CAO warns of deepening budget shortfall; council approves midyear report with $190 million in solutions and further reductions to consider

CAO Matt Szabo told the Budget and Finance Committee that the city faces "serious financial headwinds," driven by lower-than-expected tax receipts, wildfire-related costs and rising liability and labor payouts, and recommended initial actions that together total about $190 million while warning that more, deeper reductions will likely be required.

Szabo said revenues through January totaled about $3.7 billion, roughly $13 million below plan. He told the committee that property, sales and transient-occupancy tax shortfalls together account for more than $50 million of the gap and that both the city administrative officer and the city controller now project a materially larger year-end shortfall. "It is near certainty at this point that by year end our revenues will be well below our adopted budget," Szabo said.

Why it matters: the CAO said the actions in the report would reduce immediate pressure on the General Fund but leave about $80 million in unresolved overspending and that the city's reserve would fall from the adopted expectation of 5% to about 3.22% if the committee approves the report. Szabo repeatedly cautioned the committee that the report is an initial step and that further, more significant reductions will be needed if revenues continue to weaken.

Key numbers and problems - Revenues through January: about $3.7 billion, roughly $13 million below the adopted plan (reported by Matt Szabo). - Controller projection: the city controller had released an analysis projecting a $140 million year-end shortfall; the CAO said his office agrees with that assessment. - Longer-term risk: the CAO referenced a four-year outlook in which FY 2025-26 revenues could be as much as $320 million below current projections; combined pressures could push the multiyear gap toward $400 million. - Expenditures: the CAO reported a projected $300 million of overspending this year, driven principally by…