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S&P Global Ratings has downgraded the city of Los Angeles bond rating. It is about to close a budget deficit of around $1 billion.
On Friday, the credit rating agency downgraded the city’s long-term ratings from AA to AA-.
It also downgraded the municipal improvement organizations’ ratings for Los Angeles lease revenue bonds used to purchase urban equipment such as fire trucks from AA- to A+.
“The downgrade reflects a weakened city’s financial position and a new structural imbalance,” S&P Global Ratings announced the changes.
S&P said it is concerned about the rapid deterioration of the city’s reserve fund, which is supposed to remain at more than 5% of the general fund.
To close the 2024-25 budget gap, city officials fell to 3.22% of the reserve fund.
S&P said that if the city does not immediately adjust its budget control, it could further reduce its bond valuation.
The downgrade of the bond rating comes days after Mayor Karen Bass outlined the city’s tough economic situation on a 2025-26 budget, which included layoffs for around 1,650 city workers.
Bass described the possible layoff as an “absolute last resort decision” and called for state money to travel to Sacramento on Wednesday to save jobs.
Typically, a lower bond rating leads to higher interest rates, making it more expensive for the city to borrow money.
The S&P said it also builds negative outlook, including factors such as “increasing litigation risk and limited flexibility to unilaterally reduce personnel costs under current labor contracts,” despite the additional permanent economic and revenue impacts from the January 2025 Los Angeles County wildfire event.
Bass said the measures they are taking to balance the budget should alleviate some of the concerns of rating agencies.
“This announcement was unfortunately predicted in the context of recession and turbulence in the economy and decades of inefficiency built into the way cities operate,” she said in a statement. “Protecting our bond valuations is the main reason I called for basic reforms in my 27 months as mayor.”
S&P said the proposed budget for Bass ‘2025-2026 “sees an important step in identifying potential structural reforms and correcting financial imbalances.”
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