Facing $288.6M Deficit, City Could Eliminate 2,000 Positions

LOS ANGELES, CA — A City Council committee Wednesday advanced a series of recommendations to address an estimated $288.6 million budget deficit, including the potential elimination of 2,000 vacant city positions.

The five-member Budget, Finance and Innovation Committee voted 3-0 to support cost-saving measures to balance the budget after hearing City Administrative Officer Matthew Szabo discuss the Third (Mid-Year) Financial Status Report -- which reviewed anticipated impacts to the 2024-25 fiscal year budget cycle as result of overspending, new labor contracts and revenues coming in below projections.

Council members Katy Yaroslavsky and Monica Rodriguez, who are members of the committee, were absent during the vote.

"What we are seeing are the impacts of a few years of very high inflation affecting consumer behavior," Szabo said.

The committee approved plans to cover $168.67 million of the $288.6 million deficit, which include using $86.63 million from the city's Reserve Fund. Szabo recognized the deficit, which could grow, will likely cause the Reserve Fund to drop below 5% in the 2024-25 fiscal year.

The Reserve Fund is the account used to defend the city against unbudgeted or unforeseen events that may impact the city's fiscal solvency. The city's reserve balance stands at $482 million, or 6.2% of the 2023-24 General Fund revenue, according to the financial report. The city has a policy to keep the reserve fund at or above a 5% minimum.

City officials will look to identify another $31.83 million to further reduce the deficit by the end of the 2023-24 fiscal year, with the aim of bringing it down to $88.06 million.

Szabo said the city's Prioritized Critical Hiring Process would address the $88.06 million in the next budget cycle.

City officials approved a hiring strategy in January to potentially eliminate up to 2,000 positions of "non-critical" city positions that are currently vacant. Officials say the move could save the city between $150 million and $200 million. There was a chance the plan could include priority positions for non-sworn public safety positions to be cut.

"...That is exactly the reason that we forwarded the policy for priority critical hiring," Szabo said. "That is something that we will be examining and reporting on as we close out there, but that process is generating savings every day."

Moving into next year's budget, the city will need to rely on expenditure reductions to mitigate cost increases, the report says.

Szabo, in the report, noted that city leaders may have to consider "deep cuts" in departmental expenses used for contractual services, overtime and as-needed salaries; reductions in critical capital and infrastructure spending; fee increases for full-cost recovery of city services; and re- examination of prior and ongoing funding commitments.

Szabo noted that the recommendations made Wednesday should have little impact on current service levels, calling the solutions "painless" compared to what city leaders may have to consider in the coming months.

The recommendations will now be heard by the full City Council at a later date.

There are also concerns the financial challenges could hamper the city's service delivery over the next several years, as has previously occurred during times of below-average revenue growth.

The report shows revenues through January standing at $187 million below plan, and the revenue outlook going into 2024-25 seeming "dim" as a result of inflation.

"It's unclear whether we're in a recession or not," Szabo said. "Our revenues that we rely on are softening. If we were to hit a recession, that's why we are raising the flag on the condition of the Reserve Fund."

He emphasized the Reserve Fund is not there to address emergencies or to facilitate overspending. Szabo called next fiscal year "critical" to ensure the city maintains a high level of reserves in the event of a recession.

Driving over-expenditures are the Police Department ($105.3 million), liability claims ($91.6 million) and the Fire Department ($51.5 million), accounting for 86% of overspending, the report noted.

Last year, the city approved a new four-year, multimillion-dollar labor contract with the Los Angeles Police Protective League, the union representing the rank-and-file LAPD officers. Szabo confirmed it could cost the city $1 billion over the contract's lifetime.

Overspending costs associated with the LAPD include delays in hiring and overtime projections, and LAFD costs are due to anticipated sworn attrition, increased contract expenditures as well as supplies, equipment and automotive parts.

The report also outlines concerns with liability claims, as approved and pending payouts are nearing $200 million for this fiscal year alone -- almost double the budgeted amount.

Councilman Bob Blumenfield questioned Szabo about the Unappropriated Balance account, which stood at 0%. It's the account used to address shortfalls that occur during a fiscal year.

About $30 million was placed in the UB account during the 2023-24 budget process. The money was allocated to cover costs for the first half of the fiscal year, officials noted.

City officials said it was "not surprising" that pot of money was used completely, but it is unexpected that there are more gaps to fill.

By JOSE HERRERA, City News Service