(The Center Square) – As the city of Los Angeles proposes mass layoffs to close a nearly $1 billion deficit for the coming fiscal year, city officials warn Mayor Karen Bass’s “balanced” budget proposal may not sufficiently account for slowing revenue, a possible recession, expiration of labor agreements and the city’s credit rating downgrade.
“Economic policies from the Federal Government, coupled with disruptive cuts in Federal programs and spending, are likely to create significant issues for revenues and have the potential to cause greater economic harm, including potential recession. Despite this, the CAO’s four year outlook optimistically assumes average revenue growth in 2026-27 and beyond, and projects a surplus of $13.1M in 2026-27 that grows to $454.4M in 2029-30,” wrote Los Angeles Chief Legislative Analyst Sharon M. Tso.
“It should be noted that the CAO’s four-year outlook does not factor in the possibility of a recession and anticipates a return to average revenue growth, nor does it recognize any new Cost of Living Adjustments past the expiration of current labor deals or the impact of a credit rating downgrade,” she said.
Tso’s report noted that while Bass is seeking a state bailout, such a measure would, if granted, only be a one-time solution.
“The Mayor is actively seeking State assistance that may offset some of the reductions included in the Proposed Budget,” continued Tso. “It is unclear as of now if that is possible, but funds from the state would not be ongoing and it would not solve the City’s structural problem, only push hard decisions down the road.”
Last week, S&P downgraded LA’s credit rating, citing its “weakening financial position and an emerging structural imbalance.”
With a new state report finding the state’s economy is “stagnant” and “fragile,” and state-funded analysts warning the state has “no capacity” for new spending, it’s unclear how the state would afford a Los Angeles bailout.
Tso also warned that the budget’s $187.4 million in funding for liabilities for lawsuits is $90 million short of the $280 million in projected lawsuit payouts for the ongoing fiscal year alone, which could leave the city short if payouts continue at their current, growing rate.
Last year, Los Angeles City Controller Kenneth Mejia warned the city was going “broke” due to liability payouts, which reached $141 million in just the first four months of the fiscal year, requiring the taking of an emergency $80 million loan.
Tso’s report noted that cuts to essential services could actually increase costs in the long run to the potential impact on the ability to collect revenue and through inducing higher liability payments down the line.
“Further layoffs and reductions in services could have unintended consequences, including revenue collection impacts and long-term increased liability,” said Tso.
Tso said the elimination of 1,647 filled positions and 1,074 vacant positions across most city departments should start now, instead of holding out for a possible state bailout, due to the scale of the necessary cuts.
“Without legislative action from the State or a labor agreement, it would be unwise to pause the layoff process while awaiting the State’s May Revision to the Governor’s Budget,” said Tso. “The layoff schedule included in the Proposed Budget is already ambitious, and any delays would increase costs to the General Fund by tens of millions of dollars each month.”
Should a recession hit this year, Los Angeles Chief Administrative Officer Matthew W. Szabo says the city’s balanced budget proposal could fall $187 million short, rising to a $406 million deficit for fiscal year 2026-2027.
