Municipal bond ratings escape public image damage.

Municipal bond ratings escape public image damage

With red ink flowing, public demand growing and government fiscal planners struggling to make do with less, Los Angeles bashers are having a field day. But speculation that L.A.'s long-term financial stability may be in jeopardy has proven to be bit like rumors of Mark Twain's death - premature.

Bonds and notes issued in Los Angeles, by both the city and county, have maintained strong ratings despite the recession and nasty budget fights from City Hall to Sacramento. Though a hard political pill to swallow, new taxes and service cuts have enabled the region to keep ahead of other fiscally strapped U.S. regions, particularly the Northeast.

Standard & Poor's noted in an "AA" rating it gave to a $38.8 million general-obligation bond issued by the city this month: "Los Angeles has maintained sound fiscal position throughout the ongoing regional and national economic downturn and has demonstrated the ability and willingness to cut expenditures and raise revenues to keep their budget in balance."

The reason bond raters say they believe Los Angeles can tough out both the recession and an infrastructure in need of repair rests in the "numbers" and the perception that the Golden State's most populous area is showing no signs of structural financial rust.

Despite accounting for one-third of Southern California's population, the county's debt burden is ranked lower per capita than Orange, Riverside and San Bernardino counties. L.A. County's debt per capita, according to Moody's Investor Service, is $606, compared to $1,525 for Orange County, $1,886 for Riverside County and $835 for San Bernardino County.

That doesn't mean L.A. County financial analysts didn't do their share of nail biting.

The county's new $12 billion budget, dependent on Sacramento for more than one-third of its funds, was held in limbo for weeks as Gov. Pete Wilson and state legislators haggled over ways to enact a balanced budget in the midst of a recession. Two weeks after deadline, lawmakers passed a $57 billion budget and eliminated a $14 billion deficit through service cutbacks, worker layoffs and new sales taxes on everything from candy to newspapers.

Brushing aside speculation that California may have lost its way, two ratings agencies - Moody's and Fitch's - affirmed the state bond rating at "AAA" Aug. 5, as the Treasurer's office prepared to sell $4.1 billion in new notes. Even the "credit watch" imposed by Standard & Poor's was lifted.

For the county specifically, Moody's rating for L.A.'s so-called "certificates of participating" has weathered the financial storm, keeping the "A1" grade it has had since 1987. The "A1" grade is considered good for those types of government notes - a favorite method of self financing in a county limited by voters in its ability to float general obligation bonds.

Roughly $1.5 billion in those obligations are outstanding, compared to $87 million for the general obligation bonds that cities rely on heavily.

Behind all the formulas and numbers crunching, rating agencies still see Los Angeles County as an economic behemoth with a diverse business base anchored by strong financial-business services, foreign trade and manufacturing. A major question mark, in terms of future money for government coffers, remains unanswered with downturns being experienced in aerospace, real estate and construction.

One thing raters have few doubts about is property values that, through taxation, county funds are drawn from.

Asset valuation for L.A. County was a whopping $383.4 billion, more than double that of wealthy Orange County, according to Moody's. Good thing, because L.A. County relies more heavily on property taxes than do other counties - even with the limitations imposed by 1978's landmark Proposition 13, which limited property taxes.

"The economic base the county encompasses is very diverse and energetic. Even in a recession L.A. County stands on its own," said John Edmisten, a senior finance analyst with the county. "Things haven't been easy since 1978, when Prop. 13 was approved, but we've been able to demonstrate to the rating agencies that we can respond."

Like most big-city county governments, Los Angeles has its share of red ink. With nearly $2.2 billion in direct net debt, L.A. County has nearly 10 times that of Orange County. Debt in the form of lease obligations was $1.5 billion, nearly $1 billion more than Riverside County.

If the county has an Achilles Heel, it could be in the level of public assistance it doles out. That assistance, as a percent of operating expenditures, is 40.8, the second highest in Southern California.

Moody's however, notes that structural controls over the county's general fund deficit spending have been enacted and short term cash flow borrowing stabilized. As to the key issue of reserves, Moody's concluded L.A. County's are "satisfactory."

The city, meanwhile, has retained favorable ratings on its notes, even during months of wrangling over the $3.9 billion budget for 1991-92. A $177 million budget deficit was eventually closed by the City Council and the mayor through budget cuts and new taxes, including a controversial real estate transfer fee.

More pain is surely on the way with a recent court ruling the city must return $230 million in taxes it improperly collected from financial institutions.

Yet, like its big brother in the County Hall of Administration, the city seems to have the confidence of the big New York-based rating agencies. The city has kept its decades-old rating of |AAA" and "AA" on general obligation bonds and "AA" on lease obligations.

Though subject to fluctuations, the city's debt per capita is $282, compared to a median of $702 for large U.S. cities. Moreover, debt as a percent of property valuation is .58, nearly three times lower than other American metropolises. The general fund balance, as a percentage of revenues, is 8.4 percent, a substantial amount for a city of L.A.'s size, growing population and service demands.

"Although the city does have mounting financial difficulties, it remains the center of a dynamic and broad-based regional economy," said Diane Schenkman, an assistant vice president at Moody's.

"The city has a slower growth rate in the taxes - sales, property, business - it collects, but its debt is modest and the city has managed to keep a prudent level of reserves and a balanced budget," she said.

According to Moody's, the city's debt, as a percent of its tax base, is 1.6 percent compared to a U.S. median of 4 percent. Presently, the city has $112.8 million in general obligation bonds and $935 million in total lease obligation notes outstanding.

Rating analysts also point out that in terms of bonds issues, investment management and general fund strength, the city and county took a decidedly conservative, take-few-chances approach during the explosive 1980s. Those on the inside say budget balancing acts, though painful, have given them an edge as well.

"There is not a jurisdiction in the nation that hasn't been hurt by the recession" in terms of revenues it relies on," said David Brodsly, a finance specialist in the city's Administrative office. "Our fundamental economy continues to be strong and the city's reaction to the painful recession has been timely. Those are credit positives," Brodsly said.

PHOTO : Los Angeles: No fiscal image problems