L.A.&#39;s bond rating is cut as fiscal fight escalates

Amid the high-stakes financial battle at City Hall, credit rating firm Moody?s Investors Service lowered Los Angeles? bond rating effective Wednesday -- and warned that the city risks further downgrades.

Moody?s cut L.A.?s general-obligation bond debt rating to Aa3 from Aa2. That puts the city at the lower end of what Moody?s considers a ?high quality? security. A weaker credit grade typically means higher borrowing costs.

Mayor Antonio Villaraigosa on Tuesday called for shutting down non-essential agencies two days a week to conserve cash, after Controller Wendy Greuel warned that L.A. could run out of money to pay its bills and employees within weeks.

Villaraigosa is in a standoff with the City Council over Department of Water and Power electricity rates and the city?s budget gap.

Moody?s said its ratings cut ?primarily reflects the continued erosion of the city's historically better-than-average willingness and ability to quickly rebalance its budget mid-year.?

The downgrade also ?partly reflects the likelihood that the city's general fund reserves at the end of the current fiscal year could be materially weaker than we had previously expected, now that an expected transfer from the Department of Water and Power may be reduced.?

DWP on Monday took steps to withhold a promised $73.5-million payment to the city's depleted general fund after City Council refused to give the utility the electricity rate increase it wanted.

?The loss of these DWP funds would, at a minimum, make the city's planned rebuilding of its budgetary reserves over the next few years more difficult, if only because it would likely be starting from a weaker position,? Moody?s said.

?While we believe it highly unlikely that the city would fail to take the necessary steps to shore up its general fund liquidity, failure to do so would put significant downward pressure? on the bond rating, Moody?s said. It maintained a ?negative outlook? on the city?s rating -- a warning that another cut could be forthcoming.

Moody's decision follows rival Standard & Poor's move in February to cut its rating on the city's debt to AA-minus from AA because of budget woes.

And on Monday a third ratings firm, Fitch Ratings, withdrew its AA-minus rating on $720 million of new bonds DWP had expected to sell. Fitch cited DWP's failure to get the rate increase it wanted.

As for the city?s $200-million-plus budget deficit, Moody?s said that ?downward pressure [on the bond rating] would also likely result if the long-term budget solutions the city adopts are largely one-time measures rather than on-going.?

The stop-gap budget measures favored by Sacramento in recent years have left California with the lowest credit rating of the 50 states -- a Baa1 grade from Moody?s, a rating that denotes ?medium grade? quality. That is costing the state dearly when it goes to borrow.

-- Tom Petruno

Photo: Mayor Antonio Villaraigosa. Credit: Don Bartletti / Los Angeles Times