S&P Global Ratings has downgraded Los Angeles’ bond ratings due to a worsening financial situation and a structural imbalance, as the city attempts to manage a nearly $1 billion budget deficit by cutting certain expenses in its 2025-26 budget. The downgrade could lead to higher borrowing costs for the city.
“This budget makes investments to continue our progress on critical challenges like decreasing homelessness and crime while bringing the City’s finances into balance and driving change including common sense consolidations of related departments,” Bass said during her State of the City address last week. “Homelessness is down. Crime is down. These are tough challenges, and our progress shows we can do anything in this city of limitless potential.”
The city is recovering from the January wildfires, which S&P Global highlighted in its statement on the downgrade.
“We view physical risk factors as elevated given the recent wildfires in Los Angeles County and the increasing frequency and severity of such events, with recent spread into more urban areas introducing heightened potential credit risk for the city tied to negative tax base impacts or litigation from the ongoing wildfires,” wrote S&P Global in its announcement of the downgrade.
The ratings agency, headquartered in Manhattan, noted that the Pacific Palisades community, largely destroyed during the January wildfires, represents a large proportion of high-value properties that could affect the city’s property tax income.
“Consistent with entities across the state, the city is also exposed to additional physical environmental risks in the form of extreme rain events, earthquakes, and drought,” S&P wrote.
S&P Global also highlighted protests and demonstrations, as well as a high number of homeless people in the city, as weighing on the city’s budget.
“In addition, human capital factors associated with labor unions remain a key budget input for the city; however, we understand that multiyear labor agreements are in place for various employee groups,” S&P stated.
S&P Global said there is a one-in-three chance it could lower the rating further over the next two years if it determines that management and city governance are unable or unwilling to make considerable and sustained spending cuts, leading to additional operating deficits in fiscal 2026.
“We believe that Los Angeles potentially faces an uphill battle to maintain structural balance given evidence of softening revenue trends and significant underlying budget growth largely tied to personnel costs following negotiated labor union agreements in recent years,” the agency said.
Bass traveled to Sacramento on April 23 with a delegation from the City Council to request almost $2 billion in state aid.
“Meetings were productive,” Bass told City News Service in a short telephone interview Monday evening. “It is not as though we expected to walk away with a check, but we absolutely walked away with encouragement and support. We have homework we need to do in terms of getting the Legislature some more specific information in a couple of areas, but we are very encouraged.
Joel Kotkin, a fellow in urban studies at Chapman University, said that Los Angeles has long been poorly managed. He said the downgrade would make it harder for the city to borrow money.
“You’ve got a city that’s increasingly made up of very wealthy people and very poor people and young people who are here for a brief period of time and then go somewhere else,” Kotkin told The Epoch Times on April 28.
