Los Angeles officials on Tuesday raised new warnings about Mayor Karen Bass’ proposed budget, saying the city’s improved financial outlook could quickly unravel as rising costs and ballot measures threaten nearly $1 billion in potential revenue.
The $14.85 billion spending plan for the 2026-27 fiscal year avoids layoffs and is supported by stronger-than-expected revenues, including a projected $120 million surplus this fiscal year. But officials warned that much of that growth is already spoken for, leaving little room to expand services as the city faces potential revenue losses.
Much of that risk stems from measures expected to go before voters in November that could significantly reshape the city’s finances. One proposal backed by a group of business leaders to repeal the gross receipts tax could strip nearly $800 million from the general fund, forcing severe cuts to public safety and other core services, officials said.
“Combined, the gross receipts tax repeal and a document transfer tax repeal would eviscerate a billion dollars of revenue from the general fund with no replacement,” said Councilmember Katy Yaroslavsky, chair of the Budget and Finance Committee. “If that happens, this conversation changes completely, and it would be an unmitigated disaster.”
City Administrative Officer Matt Szabo told the committee that even without those external threats, the proposed budget faces structural challenges. Of the roughly $412 million in increased revenue in the proposed budget, about $363 million is already committed to employee-related costs, including salaries, pensions and benefits.
That leaves little room to expand services, even as departments continue to report staffing shortages and reduced capacity after years of cuts.
“We are not in a position to restore those resources this year,” Szabo said, adding that some departments have been diminished to the point where delivering basic services is becoming difficult.
The city is also projected to face a $187 million structural deficit in the 2027-28 fiscal year, Szabo said. That outlook assumes no recession, no expansion of services beyond what is currently proposed, and only modest growth in labor costs, factors that could further worsen the city’s financial position if they change.
While revenues have improved, driven by higher business, sales and utility taxes, officials noted that the gains are largely tied to current year overperformance rather than long-term growth. Economically sensitive revenues are projected to grow at a slower pace than historical averages.
At the same time, several financial warning signs remain. The city’s reserve fund meets its minimum requirement at 5.7% of general fund revenues but falls short of its short-term goal of 10% when combined with other reserves. The proposed 2026-27 budget projects reserves of $722 million, or 8.4% of the general fund revenues, at the start of the next fiscal year on July 1. Capital and technology investments also remain below the city’s policy target for the third consecutive year.
Budget officials also identified several underfunded or uncertain costs, including a $10 million shortfall in Palisades fee waivers, at least $8 million in street lighting obligations, about $19 million in pension obligations, roughly $7.7 million for police civilian staffing and a potential $38 million gap in homelessness reimbursement, as the budget may overestimate county funding.
Councilmembers also pressed officials on spending priorities and tradeoffs.
Councilmember Bob Blumenfield raised questions about changes to discretionary funding for council districts, including a reduction in homeless services funding and the consolidation of several spending categories into a single “Council Projects” fund.
Councilmember Eunisses Hernandez questioned the city’s ongoing spending on police helicopters, asking for an updated analysis on their use, costs and overall need.
Yaroslavsky expressed frustration over delays in moving forward with a council-approved solar streetlight program, calling it a public safety issue.
Beyond the budget itself, officials warned that future labor agreements could have an even greater impact on the city’s finances. With wages and benefits accounting for roughly 80% of spending. Szabo said the most consequential fiscal decisions may come outside the formal budget process.
“The single most consequential budget decision the City Council will make next fiscal year will not take place through the budget process,” he said, pointing to upcoming negotiations with police and other employee unions.
Budget hearings are expected to continue in the coming weeks, with council members weighing potential changes before adopting a final spending plan before the fiscal year begins July 1.