City Hall Pressured to Eliminate Structural Deficit as LA’s Budget Gap Soars to $1 Billion

LA BUDGET - The City Administrative Officer indicated that there is a budget imbalance for the upcoming fiscal year that begins on July 1st where expenditures are expected to exceed revenues by almost $1 billion.  This will require significant cost-cutting measures, including the politically controversial layoff of thousands of City employees.  

Over the past several years, the Mayor and the City Council have approved unsustainable budget busting labor agreements, relied on overly optimistic revenue assumptions, underestimated expenditures, especially those related to liability claims arising from legal settlements and judgements, and underfunded public safety and the repair and maintenance of the City’s infrastructure. They also depleted the Reserve Fund, so much so that if the City was being honest, it should have declared a financial emergency.   

Rather than business as usual, it is time to reform the City’s budget process with the goal of eliminating the Structural Deficit so the City can live within its means and provide reliable services, including public safety and a well-maintained infrastructure, to Angelenos. 

For the fiscal year that ended on June 30, 2024, the City Controller indicated there was a $600 million gap between the Adopted Budget and actual results. General Fund revenues were under budget by $221 million and over expenditures were $385 million associated with new labor agreements and higher liability claims. This shortfall was covered in part by raiding the Reserve Fund for over $300 million. 

For the current fiscal year that began on July 1, 2024, the Third Financial Status Report dated February 28 indicated that the projected gap between the Adopted Budget and year end results is around $400 million. Revenues are anticipated to be more than $100 million below plan while over expenditures are estimated to be $300 million. After corrective actions, the shortfall will be $200 million. Covering this shortfall will exert pressure on the already depleted Reserve Fund. 

This does not include the additional impact of the wildfires on personnel costs and the $275 million in infrastructure damage to parks, libraries, stormwater structures, and streetlights. Nor does it include the impact on property tax revenue and other economically sensitive taxes.  

Balancing next year’s budget (2025-26) will be challenging. According to the City Administrative Officer, the billion dollar budget imbalance is caused by revenues being $315 million lower than the overly optimistic forecast, by $275 million to replenish the Reserve Fund, by a $100 million increase in liability claims, by an additional contribution of $100 million to the City’s pension plans, by an increase of $80 million to subsidize trash collection operations (increasing the total subsidy to $200 million), and an existing forecasted deficit of $60 million. 

[Interestingly, Christopher Thornberg of Beacon Economics, a well-respected consulting firm often retained by the City, indicated that the City has a spending problem, not a revenue problem.  From 2024 to the Controller’s estimates for the upcoming fiscal year, revenues from the seven economically sensitive taxes have increased by almost $300 million (5%). The seven taxes relate to property, business, sales, hotel, utilities, real estate transfers, and parking lots.] 

Balancing the budget will require a significant reduction in expenditures, including the “inevitable” layoff of thousands of City employees.  This will result in considerable pushback from the City’s public sector unions.  Yet, at the same time, the City needs to properly fund public safety (fire and police) and the maintenance and repair of its stressed infrastructure. 

The City needs to address its Structural Deficit where there is persistent shortfall between projected revenues and expenditures. When the Mayor presented her proposed budget to the City Council on April 20, 2024, she said the Structural Deficit would be eliminated because the Four Year General Fund Budget Outlook showed a surplus of $160 million in Fiscal Year 2028-29. However, the Outlook did not consider future labor agreements and the resulting increases in personnel costs. Using reasonable assumptions regarding new labor agreements with both the civilian and sworn employees, the surplus disappears and there is a projected shortfall of approximately $300 million.  

While developing a balanced budget for next year, the Mayor and City Council must address the need for reform so the City can eliminate the Structural Deficit so it can live within its means. The Neighborhood Council Budget Advocates make the following recommendations, all of which we have made over the years. 

1. The Four Year General Fund Budget Outlook needs to be updated to reflect anticipated raises for City employees.  Personnel costs comprise about 75% of the City’s expenditures. This will give the Mayor and the City Council a better understanding of the City’s budget, finances, and Structural Deficit. 

2. Develop a two-year budget as recommended by the City Controller and the LA 2020 Commission. 

3. Conduct open and transparent labor negotiations that require significant outreach to Angelenos before, during, and after the negotiations. 

4. Place a measure on the ballot that would prohibit the City from entering into any labor agreement that would create a current or future deficit. In the short term, pass an ordinance. 

5. Develop a long-term infrastructure plan to address deferred maintenance and future capital expenditures. 

6. Create a robust Reserve Fund that can only be used in declared emergencies, not to balance the budget as is the current procedure. 

7. Establish an Office of Transparency and Accountability as recommended by the LA 2020 Commission to oversee the City’s budget and finances in real time. 

These commonsense recommendations will eliminate the Structural Deficit and allow the City to live within its means. This will require the Mayor and the City Council to use their political capital to overcome the objections of the public sector unions and other special interests.  Importantly, these reforms will provide long term benefits to all Angelenos.

(The Neighborhood Council Budget Advocates (www.budgetadvocates.org) serve Angelenos by bringing transparency to the City’s budget process, update Neighborhood Councils on the City’s financial condition, and advocate for the efficient delivery of City services from elected officials and City departments.)