Los Angeles can likely solve its projected $30 million deficit for the fiscal year ending in June, but spiraling pension costs and other possible expenses remain as challenges, according to a report issued by credit rating agency Fitch Ratings Inc. on Friday.
The Fitch report said the relatively small size of the projected deficit for the 2017-18 fiscal year – at $30 million, just over 0.5 percent of the total $5.8 billion budget – means it’s likely the city will find the funds to close the gap. The report notes that the city has closed deficits in each of the last six years and has also been able to add surplus dollars to its general fund each year.
But, the report took issue with the city’s claim that its general fund structural imbalance will be rectified by 2022. The Fitch analysts said this target date could be delayed if the economy slows or negotiations with labor unions result in higher-than-expected employee costs.
Importantly, the report said, lowered assumptions for market returns on city pension fund investments are expected to increase pension system contributions by $122 million for the fiscal year ending June 2019, on top of an expected $48 million increase in contributions. That cumulative $170 million increase would raise fiscal 2019 general fund expenditures by about 3 percent.
Fitch currently rates debt issuances by the city of Los Angeles at AA-/Stable. Friday’s report did not alter that rating. The debt rating is crucial for the city to issue bonds for public works and other projects, such as low-income housing developments; the lower the debt rating, the more interest the city has to pay on its bond issuances and the more expensive those projects become.
Economy, education, energy and transportation reporter Howard Fine can be reached at email@example.com. Follow him on Twitter @howardafine.