City Leaders Weigh Harsh Cuts as L.A. Confronts Historic Budget Shortfall
Los Angeles is facing a severe financial crisis, with its projected budget shortfall for the upcoming fiscal year approaching $1 billion, according to city officials. LA Controller Kenneth Meijia has been warning us of a severe budget shortfall since last year. On Wednesday, City Administrative Officer Matt Szabo warned the City Council that layoffs in the thousands are now “nearly inevitable” as the city struggles to address declining revenue and soaring expenses.
The budget deficit, one of the largest in recent city history, has been driven by weaker-than-expected tax revenues, escalating pension obligations, increased liability payouts, and growing personnel costs. Officials are now considering service cuts, workforce reductions, and possible deferrals of union-negotiated raises for police officers, firefighters, and other city employees.
Szabo, who oversees city finances, told the council that the city’s general fund revenues have fallen $315 million below projections, while pension costs for firefighters and police officers have surged by $100 million. Additionally, liability claims—one of the biggest drivers of the budget shortfall—have hit a record $247 million this fiscal year, while next year’s budget only allocates $87 million to cover legal settlements.
With the city’s financial situation rapidly deteriorating, Szabo did not mince words about the severity of the crisis.
“We are not looking at dozens or even hundreds of layoffs, but thousands,” Szabo said.
Despite the grim outlook, he emphasized that layoffs alone cannot close the budget gap. Instead, city leaders must consider drastic restructuring of services, potential hiring freezes, and new cost-cutting measures.
Mayor Karen Bass acknowledged the crisis and called for a complete overhaul of how Los Angeles structures its budget rather than simply making incremental cuts.
“For too long, the City’s budget and operations have simply been based on the way the City operated in the previous year,” Bass said in a letter to the Chief Administrative Officer. “This year, we must deliver fundamental change.”
Bass has directed city officials to develop proposals to slash between $500 million and $900 million in spending for the 2025-26 fiscal year, which begins July 1. She has also ordered recommendations for structural budget reforms, including:
- Reducing liability costs associated with lawsuits
- Reevaluating the number, structure, and responsibilities of city departments
- Cutting departmental contract expenses
- Finding payroll and benefit savings
- Preserving the city’s reserve fund
City officials have warned that broader economic instability, potential federal funding shortfalls, and wildfire-related expenses will likely make balancing the budget even more difficult.
The recent wildfires in the Palisades have increased emergency response costs while also reducing property tax revenues from damaged homes and closed businesses. Meanwhile, the city’s financial outlook remains uncertain amid fluctuating federal policies, declining office occupancy rates, and post-pandemic economic shifts.
However, as the city moves into the 2025-26 budget cycle, officials are preparing for difficult and painful choices. Bass emphasized that no program or department should be considered immune from budget reductions.
“We must leave no stone unturned,” she said. “If a program or department can operate better, or if they should not operate at all, we must make those changes—now.”
With service cuts, layoffs, and restructuring now looming, the debate over how to close Los Angeles’ massive budget shortfall is only beginning. The City Council must approve the final budget for 2025-26 before July 1.
