Los Angeles' Bond Ratings Under Review for Upgrade

Los Angeles is one of only two cities in California that could see its bond rating upgraded by one of the nation's leading credit rating agencies, Moody's Investment Service announced in a statement Tuesday. The other city under review for an upgrade is San Francisco. 

The agency, which rates 95 California cities, plans to scrutinize various bonds in the cities as part of a review that began in mid-August. Moody's has placed under review the lease-backed obligation and/or general obligation ratings of 32 cities in California, and has downgraded the pension obligation bonds of eight cities and one pooled financing. 

Moody's review affects approximately $14.3 billion of debt.

In Los Angeles, Moody's is looking at three obligation bonds. There's a $3.17 billion general obligation bond with an Aa3 rating, meaning it's high quality and subject to very little credit risk. That bond is under review for an upgrade. 

The city also has a 2009 Series A judgment obligation bond amounted at $20.5 million. That bond has an A2 stable rating, downgraded from an A1/stable outlook, meaning it's judged to be upper-medium grade and subject to low credit risk. L.A. also has a 2010 Series A judgment obligation bond worth $50.9 million with an A2 stable rating, downgraded from an A1/stable outlook. 

The news of bond rating upgrades is good for L.A. given its budget deficit, according to KPCC. 

"California cities operate under more rigid revenue raising constraints than cities in many other parts of the country," said Senior Vice President Eric Hoffmann, who heads Moody's California local government ratings team, in a statement. "Combined with steeply rising costs, these constraints mean that these cities will likely recover more slowly than their peers nationally, even if the state's economic recovery tracks the nation's."

Economic weakening, stagnant revenues and increasing costs, and a decline in a city's general fund balance can all drive downgrades, while positive factors that could move ratings up include robust tax base growth, a balance between revenue and expenditure growth and growth in fund balances.

According to Moody's, high-profile bankruptcy filings in cities like San Bernardino show that cities' willingness to continue to cut costs may be eroding. Because bond payments also come out of a city's general fund, the payments must compete with other priorities, the company said.

In all, 27 cities' lease-backed obligations paid from the cities' general funds will be reviewed for downgrade. Additionally, the pension obligation bonds of nine issuers were downgraded, and eight of those had already been downgraded. Nine cities' general obligation ratings are also under review for a downgrade.