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Los Angeles maintains credit ratings despite fiscal concerns

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Three major agencies will maintain the city of Los Angeles’ short-term credit ratings despite concerns about a low reserve fund, police overtime and looming layoffs, according to reports released today.

Fitch Ratings, Standard & Poor’s and Moody’s Investor Services all affirmed the city’s short-term rating for the Tax and Revenue Anticipation Notes, which allow the city to pay bills now even though taxes and fees will flow in throughout the fiscal year. The city is looking to borrow about $1.2 billion. 

The stable outlooks come with warnings, however. Fitch Ratings points out the city continues to fall short of its own goal to set aside 5 percent of the General Fund for the reserves.

“While the city has taken significant budgetary actions in response to economic contraction and its personnel-related expenditure pressures, the time taken to achieve the necessary political consensus, as well as the longer term budget initiatives still in development, indicates how politically difficult it is for the city to respond nimbly,” according to the report. 

Fitch’s report points out that the 2012-13 budget was balanced in part with one-time solutions. The city delayed layoffs for 209 employees by funding their salaries through the end of this calendar year. Fitch also noted concerns about the practice of banking police overtime. 

"Such a liability could be problematic if the economy does not support sufficient revenue growth," according to Fitch. 

In fiscal year 2013-14, Los Angeles is expected to have a $216 million deficit. 

The Standard & Poor’s report took a cursory look at a proposal to phase-out Los Angeles’ gross receipts tax. The Jobs and Business Development Committee is considering a plan to eliminate the tax over five years. It currently fuels 10 percent of the General Fund, which pays for basic city services.

“Should council adopt the proposal, we believe Los Angeles’ rising costs and potentially flat overall revenue could result in larger structural gaps, although city officials expect any change to the business tax would not take effect until fiscal 2014 at the earliest,” according to S&P’s report. 

The new fiscal year starts on July 1. 

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