LA's budget woes spark debate on state bailouts and fiscal responsibility in California's cities. (CalMatters/Jules Hotz)
- LA's budget deficit has ballooned to $1 billion, with city officials seeking state aid amid fiscal challenges.
- The request for $1.89 billion in state funds uses recent wildfires as justification for a financial bailout.
- Experts warn that bailing out LA could set a dangerous precedent for other struggling California cities.
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This commentary was originally published by CalMatters. Sign up for their newsletters.
As fate would have it, the very destructive and deadly wildfires that swept through Los Angeles neighborhoods this year erupted as its city officials were struggling to close a large gap in their budget.
At the time, the city’s deficit was estimated to be $600 million, but this month it was updated to nearly $1 billion.
LA’s Growing Structural Deficit
It would be tempting to attribute the larger shortfall to the fires, and they undoubtedly are a factor. But City Controller Kenneth Mejia has repeatedly warned Mayor Karen Bass and city council members that the city was overspending vis-à-vis revenues, creating a growing structural deficit.
From his first warnings in 2023, Mejia consistently warned city officials and the public about “financial trouble including less-than-expected revenues, increased liability payouts, and increased payroll costs and the effects this has had on the city’s budget, departments, and services,” his office said in a news release last week.
In a letter to Bass and other officials, Mejia noted that years of overspending revenues had drained much of the city’s reserves, leaving it ill-prepared to cope with such volatile factors as fire-related effects on revenues and spending and President Donald Trump’s “radical policies on tariffs, federal spending cuts and immigration.”
“Given the city’s ongoing structural deficit and new challenges, there will be a temptation to make more optimistic assumptions in the upcoming budget,” Mejia said in his letter. “Certainly we hope the actual performance will be greater than our estimates. Given all the uncertainties facing our city, it will be more prudent not to count on positive potential overcoming adverse realities.”
Related Story: $165 Billion Revenue Error Continues to Haunt California’s Budget
Similarities to State Budget Deficits
Los Angeles’ background of fiscal imprudence bears a remarkable resemblance to the state budget’s chronic deficits — overly optimistic revenue projections leading to unsustainable levels of spending — and it should be kept in mind as LA politicians try to get a bailout from the state.
This week the city’s legislative delegation formally asked the Legislature’s budget committees for a $1.89 billion appropriation “to address the City of Los Angeles’ urgent disaster recovery efforts following the devastating fires this past January, which displaced thousands, destroyed businesses and damaged critical infrastructure.”
Clearly the request — which must have originated in City Hall — uses the fires as a smokescreen to rationalize a bailout for a deficit that is fundamentally the result of years-long fiscal malpractice.
Related Story: Costly Health Care Expansion Worsens California’s Chronic Budget Deficit
The Slippery Slope of Bailouts
Gov. Gavin Newsom and legislators will feel tremendous pressure to give Los Angeles what it wants, but doing so would be a step onto the proverbial slippery slope.
Los Angeles, unfortunately, is not the only city or local government feeling the fiscal pinch for roughly the same reasons. During and after the COVID-19 pandemic public spending soared, in large measure using many billions of dollars in federal disaster aid.
And when Uncle Sam closed his wallet, local governments were stuck with higher salaries and other spending increases they had lodged in their budgets. San Francisco, Oakland, Sacramento and many other cities are facing severe deficits, along with many school districts.
Should Newsom et al bail out Los Angeles, these other local entities will demand similar largesse from a state budget already hemorrhaging red ink and that faces the likelihood of deficits at least through the remainder of Newsom’s governorship and probably longer.
“Our short-term focus on year-to-year balance neglects the need for a multi-year transition to service models that allow the city to live within its means,” Mejia tells other city officials in this month’s letter. “We have consistently recommended specific budgetary reforms that are even more urgently needed in the face of the manifold challenges confronting us.”
It’s good advice and is similar in tone to the cautions Newsom and legislators have received from their budget advisors — and often ignored.
This article was originally published on CalMatters and was republished under the Creative Commons Attribution-NonCommercial-NoDerivatives license.
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