Los Angeles Faces Threat of Insolvency

Dispute Between Municipal Utility and City Council Over Electricity Rates Deepens Fiscal Crisis; Bond Rating Cut

Wall Street Journal Online

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A bitter political dispute between this city's elected leaders and its powerful municipal utility threatens to push the city into insolvency as early as next month.

Los Angeles City Controller Wendy Greuel warned this week that the city's general fund could run out of money and fall $10 million into the red by May 5 unless the Los Angeles Department of Water & Power transfers a planned $73.5 million payment it has so far said it would withhold. Without the payment, the city would need to dip into its reserve fund, leaving that contingency dangerously low in the event of other emergencies.

The Los Angeles utility, the nation's largest municipal utility, said it wasn't making the payment because the city council earlier this month failed to approve substantial increases in electricity rates.

Utility officials say they need those higher rates to help cover the costs of investing in renewable energy, such as wind and solar, that are mandated by state and municipal laws.

The utility is an influential entity in its own right, with an annual budget of $4.2 billion, 8,600 employees and massive landholdings throughout Southern California. It makes periodic payments to the city in lieu of taxes and franchise fees.

The utility's move has kicked off a fight that already has had negative repercussions for the city. On Wednesday, rating firm Moody's Corp. cut its ratings on some $3.2 billion of Los Angeles general obligation bonds by one notch, reflecting "continued erosion of the city's historically better-than-average willingness and ability to quickly rebalance its budget mid-year."

The ratings firm warned that by the end of Los Angeles' fiscal year on June 30, general fund reserves "could be materially weaker than we had previously expected" because of the squabble with the utility.