City of L.A. suffers a trim on its credit-rating outlook

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Another bit of fallout from the housing mess: The city of Los Angeles today had the outlook on its credit rating cut to ‘stable’ from ‘positive’ by Moody’s Investors Service.

The city’s actual rating remains quite strong: Aa2, which is Moody’s third-highest grade. But the ‘positive’ outlook on the rating had meant that L.A. might have been in line to get boosted to Aa1 or Aaa, which could have reduced its borrowing costs.

Not now. Moody’s said the cut in the outlook on the city’s $3.2 billion in bond debt reflected ‘the sharpness of the city’s economic slowdown and the fiscal challenges this presents for the city in balancing its budget.’

The fiscal 2009 budget, Moody’s noted, was balanced in part with one-time fixes, including land sales. That could make the expected 2010 gap harder to close, said Moody’s analyst Eric Hoffmann.

As for the real estate market, Hoffmann noted that ‘while the downturn is still not as severe as in the outer areas of the region, nor do we expect it to be in the future, median home prices in the city are down around 20% from their peak last summer.’

And with prices still falling and foreclosures still rising, ‘property tax delinquencies are likely to be up in the coming year, and the unexpectedly sharp decline in home values may have longer-term implications for the city’s property tax revenues,’ the analyst wrote.

That sounds relatively mild, but note: property tax revenue now accounts for almost one-third of the city’s general fund, up from about 20% five years ago. That ‘heightens the challenge a prolonged real estate downturn might pose,’ Hoffmann said.

And it raises the risk of the city dinging residents for money in some other way.

But hey -- L.A. still has a higher credit rating than New York, Chicago, Altanta, Houston and San Francisco, all of which are Aa3.

We’re behind Phoenix and Boston (both Aa1). And Seattle has yet another excuse to cop some attitude: It’s at the top of the heap, with a Aaa rating.