Los Angeles city skyline
LOS ANGELES — The city controller’s newly released report on Los Angeles finances pegs soaring liability claims as the prime reason for L.A.’s overspending during the 2025 fiscal year, when revenues again failed to keep up with spending.
“Our city's financial state is the culmination of decades of unsustainable budgeting, seen and felt by Angelenos across the city in our crumbling infrastructure and deteriorating services,” City Controller Kenneth Mejia said in an introduction to the report. “As our office has warned, revenue shortfalls, liability payouts and departmental overspending continue to be the cause of our budget deficit for the second year in a row.”
In the last fiscal year, the city had to compensate for its $160 million shortfall by dipping into its shrinking reserve fund, according to the Annual Comprehensive Financial Report (ACFR), which was published on Feb. 18.
The top area of overspending during the fiscal year was liability claims, the study said. In total, $87 million had been allocated in the annual budget for the settlement of claims or civil-litigation damages awards against the city, but claims actually totaled $287 million. That sum represents overspending of 228%, the controller’s data indicates.
Liability claims were primarily filed against three city departments: the Police Department ($152 million), Bureau of Street Services ($44 million) and Transportation Department ($20 million).
In the overall budget, revenues increased by $234.9 million, or 3.4%, over the previous fiscal year thanks to increased revenues from property taxes and business taxes, according to the report, but expenditures also rose due primarily to more money going to employee salaries and benefits.
Los Angeles’ situation is an illustration of the effects of excessive civil lawsuits, according to Lauren Zelt, executive director of Protecting American Consumers Together.
“Los Angeles is a clear example of what happens when liability payouts spiral out of control – every dollar spent on excessive lawsuits is a dollar that can’t go to public safety, infrastructure or the services families rely on every day,” Zelt told the Southern California Record in an email.
When municipalities must divert hundreds of millions of dollars to pay off liability claims, taxpayers bear the burden of reduced services, she said.
“It’s time to restore balance to the system and end lawsuit abuse so communities can invest in what actually makes neighborhoods safer and stronger,” Zelt said.
Mejia said the city’s budget holes were plugged by using the reserve fund, which has been whittled down from $648 million two fiscal years ago to the current $402 million.
“In addition, four rating agencies (S&P, Fitch, Moody's and Kroll) have given the city a ‘negative outlook’ with the same concerns that we have been raising over the past three years coupled with the potential liabilities and damages from the Palisades Fire,” the controller said. “The time for bold reform is now.”
Reacting to the budget report, Los Angeles Mayor Karen Bass said that while the city needs to do more to control costs, the increasing property tax and business tax revenues are a promising development.
Mejia has urged the city to adopt a two-year budget system and more accurate budgeting for liability claims, but he also warned of short-term fiscal challenges.
“... Unchecked overspending and liability claims continue to be a major cause of financial troubles,” he said. “While departments are expected to absorb or manage remaining costs, many departments are unlikely to be able to. This could result in the use of the reserve fund and, in future fiscal years, more furlough days and the risk of more layoffs.”
