LOS ANGELES—A top financial advisor to the city of Los Angeles Wednesday shared a grim outlook for fiscal year 2025–26, saying elected officials need to address a projected $1 billion gap that will require tough financial decisions and could lead to thousands of layoffs.
City Administrative Officer (CAO) Matt Szabo said Mayor Karen Bass’ proposed budget, which will be released April 21, will close that gap, but it will require difficult “cost-cutting decisions.” He warned that the severity of revenue declines and rising costs have created a budget gap that makes layoffs “nearly inevitable.”
“We are not looking at dozens or even hundreds of layoffs, but thousands,” Szabo said. “While layoffs may be necessary, it cannot and will not be the only solution.”
“I can tell you that the mayor is absolutely committed to preserving as many jobs and city services as possible, as we face these economic headwinds,” he added.
Among areas of concern highlighted by Szabo is a $61 million starting gap, which will be exacerbated by $315 million in lower-than-anticipated revenue from taxes, $100 million in liability payouts that are expected to increase, $275 million needed to restore the reserve fund, $80 million related to solid waste fees, and $100 million to cover pensions for members of the Los Angeles police and fire departments.
Szabo attributed the fiscal crisis in part to rising legal payouts in recent years. The CAO previously reported $112 million in payouts, and most recently projected that by the end of FY 2024–25 that expense will increase to $320 million.
As a potential solution, the city attorney’s office is working with the state legislature on a bill to cap damages.
Pay raises for city employees are set to begin July 1, the start of the fiscal year, adding an additional $250 million in costs for the city.
After Szabo’s presentation, the city council entered into a closed session Wednesday to discuss the city’s contracts with several unionized public employees such as police officers, firefighters, trash truck drivers, and librarians.
Elected officials may look to defer the scheduled raises or make other concessions.
Bass issued a statement regarding her proposed budget Wednesday, which she said will “deliver fundamental change in the way the city operates.” She directed the CAO to report to her with strategies to “reduce spending significantly while protecting essential services.”
“This year, we must deliver fundamental change in the way the city operates and base our budget on how the city can best serve the people of Los Angeles and to best use their scarce budget dollars,” Bass said in her statement.
According to Bass’ office, downward economic trends mean the city is projected to take in hundreds of millions of dollars less than previously projected. In addition to these trends, costs associated with the recent wildfires are also expected to add to the burden.
In the last two years, Bass and the city council have approved new contracts with unions representing police officers, civilian city workers, and firefighters.
In a letter sent out earlier this week, Council President Marqueece Harris-Dawson and Councilwoman Katy Yaroslavsky, chair of the budget committee, outlined their 10 priorities for the upcoming budget deliberations, which include preserving the emergency reserve, covering legal payouts and seeking state relief to address budget shortfalls.
City officials have been dipping into the reserve fund, an emergency account used to maintain operations during tough financial years or to address specific challenges. Currently, the reserve fund is 3.22 percent of the general fund—well below the city’s minimum 5 percent policy. If the account drops below 2.75 percent it will trigger a “fiscal emergency,” meaning any expenditure using these funds will require a majority vote.
The City Controller’s Office released a report projecting year-end revenues will fall $140 million below the adopted FY 2024–25 budget. Sales and business taxes combined are projected to be $92 million below budget.
Projections also showed revenues will fall short $320 million in FY 2025–26 as a result of factors including federal trade, immigration policies, and the impact of this year’s wildfires on local taxes, among other challenges. General fund revenue is likely to decrease by $73 million, primarily due to a projected decrease of $198.5 million in grants.
As elected officials consider ways to increase revenues, some options may lead to higher taxes, fees, and other costs for taxpayers.
One such increase could be the solid waste fee, which has not been raised in several years. Szabo estimated that the general fund will subsidize that program by $200 million, an increase of $80 million compared to FY 2024–25.
The last major fiscal crisis the city experienced was in FY 2009–10, following the nationwide housing crash in 2008. The gap that year was about $500 million when the total general fund budget was around $5 billion, according to Szabo.
