Many of California’s biggest cities are facing major financial challenges heading into 2025, suggesting any reductions or pauses in federal funding under the coming Trump administration for sanctuary city policies could significantly impact local government services.
According to the National League of Cities’ 2024 report, American cities are on solid fiscal ground, even though the flow of COVID-era federal funding has stopped.
“More than 64 percent [of city fiscal officers] surveyed reported being better able to meet their financial needs in 2024 than in FY 2023,” wrote the NLC.
In California, where San Francisco, Los Angeles, and San Diego teeter on the edge of fiscal insolvency. Sacramento and San Jose face relatively smaller projected shortfalls in tens, not hundreds, of millions of dollars.
San Francisco faces the state’s worst short-term budget pressures, with a nearly $1 billion budget gap across the next two years and poor economic conditions driving S&P to downgrade the consolidated city-county’s credit rating last week.
“Deteriorating revenue forecasts for the current and next two fiscal years stem from a stagnant economic recovery in the downtown center, which has in turn weakened property and business tax growth,” wrote S&P analysts in their report.
Los Angeles may not face the same level of challenges that San Francisco is, but rising costs and lower than expected tax revenue are driving major budgetary constraints. The city controller has declared the city is “broke,” and shared that it is going to have to borrow $80 million to make a court-ordered lawsuit payout.
Los Angeles Mayor Karen Bass used a recent letter to reiterate the city’s poor economic forecast, “which anticipates lagging revenues and rising costs” and projects “significant deficits … until Fiscal Year 2028-2029,” to call for greater fiscal responsibility, but the city may be doing too little, too late.
“If there’s overspending by departments and high liability payouts, which is what is happening, the General Fund is in trouble,” said City Controller Mayor Kenneth Mejia in warning to city leaders.
Once the city reserve levels fall to 2.75% of the general fund, the city council must declare a fiscal emergency. Mejia says the city is “getting close” to that threshold, which would require immediate and drastic city action.
In San Diego, citizens voted against increasing local sales taxes $400 million per year as the city faces a second year of nine figure annual deficits. Mayor Todd Gloria cut local services to meet last year’s $170 million deficit before restoring some services using one-time funding, and now faces a $258 million deficit for the coming year.
“We have already implemented critical cost-saving measures, including a hiring freeze for all but essential positions, suspension of non-essential spending, and the review and prioritization of capital projects to focus only on those already under construction,” said Gloria in a statement.
Without the new tax revenue, these changes alone may not be enough. City leaders seem ready to make drastic cuts.
“The Five-Year Financial Outlook makes it clear that projected revenue is insufficient to meet the needs of our city,” said City Council President pro Tem Joe LaCava in a statement. “The takeaway is unmistakable: We must cut expenses, and some cuts will be deep — very deep,” said
Sacramento, the state capital, faces a $77 million deficit next year, after closing $66 million deficit this year without laying off any government employees by cutting spending and raising fees. While new mayor Kevin McCarty has not made any budget moves since taking office earlier in December, he rejected extending the contract for the existing city manager — who has worked at the city for over two decades — telling ABC 10 “It’s a new era for a transition of city management.”
San Jose, the largest city in Northern California and third-largest city in the state behind Los Angeles and San Diego, is projected to have a $25 to $35 million shortfall this year. While a large sum, this is still an order of magnitude less than what similarly sized San Diego and San Francisco face.
San Jose Mayor Matt Mahan was one of the few mainstream California Democrats to endorse Proposition 36, which was passed by more than two-thirds of state voters and allows serial theft and more drug crimes to be prosecuted as felonies, with treatment available as an alternative to prison for mentally ill or substance-addicted individuals.
In contrast to California’s other big-city mayors, Mathan’s “focus on the basics” budgets have prioritized crime, getting homeless individuals into temporary shelter, and speeding up permitting for housing and businesses to bring more jobs to the region.
As a whole, economic headwinds are challenging California’s cities — recently released federal payroll data says the state’s economy has shrunk by over 150,000 jobs in the first six months of 2024 — but the greatest challenge to municipal finances could come from the administration of president-elect Donald Trump.
Trump’s pick for border czar told The Center Square the new administration could block federal law enforcement funding to cities that do not cooperate with federal immigration officials could significantly impact city budgets.
According to the NLC’s report, public safety spending is the plurality of city general fund spending, meaning any loss of federal funding could leave city budgets — already stretched to the limit — with little recourse but to comply, or make major spending cuts.
California itself, which narrowly overcame a $47 billion deficit earlier this year, is expected to face continued deficits in the tens of billions of dollars and has “no capacity” for new spending — or bailouts.
