Standard & Poor's Corp. notified city officials by telephone that it was lowering the city's general fund credit rating from AA to AA-, and reducing the rating on its Municipal Improvement Corporation from AA to A+.
"It will mean we will have to spend millions more (in interest payments) to get credit," City Administrative Officer Miguel Santana told the City Council.
Santana said the exact impact will not be known until the city approaches investors to sell new bonds.
The embarrassing reprimand follows last week's decision by Moody's Investor Services Inc., the other leading Wall Street rating agency, to lower Los Angeles' credit outlook to negative from stable. That move typically precedes a full credit downgrade like the one S&P gave the city Tuesday.
While S&P's full report was not available, Santana said the rating agency said it was disappointed in the city's inability to stop spending money it doesn't have, which has created a huge structural budget deficit.
The agency said it wanted to see real action from the city council, such as employee layoffs, significant concessions from unions, steep cuts to city services or any combination to fill in a budget gap now at $212 million
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Alarmed by Moody's warning last week, the City Council voted to layoff some 4,000 city workers over the next 18 months, although that number could be lowered if unions agree to concessions like paying more for their health and pension benefits.
The notification from S&P came as the City Council continues its review of city spending, sparking sharp exchanges among council members.
Deputy Mayor Matt Szabo said he believed the city was on the proper path of reductions to try to deal with the credit issues and the operations of the city.
"We know what we need to do," Szabo said. "The downgrade does not change our plan to cut costs and strengthen our reserve, but it enhances the urgency with which we must implement the plan."
Councilmen Richard Alarcon and Paul Koretz questioned the city's actions in ordering the layoff of 4,000 workers and how the numbers were developed as well as the effort of the city to satisfy the credit agencies.
"These are the same people who gave Lehman Brothers a good rating just before they went under," Alarcon said.
"The credit rating agencies, who I despise, are only concerned with getting money to Wall Street. What are they going to do when we dip into our reserves? They are going to hammer us again. We should not take actions just because of them."
Koretz questioned how the city decided it needs to lay off 4,000 workers and if it had considered the other costs involved.
His remarks prompted Councilwoman Jan Perry to say the council had been dealing with the issue for years.
"We did not pick the figures out of thin air," Perry said. "I am not concerned about us acting prematurely, My hope is we haven't acted too late."
Related to that, the council asked that it get a complete listing of the 1,000 jobs to be laid off by June 30 to see the impact on programs.
Councilman Ed Reyes also said he believed the city needed to move quickly.
"If we don't act now, the problem only gets worse," Reyes said. "The longer we wait, the more people are going to be affected."
During Tuesday's meeting, much of the discussion was on the loss of programs from the Parks and Recreation Department, affecting general park programs and those providing child care and after-school programs.
"There will be cuts," Parks General Manager Jon Mukri said. "I have cut my staff by 25 percent and other supervisors by 56 percent. There is no where else to go but in programs."
Councilman Tony Cardenas worried about the impact in poorer areas if parks are abandoned.
"There will be a higher cost, but it will be from having to bring police officers out there," Cardenas said.
From Daily News by Rick Orlov