L.A. faces $1 billion budget hole, warns of thousands of layoffs

Los Angeles is facing a projected deficit of nearly $1 billion in the next fiscal year as the city grapples with the aftermath of historic wildfires and a deep decline in revenue.

A key budget official painted a grim picture of the city’s finances at a council meeting on Wednesday. Warnings included the possibility of thousands of layoffs and “extremely difficult cost-cutting decisions” that will be required to close the gap, said Matthew Szabo, the city administrative officer. The shortfall is about 13% of the adopted budget, a threshold he called “extraordinary.”

“This is an enormous hole to fill,” he told city council members. “The severity of the revenue decline paired with rising costs has created a budget gap that makes layoffs nearly inevitable. We are not looking at dozens or even hundreds of layoffs, but thousands.”

The stark statements offer a first glimpse into what is expected to be a challenging budget cycle for Mayor Karen Bass, a Democrat who is set to unveil her spending proposal next month. Most U.S. cities can’t operate at a deficit, so her plan is poised to include cost-cutting efforts. On Wednesday, she directed Szabo’s office to game-plan ways to save between $500 million and $900 million in structural budgetary expenses.

“We must deliver fundamental change in the way the city operates,” Bass said in a letter. Her directive asked for plans to change the number, structure and responsibilities of departments, cut contract expenses and find payrolls savings.

Cities across the U.S. are facing tough budget decisions this year as inflation raises costs and pandemic-era stimulus aid sunsets. Chicago’s city council passed a 2025 budget that closed a nearly $1 billion deficit and in San Francisco, the city is projecting a budget shortfall of about $876 million for the 2026 fiscal year.

The municipalities, already facing a squeeze, could see further pressures from federal government cuts. President Donald Trump has threatened cities that don’t comply with his immigration agenda while educational institutions are already cutting staff and freezing some spending.

In Los Angeles, the negative forecast is driven by declining revenue coupled with rising costs related to January’s wildfires. Revenue is expected to drop $315 million below projections for the next fiscal year that begins July 1, Szabo said. When asked by Councilmember Eunisses Hernandez for a historical comparison to understand “the gravity” of the current situation, Szabo pointed to 2009, which was the first budget cycle after the 2008 financial crisis.

Also, the city has underbudgeted costs for legal settlements which has further pressured its finances, Los Angeles Controller Kenneth Mejia said in a report last month.

Complicating the outlook are rapid federal policy changes, including uncertainty around trade and its impacts on inflation. Plus, the Trump administration’s immigration crackdown risks shrinking the construction labor pool, hindering the city’s ability to rebuild after the fires.

“The construction industry in the state of California is estimated to be about 40% undocumented, and due to the fires, there is nowhere in the country where demand for construction and construction-related services will be higher than here in Los Angeles,” Szabo said.

The extent of property damage from the fires is likely to significantly weigh on property tax revenues. Mejia said the scale of economic losses in the region will likely offset any stimulus from the clean-up and recovery efforts.

Earlier this year, S&P Global Ratings and Fitch Ratings placed negative outlooks on the city’s bond rating, signaling downgrades are more likely.

“Immediate spending reductions are required and this body needs to prepare for further reductions if revenues continue to decline,” Szabo said. “When the gap between expenditures and revenue approaches a billion dollars, it is not possible to close that gap without looking at reduction of some services somewhere in the city.”