KBRA Affirms City of Los Angeles, CA G.O. Bonds at AA and Municipal Improvement Corporation of Los Angeles (MICLA) Lease Revenue Bonds at AA-; Outlook Remains Negative
1 May 2026 | New York
KBRA affirms the long-term rating for the City of Los Angeles, CA General Obligation Bonds at AA. The Outlook remains Negative.
Concurrently, KBRA affirms the long-term rating for the MICLA Lease Revenue Bonds at AA-. The Outlook remains Negative.
Maintenance of the Negative Outlook reflects the lack of resolution of structural pressures tied to last year’s downgrade. Despite a technically balanced FY 2027 Proposed Budget (“Proposed Budget”), growth in recurring expenditures, cumulative reserve levels that remain below the City’s target, ongoing exposure to wildfire-related and other liability claims, and federal funding risks continue to pose budgetary challenges over the outlook period. In addition, there is the potential for material downside risk to the General Fund associated with the 2028 Olympics.
The General Obligation (“G.O.”) Bond rating continues to acknowledge the City of Los Angeles’ (the “City’s”) credit strengths consistent with the rating level, including a very large and diverse tax base that continues to demonstrate strong growth in assessed values, sound pension funding metrics, broad revenue-raising capacity, and budgetary reserves that, while modest relative to risk, are projected to remain above the City’s minimum Reserve Fund policy threshold in FY 2027. Counterbalancing these strengths are the City’s reliance on economically sensitive revenues, significant recurring costs related to homelessness, public safety, infrastructure, labor, and City services, and the contingent risks listed above.
Ratings assigned to Lease Revenue Bonds issued through the Municipal Improvement Corporation of Los Angeles (MICLA) are informed by the City’s G.O. rating, with distinction made to reflect rating factors outlined in the U.S. State and Local Government Abatement Lease Rating Methodology.
Key Credit Considerations
The rating actions reflect the following key credit considerations:
Credit Positives
- The City’s large and diverse tax base has demonstrated consistently solid growth in assessed valuation, and the economic base has shown resilience in the face of recent challenges including wildfires, federal immigration enforcement, and inflationary impacts.
- Established financial management practices including quarterly revenue and reserve updates, mid-year budget revision and limits on the use of one-time General Fund revenues for ongoing expenditures have historically contributed to fiscal stability.
- The City has consistently addressed rising pension and OPEB contributions, resulting in favorable pension and OPEB funding metrics, which, though contributing to elevated fixed costs, facilitate long-term financial flexibility.
Credit Challenges
- Current police and civilian labor agreements contribute to budgetary structural imbalance through FY 2028; the FY 2027 Proposed Budget’s assumptions for labor costs following contract terminations may prove to be optimistically low.
- Fiscal uncertainties include the ultimate potential liability exposure related to the January 2025 wildfires, the outcome of ballot measures impacting key revenues, and federal funding risks.
- While the FY 2027 Proposed Budget would restore the Reserve Fund above the City’s 5% minimum policy level, cumulative reserves remain below the 10% target and the City’s four-year outlook does not return to structural balance until FY 2030, leaving limited flexibility to absorb revenue shortfalls or higher-than-budgeted costs.
Rating Sensitivities
For Upgrade
- Restoration and maintenance of recurring structural balance, including elimination of projected outyear operating gaps, through realization of revenue assumptions and sustained control of expenditures.
- Maintenance of the Reserve Fund above the City’s 5% policy minimum, together with a material rebuilding of cumulative General Fund reserves toward or above the City’s 10% goal and stronger available governmental funds liquidity.
- Improved financial management and budgetary flexibility, evidenced by sustained structural balance, avoidance of one-time revenues for ongoing services, and consistent compliance with the City’s capital funding and debt policies.
For Downgrade
- Failure to maintain structural balance, including renewed operating deficits driven by revenue underperformance, labor resets, liability claims, wildfire-related costs, or other expenditure growth beyond current assumptions.
- A decline in the Reserve Fund below the 5% policy threshold, or other material deterioration in cumulative reserves, unassigned General Fund balance, or available governmental funds liquidity.
- Diminished budgetary discipline or long-term liability management, including greater reliance on nonrecurring revenues for ongoing operations, continued underfunding of obligatory costs, material policy departures, or a significant decline in pension funding progress.
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