Los Angeles received its second upgrade in six days Wednesday, as Kroll Bond Rating Agency boosted the city’s general obligation rating a notch to AA-plus.
The Kroll upgrade came on the same day Mayor Eric Garcetti was scheduled to deliver his State of the City speech.
Kroll cited strong credit characteristics, favorable trends in the city’s financial operations, and an expanding economy. The city’s robust residential and commercial real estate markets and tourism were singled out as particular strengths.
The ratings agency also raised the city’s Municipal Corporation of Los Angeles lease revenue bonds to AA from AA-minus.
The upgrades affect $700 million of general obligation bonds and $1.56 billion of MICLA lease obligation bonds and certificates of participation, according to Kroll.
Fitch
“I am very pleased that Kroll has joined Fitch in recognizing the strong fiscal stewardship of our council and mayor,” said City Administrative Officer Richard Llewellyn. “We think it recognizes both the city’s fiscal stewardship and that Los Angeles is a vibrant place to live, work, learn and play. And we are very excited.”
An experienced leadership team, well-established financial management practices, and a demonstrated history of proactive fiscal controls were all cited in the report authored by Alice Cheng, a Kroll director and Peter Scherer, a Kroll associate.
Kroll analysts also noted the city has a manageable debt burden of $2.7 billion in outstanding bonds and commercial paper with minimal exposure to variable rate debt and interest rate swaps. The direct debt burden is low at 2.9% of the assessed value or about $4,024 per capita.
“We constantly look at our debt portfolio to make sure it is conservative and risk averse, and at the same time, the best value for our residents,” Llewellyn said.
The strength of the city’s financial performance was reflected in the recently-released fiscal year 2018 comprehensive annual report, according to Kroll analysts.
Strong operational results coupled with ample financial flexibility positioned the city to pay down larger than anticipated expenses while continuing to build reserves, completing the fiscal year with an unassigned general fund balance in excess of 10% of expenditures for a fifth consecutive year, Kroll analysts wrote.
Pensions were listed as both a positive and a negative.
“We have always recognized that our obligations to retirees include both pension and healthcare,” Llewellyn said. “Long before accounting rules recognized OPEB, we have always paid it fully and plan to continue to do so. We have created pension tiers in all of our pension plans that reduced benefits for new workers. We have gone back to employees and asked them to contribute more toward healthcare. It’s a subject we try to manage on an ongoing basis.”
The city has fully funded the actuarially determined contribution for its pension plans and OPEB, but a result, analysts said, the fixed cost burden is sizable at 25% of total governmental expenditures. Kroll lauded the city’s “disciplined approach to managing contingent liabilities in a sustainable manner, rather than deferring such costs.”
In his State of the City speech, Garcetti is expected to renew his support for a parcel tax measure on the June ballot estimated to bring in $500 million annually for 12 years to support the Los Angeles Unified School District. Garcetti helped broker an agreement between the school district and it's teachers after a six-day strike in January.
He plans to unveil his budget in a separate speech at City Hall on Thursday.
With almost four million residents, Los Angeles is the nation's second-most populous city, though the city government's direct debt is orders of magnitude lower than that of number one New York and number three Chicago.
