State threat costs L.A. County top rating on short-term debt

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California’s budget crisis cost Los Angeles County its top credit rating on $1.1 billion in short-term notes the county plans to sell this week.

Standard & Poor’s said it cut the rating on the notes one notch, to ‘SP-1’ from ‘SP-1-plus,’ citing potential fallout from the massive budget cuts Sacramento has proposed.

S&P said it was concerned about possible state welfare-funding cuts that could boost the county’s own welfare outlays by more $400 million a year.

Glenn Byers, assistant treasurer for the county, said S&P’s assessment was a ‘worst-case’ scenario and that it was wrong to assume the county wouldn’t pare back spending to counter whatever hit it takes from the state’s cuts.

L.A. County routinely borrows money at this time of year via so-called tax and revenue anticipation notes, which provide a cash bridge to cover expenses ahead of future tax payments.

The note sale had been scheduled for last week, but was delayed until this week so officials could go back to Wall Street investors and brief them on the potential effects of the state’s latest proposals to close a $24-billion budget gap.

Byers said the county now expects to pay an annualized tax-free yield of between 0.45% and 0.6% on the notes. Before the ratings downgrade, the county had hoped to pay as little as 0.4%.

The cost of borrowing is likely to rise because some investors probably will stay away amid the ‘noise and smoke’ from the state’s woes, Byers said.

S&P also revised its outlook for the county’s general credit rating, now AA-minus, to ‘negative’ from ‘stable’ because of the state’s budget mess.

‘If proposed state cuts are enacted and the county is not able to fully pass through state program cuts or make offsetting other budget cuts, we might consider lowering the rating,’ S&P said.

-- Tom Petruno