LA has overspent by $300 million so far, cuts to city services likely

Four months into the fiscal year, the city of Los Angeles has already overspent its budget by nearly $300 million, according to a report released this week by the City Administrative Officer.

The city is in “a particularly challenging financial position,” the report states, noting increased legal liability and labor costs across a number of departments.

L.A.'s reserve fund has dropped to 4% of revenues, according to the report. The city has a policy of keeping the fund at a minimum of 5%. If it drops below 2.75%, the council would need a two-thirds vote to withdraw money from it. That could threaten the city’s bond rating, which would increase the city’s borrowing costs.

“The warning alarms are appropriately going off,” said Bob Blumenfield, chair of the City Council Budget Committee. He said cuts in city services would likely be needed to address the problem in the $12.8 billion budget.

“We’re talking about slowing down the hiring, which has real impacts on services,” he said. “We’re talking about asking departments to absorb some of these deficits within their departments, which also has an impact on services.”

Where did the money go?

More than a third of the overspending is related to increased legal payouts to people who’ve sued the city. The city has overspent its liability claims account by $112 million — more than twice what was budgeted for the entire year.

“It’s pretty stunning to see how quickly we've blown through that money,” said Rob Quan of Unrig LA, a watchdog group.

Legal liabilities include court judgments and legal settlements involving police abuse or negligence, which accounts for 40% of all payouts, but also for things like traffic collisions involving city vehicles and slip and fall lawsuits involving buckled city sidewalks.

Blumenfield blamed the current legal climate on the rising costs of judgments and settlements.

“Juries — not just in Los Angeles, but across the nation — are coming back with much higher judgments and of course that has a ripple effect on the settlements,” he said.

He also said cases slowed by COVID’s impact on the courts are just now getting settled.

“The George Floyd cases are coming due,” said Blumenfield, referring to police abuse cases that occurred during massive street protests in 2020 following the murder of Floyd by a Minneapolis police officer.

Deferred maintenance has played a role, too. “Our sidewalks haven’t been getting better in the last several years, they’ve been getting worse, which means there are more trip and falls,” Blumenfield said.

He predicted legal payouts would be near $300 million by the end of the year.

How will the city cover costs?

The CAO has recommended borrowing up to $80 million to cover some of the legal costs. The move would help with the short term problem, but increase the city’s debt.

Blumenfield said service cuts would likely be necessary, too.

“There’s not a lot of fluff for departments to make cuts that they need to make without impacting services,” he said.

The report identified overspending in a wide range of departments. The Fire Department led the way with more than $90 million in overspending due largely to a new labor contract. Firefighters are getting an annual 3% increase to their base wages, totaling 12% by Fiscal Year 2027-28. They’ll also see a 5% annual increase to their health benefits.

The labor contract mirrored similar agreements with other city unions that the city signed last fiscal year. Each contract continues to weigh on the current budget.

Other departments that overspent include the city attorney ($25 million) police ($20 million) and transportation ($14 million). The rising cost of gasoline was among the reasons cited.

On the bright side, the CAO noted general fund revenue is up $54 million. But he cautioned city leaders against counting on revenues to continue to be higher than anticipated.

“Forecasts specific to the state and local economy predict subpar economic growth throughout 2024 and increasing unemployment with indicators not anticipated to improve until the end of 2025,” the report stated.

The City Council Budget, Finance and Innovation committee will consider the report at a meeting Wednesday at 2:30 p.m. You can view the committee's agenda and watch the meeting live here.