Los Angeles is staring down a staggering $1 billion budget shortfall for the 2025-2026 fiscal year, a financial crisis that could lead to deep service cuts, fee increases and thousands of potential layoffs.
The shortfall, driven by weakening tax revenues, rising liabilities, federal policies and the impact of the recent wildfires, has left city officials scrambling for solutions.
While the full scope of potential budget cuts remains uncertain, early proposals suggest difficult choices ahead. As the Los Angeles City Council prepares for budget discussions next month, Los Angeles Daily News breaks down the key issues and what they mean for Angelenos.
1. How severe is the budget deficit?
City Administrative Officer Matt Szabo said the gap between anticipated revenues and planned expenditures for Fiscal Year 25-26 is nearly $1 billion.
“The proposed budget the mayor will deliver to this council in just over a month from today will close that gap,” Szabo said in a presentation during the City Council meeting on Wednesday, March 19. “But it will require extremely difficult cost-cutting decisions.”
“The severity of the revenue decline, paired with rising costs, has created a budget gap that makes layoffs nearly inevitable,” Szabo added. “We are not looking at dozens or even hundreds of layoffs, but thousands.”
The closest comparable budget crisis Los Angeles faced was during the 2009-2010 fiscal year in the wake of the Great Recession. At that time, the city had a $500 million deficit on a $5 billion general fund budget. In contrast, the current $1 billion shortfall on an $8 billion budget is even more severe.
“The budget outlook is bleak and it’s imperative that the Mayor and Council question what is a true core city service and transparently decide what we can and cannot afford to do,” Councilmember Bob Blumenfield, who sits on the City Council’s Budget and Finance Committee, said in a statement Thursday.
2. What are the primary factors contributing to the shortfall?
Los Angeles’ budget deficit has been exacerbated by slower-than-expected revenue growth, with key sources like business taxes, sales taxes, and hotel taxes falling short of projections, Szabo said. At the same time, rising costs—particularly for liability claims and labor agreements—have widened the gap, leaving the city with few easy solutions.
City Controller Kenneth Mejia on Thursday pointed to three main drivers of the deficit: overestimated revenue projections, surging liability payouts, and steep increases in payroll costs.
“So for the next fiscal year we’re estimating that we’re actually going to be nearly $300 million short compared to what the city was planning to receive in general fund revenue,” Mejia said.
“So, when you have that $300 million shortfall in revenue, the city tried to base how much they were going to spend on that amount,” he added, “and if that money doesn’t come in, which we’re projecting that it’s not, then there needs to be a lot of different ways to address that issue because the spending is going to be high.”
Councilmember Katy Yaroslavsky, who chairs the Budget and Finance Committee, attributed the financial crisis to years of short-term budgeting and an over-reliance on a volatile revenue model.
Yaroslavsky said in a statement on Thursday, March 20, “These structural weaknesses have been exposed by slower-than-expected growth, chaos out of Washington, rising liability costs, and labor agreements based on stronger revenue projections—challenges that have only been compounded by the recent wildfires.”
But Christopher Thornberg, founding partner of consulting firm Beacon Economics, said Los Angeles’ financial troubles are largely self-inflicted–the result of overspending during a period of unsustainable revenue growth.
“Look, the city has been spending money like crazy,” he said. “They have been spending a lot of money on homelessness. They’ve been increasing wages and benefits for city employees dramatically, even as the economy has downshifted a bit.”
A few years ago, Los Angeles saw a surge in revenues, driven by rising real estate prices and strong consumer spending. This temporarily boosted tax collections, creating a false sense of long-term growth, Thornberg said.
But as revenues slowed, the city kept increasing spending, making long-term budget commitments based on what turned out to be a temporary boost, he said. As a result, Los Angeles—along with many other California cities, including San Jose and San Francisco—is now facing major budget shortfalls.
3. What are the budget deficits’ impact on residents and services?
Szabo said the nearly $1 billion shortfall will have unavoidable consequences, including layoffs and reduced funding for essential programs.
“When the gap between expenditures and revenue approaches a billion dollars, it is not possible to close that gap without looking at a reduction of some services somewhere in the city,” Szabo said.
Mejia noted that residents are already feeling the effects of budget cuts due to hiring freezes and eliminated positions.
He said Los Angeles has been grappling with a budget deficit for two consecutive years, leading to a citywide hiring freeze implemented in January 2024. As a result, many departments have struggled to fill vacancies even when essential staff leave, making it difficult to maintain basic services.
“When you have this freeze, your services either remain the same, which is not even at the bare minimum, or it decreases because of the strict cost control measures, such as a hiring freeze,” Mejia said.
Critical operations such as public works, payroll processing and the fire department have all been impacted due to staffing shortages, he said. In July 2024, the city eliminated 1,700 positions, further straining its workforce.
If layoffs move forward as a last resort, the impact on city services will become even more severe. The city would lose not just the vacant positions, but also positions that were already filled.
“And that is the last resort, based on what I know,” Mejia said. “So the city is going to do its best to make sure we exhaust all efforts before it has to come to that.”
4. What cost-cutting measures are the city exploring?
Yaroslavsky pushes for structural reforms to prevent future deficits.
“We need to fix the underlying problems that got us here—reforming how we budget and deliver services, reducing liability costs, and making better use of city assets and revenue,” she added. “As budget chair, I’m focused on taking a responsible, long-term approach that stabilizes the city’s finances while protecting and eventually expanding essential services for Angelenos.”
While Blumenfield said “everything is on the table” when it comes to possible budget cuts, he said public safety must remain a priority, citing the Palisades fire as proof of the need for sufficient equipment forfirst responders.
Mejia advocates for several long-term measures.
He said adopting a two-year budget cycle would save time, increase efficiency, and give departments the opportunity to implement and evaluate spending decisions, instead of rushing to prepare the next budget.
He also noted that the city lacks a unified vision and instead manages an overwhelming list of scattered, one-off repair projects. Investing in infrastructure, he argued, could also help reduce the city’s liability costs.
Mejia urged greater accountability, particularly on liability payouts, and called for more honest budgeting, noting that overly optimistic revenue projections and underestimated liabilities have led to budget cuts and hiring freezes.
“If we don’t go with these more strategic approaches, like the ones we’ve recommended, then we will continue to put ourselves in this situation,” he said, “whether that’s a budget deficit, whether that is having to cut city services, cut positions, hiring freezes, that’s going to continue.”