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 the Fire Department, liability claims and police and city attorney costs. - Fire Department: the CAO identified roughly $54.3 million tied to sworn labor cost increases and additional overtime related to the wildfire response; those items are folded into the department's overspend projection. - Liability payouts: projected to reach about $320 million by year end, the CAO said.

Recommended near-term solutions and limits Szabo and his team identified about $190 million of near-term solutions. The report breaks that down, in part, as about $175 million from an unappropriated midyear adjustment balance and roughly $70 million from the reserve fund, along with approximately $76 million in recommended reductions to departmental accounts. The CAO said the report also identifies a further $30 million in potential FEMA-eligible wildfire-response solutions and that even with these items there would remain roughly $80 million of unresolved overspending.

The CAO's reduction recommendations emphasize salary-account savings (the report flagged about $13.7 million in salary savings) and reductions to contractual services. Szabo told the committee that the reductions in the report do not include any position eliminations. He said departments were asked to propose reductions that minimize service impacts; the report notes some service curtailments, the most visible being a recommendation to delay the expansion of the Care and Care Plus program from two to five days until FY 2025-26.

CAO and staff explanations; FEMA timing Patty Huber of the CAO's office said the city's FEMA application for wildfire assistance was submitted in January and the city is waiting for FEMA to begin its portion of the process. Huber said the CAO's office expects a recovery scoping meeting with FEMA in April and that reimbursement timing will vary by project type: emergency-response costs can be documented and submitted relatively quickly, while reimbursement for work that requires construction typically follows project completion.

Judgment obligation bond The CAO reported that the office no longer recommends pursuing a judgment obligation bond this fiscal year because of timing constraints and because many liabilities under consideration could not be validated for bond issuance in a manner that would be usable this year.

Questions from council members Committee members pressed the CAO on process and service impacts. Councilmember Tim McCosker asked how the reduction proposals were developed with general managers; Jacob Webster of the CEO's office described a process that began with targets communicated to departments and then iterative discussions with analysts. Councilmember Heather Hutt and Councilmember Nury Martinez (the chair) asked about staffing, hiring implications of salary-account changes, and how the proposed midyear reversions would affect next year's baseline.

Department-level impacts discussed in the meeting - Department on Disability: the CAO recommended a $312,497 reduction in contractual services for the city's AIDS/HIV prevention programs; Department on Disability staff and Executive Director Steve Simon told the committee this cut could reduce naloxone distribution, syringe collection and testing/referral services if applied across all vendors, and the council later moved a direction asking the CAO to identify funding to restore contractual services (motion introduced; outcome not recorded in the transcript excerpt). - Bureau of Street Services / Street Resurfacing: staff warned that the Street Damage Repair Fund (SDRF) is projected to be roughly $25 million below budget for the year and that, because multiple departments rely on SDRF, a shortfall could require hard choices about paying past-due emergency work or reducing planned pavement preservation. The CAO said a separate, forthcoming report will recommend options. - Los Angeles Sanitation and Environment: General Manager Barbara Romero said her office will finish a cost-recovery study on the Solid Waste Revenue Fund and brief the committee; she also said the recommended delay to Care and Care Plus expansion would leave street clean-up and encampment transition services at current levels rather than expanded ones. - Department of Transportation: staff said parking fine revenues were down and that enforcement staffing shortages, and a temporary warning period for new bus-lane camera enforcement, are factors.

Vote and amendments The committee approved the CAO's midyear financial status report as amended. The final motions approved by the committee included a set of consent approvals for many agenda items and a separate vote on item 1. The committee also approved placing $150,000 aside for a Los Angeles Fire Department after-action report in the unappropriated balance pending scoping discussions. Councilmember Matt Blumenfield, Councilmember Tim McCosker, Councilmember Heather Hutt, Councilmember Mike Yaroslavsky and Councilmember Hydee Feldstein (via roll-call transcript entries) voted in favor; the roll calls in the transcript show the final vote on item 1 as five ayes.

What happens next Szabo told the committee this report is the beginning of a multistep process and that additional reductions and structural changes to the budget may be required in the coming months to address a projected multiyear gap. The CAO and departments are preparing follow-up reports on SDRF, litigation and reserve strategy, and FEMA reimbursement timing, all of which the committee asked to receive as soon as possible.

Ending The committee approved the midyear report as amended and directed the CAO to return with additional detail on department impacts, FEMA timing and liability-reduction strategies ahead of next fiscal-year budget development.