L.A. city budget shortfall grows to nearly $1 billion, with layoffs ‘nearly inevitable’

L.A.’s financial problems exploded into a full-blown crisis on Wednesday, with the city’s top budget official announcing that next year’s shortfall is now just shy of $1 billion, making layoffs “nearly inevitable.”

City Administrative Officer Matt Szabo advised the City Council to focus on cost-cutting measures, including a potential reduction in the size of the workforce, to bring the budget into balance for 2025-26.

Szabo, in his presentation to the council Wednesday, attributed the city’s financial woes, in part, to increased spending on legal payouts, which have ballooned over the last few years. Tax revenues have been coming in much weaker than expected — and are expected to soften further in the upcoming budget year, which starts July 1.

Pay raises for city employees that are scheduled to go into effect in the coming budget year are expected to consume an additional $250 million. On top of that, Szabo said, the city needs to put hundreds of millions into its reserve fund, which has been drained in recent months in an attempt to balance this year’s budget.

“The severity of the revenue decline, paired with rising costs, has created a budget gap that makes layoffs nearly inevitable,” he said. “We’re not looking at dozens or even hundreds of layoffs, but thousands.”

Mayor Karen Bass must present her strategy for closing the $1-billion gap by April 21, the legal deadline for her to release her proposed 2025-26 budget. At this point, neither she nor the council are willing to wait.

“Because of the severity of the gap we are facing, the mayor has made it clear we need to take action now,” Szabo told the council.

Minutes after Szabo’s presentation, council members went behind closed doors to take a fresh look at the city’s contracts with a wide array of unionized public employees — police officers, firefighters, trash truck drivers, librarians, park maintenance workers and many others.

Councilmember Katy Yaroslavsky, who heads the budget committee, said the council will need to look at the possibility of asking unions representing city workers to defer the scheduled raises or make other concessions.

“I think everything needs to be on the table,” she said in an interview.

David Green, president and executive director of Service Employees International Union Local 721, called Szabo’s remarks “short-sighted and irresponsible.”

“Before laying off employees, the city needs to take a hard look at reining in spending on private outside contractors,” Green said.

At City Hall, some were taken aback by Szabo’s presentation.

“There’s no question that all of us are in shock with this number,” said Councilmember Bob Blumenfield, who sits on the council’s budget committee.

Bass, in a statement released during the council’s deliberations, said her upcoming budget will seek “fundamental change” to city operations.

“We must leave no stone unturned. We must consider no program or department too precious to consider for reductions or reorganization,” she said in a letter to Szabo.

Bass, in her letter, said the city’s budget woes have been at least partially driven by pricey legal settlements, emergency response costs related to the Palisades fire and “downward national economic trends” ranging from unpredictable federal fiscal policy to “volatile stock markets.”

Blumenfield predicted that city leaders would need to seek financial concessions from the workforce.

“Eighty percent of our expenses is labor,” he said. “If we are short more than 10% of our budget, the ‘math doesn’t math’ without looking at labor costs.”

Four years ago, following the outbreak of the pandemic, city leaders persuaded public employee unions to forgo scheduled raises, delaying them until President Biden provided a COVID relief package. During that crisis, the council also signed off on an early retirement program that gave more than 1,000 employees up to $80,000 to leave their jobs.

Council members cannot unilaterally put a stop to raises that are already part of an approved contract. The city would need to negotiate any giveback, which would likely require concessions on its end.

Over the last two years, Bass and the council have signed off on raises and increased benefits for an array of unions — first police officers, then civilian city workers, then firefighters.

Those raises largely brought labor peace to City Hall, offering elected officials the prospect of smooth relations until after 2026, when Bass and six council members are up for reelection. But they have already come at a price.

To make room for this year’s pay increases, the council voted to eliminate about 1,700 vacant positions. Even with those reductions, the raises slated for 2025-26 are expected to take a big bite out of the budget.

Earlier this week, City Council President Marqueece Harris-Dawson and Yaroslavsky issued a letter spelling out their 10 priorities for the upcoming budget deliberations. Those include preserving the reserve fund, setting aside sufficient money to cover legal payouts and pursuing “state relief to address budget shortfalls.”

Harris-Dawson and Yaroslavsky also called for city officials to identify strategies for generating more revenue, such as hiking fees for public services.

One likely target will be the trash fees the city charges for pickup at single-family homes and buildings with two to four units. City officials are studying whether to collect as much as $200 million in additional fees from those customers, Szabo said.

City Controller Kenneth Mejia presented his own grim forecast on Tuesday, warning the council’s budget committee that revenues for the coming fiscal year are expected to come in well below projections. He pointed out that the council’s efforts to address this year’s budget gap are reducing the reserve significantly, taking it down to 3.22% of the general fund budget, which pays for core services.

The city’s financial policies call for the reserve to fall no lower than 5%.

Mejia said the budget woes were not sparked by an outside crisis, but rather, decisions made at City Hall.

“We didn’t have a COVID or a global recession,” Mejia said. “This is something that is happening from the inside.”

Szabo said the city’s finances are also being buffeted by outside factors. The federal government’s actions on tariffs and its planned crackdown on immigration could boost inflation in California, potentially dampening tax revenues, he said.

In addition, properties burned by the Palisades fire will likely be reassessed to reflect a reduction in their value — which would diminish property tax revenues.