Los Angeles budget woes may drive layoffs

Bloomberg News

With revenues falling and expenditures rising after devastating wildfires, Los Angeles Mayor Karen Bass said her next budget will "deliver fundamental changes to the way the city operates."

Los Angeles is confronting a nearly $1 billion budget deficit making layoffs inevitable and potentially affecting city services, City Administrative Officer Matt Szabo warned the city council this week.

Bass has asked Szabo to develop a budget proposal including cuts between $500 million and $900 million for fiscal 2026 that will preserve essential services.

Bass is expected to release her proposed 2025-26 budget April 21.

"For too long, the city's budget and operations have simply been based on the way the city operated in the previous year," Bass wrote in a letter to Szabo. This year "we must base our budget on how the city can best serve the people of Los Angeles to best use their scarce budget dollars."

Downward economic trends have lowered projections by hundreds of millions of dollars, which is exacerbated by increased costs from liability payments and wildfires, Bass wrote.

Among her requests to the city's finance staff were recommendations on how to reduce liability costs, which have risen to $320 million, three times as much as what was budgeted for fiscal year 2024-25.

Szabo, who made a presentation to the City Council Wednesday, advised city leaders that a reduction in the city's workforce is "nearly inevitable," given the budget challenges.

In a mid-year financial report Feb. 28, Szabo wrote that the city is in a "particularly challenging financial position" and it continues to experience overspending, downside risk to revenue and very limited opportunities to resolve these issues through the use of general fund reserves.

He reported his office has identified $296 million in overspending, but that it has only found potential solutions for $130 million of that. If reserves are tapped to address the shortfall, it would reduce the reserve fund balance, currently at 4%, to 2% of the city's general fund, he said.

The main areas of overspending were from liability claims, a labor agreement with the fire department and windstorm and wildfire response.

In addition to the cost to respond to the destruction wrought on the city by January's wildfires, the city is also paying for cleanup, so the total cost isn't clear at this point, Szabo wrote. 

Federal actions, like defunding established programs and initiatives as well as enforcement actions against immigrant communities, have added to the city's uncertainty, Szabo said.

Szabo also noted in his report that rating agencies have published reports on the effects of the fires and are closely monitoring the city's fiscal situation. 

He added that the city's bond ratings were placed on "watch downgrade" by KBRA, on "rating watch negative" by Fitch Ratings, had their outlook revised to negative from stable by Moody's Ratings and its ratings placed on negative watch by S&P Global Ratings.

"If the city is downgraded, it could increase the cost of borrowing, which could either add budgetary pressures from rising debt service payments in the coming years or cause the city to consider reducing its capital spending," Szabo wrote.