Report Warns of Deepening Fiscal Challenges as Revenues Drop, Reserves Dwindle
The City of Los Angeles is facing a projected $140 million revenue shortfall for the current fiscal year, largely due to declines in business and sales tax collections, according to a newly released Revenue Forecast Report. The report, compiled by the office of the Los Angeles City Controller, Kenneth Meija, provides an assessment of the city’s fiscal health and estimates revenue projections through June 2026.
The findings raise concerns over the city’s ability to balance its budget, particularly as it grapples with declining revenues, rising costs, and the financial burden of recent wildfires.
The report indicates that key revenue sources, including business taxes, sales taxes, and income from grants, licenses, and fines, have all fallen below expectations. The city’s general fund revenue for the current fiscal year is projected to be $7.89 billion, a decline from the budgeted $8.03 billion. For fiscal year 2025-26, revenue is estimated to fall slightly to $7.82 billion.
Adding to the city’s financial strain, last year’s budget deficit forced officials to withdraw $358 million from the city’s general fund reserves, prompting hiring freezes and spending cuts. The latest financial status report projects an additional $300.5 million in overspending this year, meaning further withdrawals from reserves may be necessary to balance the budget.
If current spending trends continue, the city’s reserve fund could drop from $648 million two years ago to just $263 million, falling dangerously close to the threshold that would require the City Council to declare an “urgent economic necessity.”
Economic uncertainty at the national level, coupled with local challenges, has exacerbated the city’s financial troubles. The report cites several key issues contributing to the declining revenue:
- Weakened Consumer Confidence: Uncertainty surrounding federal policies on tariffs, spending cuts, and immigration has led to decreased consumer spending.
- Entertainment Industry Slowdown: Production declines have impacted Southern California’s economy, reducing tax revenue from the film and television sectors.
- Inflation and Housing Market Challenges: Rising costs have stifled consumer spending and delayed new real estate developments, limiting revenue from property and sales taxes.
- Impact of Wildfires: The Palisades and Eaton wildfires have caused significant property losses, disrupting tax collections and adding to the city’s financial strain.
- Insurance Costs: Increases in home and business insurance premiums could further depress consumer spending.
- Shift in Work and Retail Trends: The continued rise of remote work, automation, and online shopping has eroded traditional tax revenue streams, such as business taxes and sales tax from brick-and-mortar retailers.
While the city hopes for economic recovery, the report warns that a potential recession or additional natural disasters could worsen the financial situation.
- Property Tax: Expected to increase by 3.2% in 2025-26, generating an additional $89 million.
- Sales Tax: Projected to decline by $40 million in 2024-25 before recovering with a 2% increase next year.
- Business Tax: Estimated at $792.8 million, with non-cannabis business tax revenue rising 2.9% while cannabis tax revenue declines by 15% due to new legislation.
- Utility Users Tax: Projected to increase by $3 million due to higher utility rates.
- Documentary Transfer Tax: Expected to see a modest 1.8% increase following a slowdown in real estate transactions.
The city’s structural deficit and increasing liabilities mean that budget cuts, revenue adjustments, or additional borrowing may be necessary in the coming fiscal year.
Officials warn that without long-term financial planning, Los Angeles could face prolonged deficits that jeopardize essential services, infrastructure repairs, and public safety programs.
In an effort to stabilize the city’s finances, Mayor Karen Bass has proposed a long-term capital infrastructure strategy, focusing on sustainable investments and fiscal responsibility. However, financial analysts caution that unless the city implements structural budget reforms, future deficits will continue to threaten its ability to provide services to its four million residents.
“We cannot continue to rely on short-term budget fixes while ignoring the growing financial pressures we face,” the report states. “A multi-year strategy is necessary to ensure that Los Angeles remains financially sustainable while meeting the needs of its diverse communities.”
City officials and the public will have a chance to weigh in on the upcoming budget during a series of hearings scheduled for later this year. The final budget for 2025-26 must be approved before July 1, 2025.
