Los Angeles is facing a projected shortfall of nearly $1 billion next fiscal year, and significant cuts and “thousands” of layoffs are “nearly inevitable,” the top budget official told the City Council on Wednesday.
The sobering forecast was the latest blow to Los Angeles officials as they grappled with the toll of the Jan. 7 wildfires and federal policy changes that were expected to reduce revenues from trade and immigration. Calling the situation “extraordinary,” Matthew W. Szabo, the city’s administrative officer, compared the city’s financial straits to the aftermath of the 2008 financial crisis and said the budget gap estimated for the fiscal year that starts in July represented an eighth of the $8 billion general fund.
“The city is currently facing serious financial headwinds,” he said. “Immediate spending reductions are required. And this body needs to prepare for further reductions if revenues continue to decline.”
Preliminary estimates have placed the city’s costs from the January wildfires at more than $282 million just for expenses such as firefighter and police officer overtime and infrastructure replacement — unexpected bills that have already worsened the city’s budget outlook. But Los Angeles officials have increasingly noted that shifting federal policies on tariffs, deportations and reductions in federal spending have combined with the disaster to dampen the economy in Southern California and its city tourism, business and property tax revenues.
In a separate forecast this month, for example, the city controller, Kenneth Mejia, estimated that city revenues would remain flat or decline next year, partly because of fire losses and the soaring costs of disaster insurance and partly because of “uncertainty generated by the new presidential administration’s radical policies on tariffs, federal spending cuts and immigration.” President Trump, he noted, has already signaled that federal grants to the city would drop after they had risen during the Biden administration.
Even before the fires, the city had stretched to pay for new contracts with the politically powerful unions that represent tens of thousands of public safety and civilian employees. Some 1,700 vacant positions were eliminated last year to help cover the cost of raises for current employees.
Exacerbating the payroll expenses are costs stemming from lawsuits against the city for police officers’ use of force, buckled sidewalks that have hampered access for disabled people and other issues that have skyrocketed in the past several years, generating hundreds of millions of dollars in liability claims.
Earlier this month, in a separate warning about overspending in the current year’s budget, Mr. Mejia reported that salaries and benefits this year had added more than $343 million to the city’s obligations as a result of new labor agreements, police and fire overtime and retirement and sick payouts.
Moreover, he reported, the city had spent more than $246 million on liability payouts for legal claims this year, roughly three times the $82 million the city had budgeted for such obligations. Liability claims at the Los Angeles Police Department alone amounted to more than $75 million, he wrote.
“The full scope is just emerging for disaster response expenses, revenue loss from property damage and business disruption and the costs of recovery and rebuilding,” Mr. Mejia wrote. “This added stress on the budget comes on top of the growing responsibilities for preparing for the Olympic and Paralympic Games in 2028.”
If the city did not stop dipping into reserves, he added, it risked falling below a legally required threshold and officially setting off a fiscal emergency.
That report, on March 3, dealt with the remainder of this fiscal year, which ends in June, not with estimates for the next one.
The new billion-dollar estimate surfaced a crisis far worse than had been implied by prior public projections. Councilwoman Eunisses Hernandez called the situation “grave.”
In a statement, Councilwoman Katy Yaroslavsky, who leads the budget committee, called the shortfall “the result of years of short-term budgeting, temporary fixes and a revenue model that is highly sensitive to changes in the economy.”
“These structural weaknesses have been exposed by slower-than-expected growth, chaos out of Washington, rising liability costs and labor agreements based on stronger revenue projections — challenges that have only been compounded by the recent wildfires,” she said. “We need to fix the underlying problems that got us here.”
California cities have little power to raise revenue, and unlike the federal government, they are not allowed to run operating deficits. Los Angeles’s city funding comes largely from a share of property taxes that are likely to be heavily affected by the extensive fire losses, and from business, sales and hotel taxes that are intensely sensitive to the local economy.
Canada, Mexico and China, for example, are among the largest sources of visitors to Los Angeles, and all have been targeted with hostile rhetoric and tariff threats by the Trump administration, which in turn has dampened tourism, according to city officials. Mr. Szabo said that the largest component of the $1 billion estimated shortfall for 2025-26 was a downward adjustment of some $315 million in revenue projections.
Mr. Szabo, whose agenda item had included only a look at the current year’s finances, said he had flagged next year’s projected shortfall at Wednesday’s meeting because of the severity of the situation. He said that Mayor Karen Bass had been apprised and was already crafting her annual budget proposal, due next month, to limit potential layoffs.
“The proposed budget the mayor will deliver to this council in just over a month from today will close that gap, but it will require extremely difficult cost-cutting decisions,” he said. “We are not looking at dozens or even hundreds of layoffs, but thousands.”
In a statement, the mayor vowed to “deliver fundamental change in the way the city operates.”
In a letter this week to Mr. Szabo and Sharon Tso, the city’s chief legislative analyst, Marqueece Harris-Dawson, the City Council president, and Ms. Yaroslavsky recommended restructuring city operations and seeking financial help from state officials.
California, however, is facing its own budgetary challenges, with federal disaster assistance for the state uncertain under the Trump administration and roughly a third of the state’s budget derived from federal funds.
