Los Angeles credit outlook remains negative as budget and liability risks persist

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LA credit outlook negative

Highlights

KBRA maintains Los Angeles' negative credit outlook due to unresolved recurring expenditure growth and reserves still below city targets in the FY 2027 budget.
General Fund faces ongoing liability risks, including wildfire claims, federal funding uncertainty, and potential material downside related to the 2028 Olympics.
Strong and diverse tax base with continued growth in assessed values partially offsets budget and liability pressures for Los Angeles' credit profile.

FY 2027 budget outlook and rating drivers

Kroll Bond Rating Agency said the maintenance of the negative outlook reflects unresolved pressures that followed last year's downgrade, despite the city's balanced FY 2027 Proposed Budget.

According to the agency, recurring expenditure growth remains a central challenge over the outlook period. KBRA also points to cumulative reserve levels that are still below the City's target, alongside ongoing exposure to wildfire-related and other liability claims and risks tied to federal funding.

The report adds that the General Fund could face material downside risk associated with the 2028 Olympics, extending uncertainty beyond the near-term budget cycle. At the same time, the City's General Obligation bond rating continues to reflect credit strengths consistent with the current rating level.

Tax base strength offsets part of the pressure

Los Angeles retains support from a very large and diverse tax base, which the rating agency says continues to show strong growth in assessed values. That underlying economic breadth helps sustain the City's credit profile even as expenditure and liability pressures remain unresolved.

For municipal credit markets, the surveillance report underscores a mixed picture, with stable tax base fundamentals counterbalanced by spending growth, reserve constraints and event-related fiscal risks. The negative outlook indicates that budget execution and risk management remain key factors for the City's borrowing profile over the coming years.

In our earlier coverage of KBRA’s AA+ rating with a Stable Outlook for Wills Point Independent School District’s Series 2026 unlimited tax school building bonds, we highlighted how a growing, diverse tax base and strong unassigned reserves supported the district’s borrowing profile. We also noted the key constraints KBRA flagged, including limited revenue flexibility from property tax rate and state funding limits, and downgrade risks tied to tax base or enrollment declines that could pressure General Fund balances.

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