LA is on perilous financial footing, city controller says in new report

Los Angeles remains on shaky financial ground with increased liability costs, overspending by city departments and revenue shortfalls forcing it to dip into its reserves, according to a financial report released Wednesday.

The annual report for the fiscal year that ended in June, from Los Angeles City Controller Kenneth Mejia, said the culmination of decades of “unstable budgeting” is seen and felt by Angelenos across the city “in crumbling infrastructure and deteriorating services.”

Additionally, short-term budget balancing over the past two years resulted in unpaid furlough days for city employees and the elimination of thousands of unfilled positions.

“The service impacts of those cuts are still hitting departments as they struggle to address growing needs with severely diminished capacities,” the report read.

Key takeaways

Here are some of the major points made in the report:

• The top area of overspending continued to be liability payments. Liability claims exceeded the budget by $199 million or 228%, totaling a record of $287 million for the year. The top three areas include police at $152 million, street services at $44 million and transportation at $20 million. 

• The top area of underspending was capital improvement projects. The city only spent $25 million (19%) of the $131 million budget.

• Salaries and employee benefits increased by $162.6 million (4.7%) compared to previous  years, primarily because of cost-of-living adjustments associated with labor agreements with civilian and sworn employee unions, sworn employee hiring, increased overtime usage and higher benefit and insurance premium costs. Property taxes, which represent 40.6% of general fund revenues, increased by 4.3%. Business tax revenue increased by 8.6%, while sales tax revenues declined by 2.2%

• The city had to make up $160 million in revenue shortfall by tapping the reserve fund, which dropped from $648 million two fiscal years ago to $402 million for fiscal year 2024-25. The reserve fund currently sits at 5.06% of the total general fund budget, according to a December financial status report from the city administrative officer — barely above the 5% minimum set by the City Council.

• Four ratings agencies, including S&P, Fitch, Moody’s and Kroll, have given the city a “negative outlook” over a variety of concerns including liability payments and damages from the Palisades Fire. A negative outlook indicates a heightened risk that a city’s credit rating may be downgraded within the next 12 to 18 months. L.A. still holds an Aa2 rating from Moody’s, which is considered a high grade.

The controller issued a series of recommendations, including shifting to a two-year instead of one-year budgeting process, more realistic revenue projections, and more revenue generation by growing the tax base (for example: implementing a vacancy tax or taxing rideshare/autonomous vehicles, not just raising the sales tax).

General fund challenges

Councilmember Eunisses Hernandez, a member of the city’s Budget and Finance Committee, said in the report that the city can’t keep relying on short-term fixes, while “structural deficits,” like ongoing budget shortfalls, grow.

She added that “years of draining reserves, soaring liability payouts, and underinvestment in infrastructure have left us in a perilous financial position that our communities are now forced to absorb.”

“We need transparent, multi-year budgeting rooted in long-term planning and fiscal responsibility,” Hernandez said.

Mejia said that although the city is halfway through its fiscal year, it continues to have general fund budget challenges.

“The current fiscal year’s budget assumes moderate revenue growth, however, the long-term impact of current economic activities on revenue growth remains unknown and revenue has been stable during the first half of the year.”

LA’s demographics

In addition to providing a financial picture, the report provided a demographic look at the city. L.A.’s population is 3.84 million, the average age is 37.5, the total school enrollment is 409,108 and the unemployment rate is 6%.

The city employs more than 50,000 workers, the metro L.A.’s GDP is $1.3 trillion (among the top 20 economies in the world), and LAX has 75 million passengers a year.