Trump policies will add to LA’s billion-dollar budget shortfall, officials say; others point to city overspending

The Trump administration’s trade tariffs and crackdown on unauthorized immigrants are expected to reduce tax revenues to the city of Los Angeles, contributing to a projected budget shortfall of nearly $1 billion in the next fiscal year, according to city officials.

City Administrative Officer Matt Szabo delivered the news to the City Council this week during his mid-year financial status report. He told the panel that for the fiscal year that starts July 1, revenue alone is projected to be $315 million below the city’s four-year projected outlook.

“Federal trade policy is not only likely to spur further inflation but also to slow growth and to dampen international travel upon which our hotel tax relies,” Szabo said.

A weakening economy already has pushed revenues down $141 million below projections.

Bass echoed worries about the economy in a letter to Szabo.

“Our city is affected by downward national economic trends ranging from unpredictable federal fiscal policy and ever-changing tariff proposals, to volatile stock markets, to continued post-pandemic impacts related to tourism, lower office occupancies and more,” the mayor wrote.

But one economist said the city may be overstating the effects of Trump administration policies. He and others said the real problem is overspending by the city of L.A.

“It's a little too early in the day to see just how far he’s going to push these things,” said Christopher Thornberg of Los Angeles-based Beacon Economics, who noted that the city largely makes its money off of consumer demand, including property taxes, sales taxes, and gross receipts taxes.

“The fundamentals of the consumer economy are still pretty good,” he added. “I don’t see the Trump Administration having a sizable impact on city revenues.”

Federal fire relief money

City officials have several concerns about the potential impacts of President Donald Trump’s policies on local revenue.

One has to do with Palisades Fire federal relief money. Trump has threatened to withhold relief money if California doesn’t enact a voter ID law requiring people to show identification at the polls.

Szabo said federal immigration policy also “poses a particular threat to our local economy,” especially after the Palisades Fire. He noted that unauthorized immigrants make up about 40% of the workforce in the construction industry.

“Due to the fires, there is nowhere in the country where demand for construction and construction related services will be higher than here in Los Angeles,” he said. Restricting immigration and mass deportations could contribute to inflation in the construction industry.

He also said the Palisades Fire will cause property values on thousands of homes to go down, reducing tax revenue. Because of declining revenue and increasing costs, layoffs and reductions in city services are “almost inevitable,” Szabo said.

Not everyone agrees on those claims. The head of the city’s biggest labor union balked at the notion of layoffs, calling them “short-sighted” and “irresponsible.”

“Before laying off employees, the city needs to take a hard look at reining in spending on private outside contractors,” said David Green, president of the Service Employee International Union Local 721.

Thornberg, from Beacon Economics, said it’s unlikely Trump will accomplish the number of deportations he’s promised, and the city of L.A. has more of a spending problem than a revenue issue. The situation, he said, dates back to the pandemic stimulus spending by Congress, which resulted in an enormous surge in taxable sales, property values and gross receipts taxes.

“So we increased our permanent expenditures on the basis of a temporary surge in revenues and now deficits are showing up,” he said. “This is a spending problem.”

Thornberg continued: “A lot of cities and states started to increase their spending to match that surge and what happened was what they thought was going to be a long-run increase in revenues turned out to be a very short run. But once you start spending, it's hard to stop.”

Liability costs increase dramatically

City officials say L.A.’s financial challenges go much deeper.

The reserve fund dropped well below the 5% required by city policy, and Szabo said it will take $285 million to restore it next fiscal year.

In addition, liability costs have increased sharply. Payouts from legal settlements and judgments are expected to be $320 million in the 2024-2025 fiscal year — three times what was budgeted. Szabo said the city will need to set aside an extra $100 million beyond the city’s four-year outlook for the next fiscal year.

The city also faces a $100 million increase in pension obligations next fiscal year largely because of salary increases for city workers, Szabo said.

Last year, the mayor and City Council signed what critics said were too generous labor contracts with city workers. The police contract alone boosted the starting pay of officers by nearly 13% and provided four raises of 3% over a four-year period.

Bass sent a letter to Szabo asking him to explore ways to address the deficit. They included reducing liability costs and “proposals that realize payroll and benefit savings.”

That could mean layoffs or deferred compensation, said Councilmember Bob Blumenfield, vice-chair of the Budget and Finance Committee.

“Given 80% of the budget is labor, it's going to have to involve labor in some way,” he said.

What’s next?

The mayor is set to release her budget on April 21. The City Council will then hold a series of public hearings on the document and send it back to the mayor.