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Tuesday, Oct 3, 2023


Top Los Angeles County officials, seeking to borrow $1.3 billion against next year’s tax rolls, are telling Wall Street analysts and investors that the nation’s largest county government has turned the corner from its worst fiscal crisis ever.

“The county you are seeing this year is significantly better than two years ago,” Chief Administrative Officer David Janssen told institutional investors and rating agency analysts at a meeting last week in New York that was piped via phone lines to investors in Los Angeles.

“We do have problems, but they are manageable,” he said.

Janssen and other county officials including Treasurer-Tax Collector Larry Monteilh spent most of last week promoting the county’s fiscal recovery to major Wall Street players. Ultimately, their mission was to pitch the annual issuance of Tax and Revenue Anticipation Notes scheduled for June 17.

The $1.3 billion of notes are used to help the county meet short-term cash needs. The financial instruments are backed by future property tax revenues, which are paid out in December and next April.

But the rating agencies, which have downgraded the county’s long-term credit rating several times in recent years, remained cautious.

Wall Street has been warning in recent years that the county must balance its budget by bringing spending into line with income. The rating agencies complain about the continued reliance on debt issuance to pay for ongoing programs.

The county has been on “negative outlook” by Standard & Poor’s Corp. one of Wall Street’s major rating agencies for the past few years. The status could be removed if analysts are convinced L.A. County has brought spending into line.

“We’re still studying their presentation but certainly this year’s budget isn’t as dire as previous years,” said Chris Irwin, an analyst with Standard & Poor’s. “It looks like their funding gaps are smaller, they are balancing their budget, and things look somewhat better.”

Irwin said the rating agency expects the county eventually to balance its budget by reducing its dependence on one-time excess earnings from its pension funds and carry-over balances from previous fiscal years.

The same attitude was taken by Moody’s Investors Service, which also met with county officials last week.

“We’re taking a hard look at what they’ve told us,” said David Brodsly, managing director for Moody’s San Francisco office. “We need to see some more positives to balance out the years of negatives (before a rating upgrade).”

Generally, the lower the county’s credit rating, the more it costs to borrow. As a consequence, the county ends up paying bondholders interest that could have been spent on public services.

Rather than seeking to have the $1.3 billion in one-year Tax and Revenue Anticipation Notes rated on the county’s own credit worthiness, Monteilh said the borrowing will be highly rated based on a letter of credit from Swiss, German and American banks that guarantees repayment to investors.

This will be the third consecutive year that the county has bought credit to back a notes issuance. Last year, the county bought a $1 million letter of credit from a syndicate of banks lead by Credit Suisse, Union Bank of Switzerland, and Morgan Guaranty and Bank of America.

“This gets us a better price and a better deal for our notes,” said Monteilh.

Buying a letter of credit also eliminates the need for L.A. County to have its notes rated which could have sparked some embarassment, said Zane Mann, publisher of the California Municipal Bond Advisor newsletter.

Mann said the number of local governments in the state needing such guarantees for their short-term borrowing has been reduced.

He said the $1.3 billion of notes, and the addition of insurance on the securities, show that the county’s problems aren’t over.

“As the whole state begins to work itself out of its difficulties, you’d think they wouldn’t need that kind of short-term money,” said Mann. “Obviously they do. It’s an indication of poor money management.”

This year’s note issuance up only slightly from last 1996 registers as one of the largest in the nation. Only the states of California and New York issue more each year, Mann said.

Yet, the insurance makes the deal more attractive to institutional investors and portfolio managers like Merrill Lynch & Co.

“This is a safe security,” said J. Timothy Romer, a director with the securities broker. “L.A. County is stepping up and saying to Wall Street that they’ve made great strides. We’re expecting good response when we issue the notes.”

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