Fitch Rates Los Angeles, CA $176.5MM GO Bonds 'AA'; Outlook Negative.

SAN FRANCISCO -- Fitch Ratings assigns an 'AA' rating to $176.5 million city of Los Angeles (the city), CA's general obligation (GO) bonds, series 2009-A and 2009-B. These bonds are expected to sell competitively on Aug. 4, 2009 (series 2009B) and Aug. 5, 2009 (series 2009A), and are payable from ad valorem property taxes.

In addition, Fitch affirms the following ratings:

--$1.3 billion in outstanding City of Los Angeles GO bonds at 'AA';

--$25.9 million in City of Los Angeles judgment obligation bonds at 'AA-';

--$1.0 billion in outstanding MICLA certificates of participation (Refunding Program AY), and lease revenue bonds, series 2006-A, 2007-A, 2007-B1, 2007-B2, 2008-A, 2008-B, 2009-A, and 2009-B at 'AA-';

--$419.7 million in Los Angeles Convention and Exhibition Center Authority lease revenue bonds, series 2003A and series 2008A at 'AA-'.

The Rating Outlook is Negative.

The Negative Outlook reflects declines in key taxation revenues, the ongoing softening of the city's property market, and the city's high unemployment rate. Nevertheless, the ratings reflect the benefits to the city of being the commercial and cultural center of a large and populous geographical area, with a diverse economy that has strong underpinnings. The ratings also reflect the city's sizable general fund balances and reserve levels, relatively well funded pension and other post-employment benefit (OPEB) liabilities, and moderate overall debt burden. Although the city's strong budgeted reserves are projected to grow in fiscal 2010 and its post-employment benefits are funded on an actuarially sound basis, significant financial challenges will likely erode its financial situation.

The city's three-year financial projections indicate a worsening structural imbalance which will be difficult to resolve without significant economic improvement, a stronger property market, and significantly reduced personnel expenditures. The annual net general fund operating deficit has grown in each of the last three fiscal years, up to $110.1 million in fiscal 2008 from $24.9 million in fiscal 2005. By contrast, net income in fiscal 2004 was $180.3 million. As a result, while still sizeable, the unreserved general fund balance in fiscal 2008 has declined to $418.7 million (9% of spending) from a high of $578.9 million (15.4% of spending) in fiscal 2005. By implementing various budget balancing measures, the city closed a total fiscal 2009 budget gap of $35.3 million and its fiscal 2010 adopted budget closes a $529 million budget gap, including $326 million in personnel expenditure reductions. The solutions for this $326 million reduction are currently being negotiated with the labor unions. In the absence of long-term solutions, the budget gap is projected to worsen dramatically to $901 million in fiscal 2011 and $1.1 billion in fiscal 2012. These projections assume ongoing revenue declines through fiscal 2011, stabilizing in fiscal 2012, and significant expenditure growth, particularly in employee remuneration and benefits.

In 2008, Los Angeles' economy saw its first overall job decline since 2003. Particular sectors experiencing job loss are construction and finance. Between May 2008 and May 2009, the unemployment rate rose sharply to 12.5%, from 7.5%. The city's unemployment rate is consistently higher than those of the county, state, and nation. Income levels are consistently below state and national levels. Assessed valuation growth slowed to under 8% in fiscal 2009, from very high levels in prior years, and is projected to decline in fiscal years 2010 and 2011.

Los Angeles' debt issuance has been increasing. The overall debt burden is moderate at $3,671 per capita and 3.4% of market value, and Fitch expects it will remain affordable given the city's above-average amortization rate of 66% in 10 years.

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