LA Quietly Dumps S&P After Threat To Downgrade City's Credit Rating
LOS ANGELES (CBS) — The city of Los Angeles cut ties with Standard & Poor's credit rating in response to its threat to downgrade the city's investment portfolio, officials said Tuesday.
Interim city Treasurer Steve Ongele announced the move before a City Council committee on Monday after Standard & Poor's said last week it would be downgrading the city's $8 billion "general pool" investment portfolio from AAA to AA.
Ongele told the Budget and Finance Committee the move led him to withdraw from S&P's investment rating, which costs the city $16,000-$20,000 per year.
The city's debt rating, which determines interest rates the city pays on money it borrows, will still be monitored and reported by the three major rating agencies: S&P, Moody's and Fitch.
The investment downgrade was largely based on the fact that about 80 percent of the city's investments are in U.S. Treasury bonds, which S&P recently downgraded from AAA to AA-plus for the first time in U.S. history.
Ongele called the rating "completely discretionary" and said it would have no impact on investors' likelihood to invest in the city.
"We in the treasury have really lost faith in S&P's judgement," Ongele said, citing last week's sharp stock market decline. Investors flocked to U.S. Treasury bonds, despite S&P's downgrade of U.S. treasuries.
"They were doing that because they knew that is the safest bet that you can make whenever things are unstable," Ongele said.
Councilman Paul Koretz said the move looked like a retaliation.
"Wouldn't the general financial public out there view us somewhat askance for saying `OK, we had them when we were getting good ratings. They gave us a bad rating. So to hide the fact that we deserved the bad rating, we got rid of the rating agency,"' Koretz asked. "I'd be very suspicious."
The city discloses more about its finances than ever before, Ongele responded, "so it will be very easy for investors to tell if L.A. is a safe investment or not."
Councilman Bernard Parks, who chairs the committee, said he was confident in Ongele's unilateral decision.
"Many cities never even get a rating on their investments," Parks said, adding that the rating was completely to boost the city's perception, rather than for any practical basis. "They were not advising us on strategy or giving us investment advice."
Parks predicted it would have no impact on the investments, which he said contribute "double-digit millions" of dollars to the city's general fund each year.
But despite the support, Parks cautioned the panel and Ongele to refrain from celebrating the move, warning the city would not want to be seen as bashing an agency that controls one-third of the city's debt rating.
"We didn't do any press release. We just tried to keep it as quiet as possible. Just a letter to the mayor," Ongele said.
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