L.A.’s financial issues exploded into a full-scale crisis on Wednesday, with city’s highest budget officials making the shortfall slightly shy of $1 billion next year and announced layoffs as “nearly inevitable.”
City Manager Matt Sabo advised the city council to focus on cost-cutting measures, including potential reductions in the size of the workforce, to balance the 2025-26 budget.
In a presentation to the council on Wednesday, Szabo attributes the rise in spending on legal payments that have risen over the past few years to financial difficulties in some cities. Tax revenue is much weaker than expected, and is expected to be even softer for the budget year that begins on July 1st.
City employees’ pay raises expected to take effect in the upcoming budget year will consume an additional $250 million. Additionally, Zabo said the city will need to put hundreds of millions of people in the budget funds released in recent months to balance this year’s budget.
“The severity of the decline in revenue, combined with rising costs, created a budget gap in which layoffs are almost inevitable,” he said. “We haven’t seen dozens of layoffs, but thousands of layoffs.”
Mayor Karen Bass must present a strategy to close the $100 million gap by April 21st. At this point, neither she nor the council are willing to wait.
“Because of the seriousness of the gap we are facing, the mayor has made it clear that we need to take action right now,” Zabo told the council.
Minutes after Szabo’s presentation, council members closed closed rooms after seeing a new city contract with a wide range of union civil servants with police officers, firefighters, trash can drivers, librarians and park maintenance workers.
Councillor Katy Yaroslavsky, who heads the Budget Committee, said the council should consider the possibility that it may require unions representing city workers to postpone their scheduled pay 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 employee, known as Szabo’s remarks.
“Before we fire employees, the city needs to be strictly looking at curbing spending on private external contractors,” Green said.
Some people at the city hall were surprised by Szabo’s presentation.
“We are sure that we are all shocking this number,” said Councillor Bob Blumenfield, who sits on the council’s budget committee.
Bass said in a statement released during council deliberations that her upcoming budget would call for “fundamental changes” in urban operations.
“We should not turn the stones over, and do not consider programs or departments that are too valuable to consider reductions or reorganizations,” she said in a letter to Szabo.
Bass said in her letter that the city’s budget struggles are driven at least in part by expensive legal settlements, emergency response costs related to the Palisade fire, and “downward national economic trends” ranging from unpredictable federal fiscal policies to “unstable stock markets.”
Blumenfield predicted that city leaders would need to seek financial concessions from the workforce.
“80% of our expenses are labor,” he said. “If you’re short on more than 10% of your budget, you don’t look at labor costs, “Mathematics is not mathematics.” ”
Four years ago, after the outbreak of the pandemic, city leaders persuaded civil servants’ unions to refrain from scheduled pay increases, delaying them until President Biden offered a community relief package. During that crisis, the council also signed an early retirement program to give more than 1,000 employees up to $80,000 to quit their jobs.
Council members cannot unilaterally suspend a filing that is part of an already approved agreement. The city will need to negotiate any giveback, but that will likely require concessions at the end.
Over the past two years, Bus and Council have signed a series of union raises and benefits increase. First police officers, then private urban workers, and firefighters.
These primarily brought labor peace to city halls, providing elected officials with a smooth relationship outlook from 2026 onwards until Bus and six councillors rose to reelection. But they’re already paying the price.
To ensure there is room for wage increases this year, the council voted to eliminate roughly 1,700 vacant seats. Even with these cuts, pay increases are expected to remove a big sip from the budget from 2025-26.
Earlier this week, City Council Presidents Marquez Harris Dawson and Jaroslavski issued a letter writing about 10 priorities for future budget deliberations. These include keeping reserve funds, putting enough money aside to cover legal payments and pursuing “state relief to address budget shortages.”
Harris-Dawson and Yaroslavsky have asked city officials to identify strategies to generate more revenue, including public service hiking fees.
Perhaps one of the goals is to bill urban fees for pickups in detached houses and buildings with 2-4 units. City officials are studying whether to collect $200 million extra fees from those customers, Szabo said.
City controller Kenneth Mezia released his own harsh forecast on Tuesday, warning the council’s budget committee that revenues are expected to fall far below forecasts next year. He noted that council efforts to address this year’s budget gap have significantly reduced reserves and reduced them to 3.22% of the general funding budget paid to core services.
The city’s financial policy requires that the reserves exceed 5%.
Mezia said the budget struggles were not caused by an external crisis, but by a decision made at city hall.
“We had no COVID or global recession,” Mezia said. “This is what’s happening from within.”
Szabo said the city’s finances are also being buffeted due to external factors. Federal government actions on tariffs and planned crackdowns on immigration could promote California’s inflation and attenuate tax revenues, he said.
Additionally, properties burned by the Palisades fire could be revalued to reflect a decline in their value.
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