angeles lost a critical revenue source after the Palisades fire affected a high-value property tax base, costing the city an estimated $30 million a year from the Pacific Palisades area alone, according to the city Office of Finance.

Despite an emergency transfer of $219.3 million from the Department of Water and Power’s surplus revenue, city financial records showed the reserve fund remained $60 million short of the policy minimum.

Christopher Thornberg, founder of Los Angeles-based Beacon Economics, said the city’s priorities have drifted from core services like fire protection and infrastructure to expensive social programs.

“The social justice mission the city has adopted has taken precedence,” Thornberg told Westside Current. “I’m not trying to be political, that’s just the reality of the situation. I hope the city learns to get itself refocused on the nuts and bolts of what a city needs.”

Credit analysts have expressed concern about the city’s limited flexibility to cut personnel costs because of existing labor contracts, heightened litigation risk and slower economic growth across the region.

“Right now the Los Angeles economy is in the hands of the federal government,” Thornberg said. “When push comes to shove, they know they have to help and will. L.A.’s too big a city to let fail.”

— Dana Bartholomew