Revenue shortfalls, rising liability payouts and departmental overspending contributed to a second consecutive annual budget deficit for Los Angeles, City Controller Kenneth Mejia reported.

On Wednesday, the controller’s office released its Annual Comprehensive Financial Report for the 2024-25 fiscal year, which ended June 30, 2025. While the report recognized that L.A.’s deficit is a “culmination of decades of unsustainable budgeting,” it also found that crumbling infrastructure and reduced city services have worsened since 2023.

Mejia repeated his urgent call for Mayor Karen Bass and the City Council to make “bold” governmental reforms.

“We’ve gone from record levels of General Fund Reserves of $648 million two fiscal years ago to $420 million,” Mejia said in a statement. “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.”

Report highlights included:

— Revenues came in $160 million below budget projections, prompting the City Council and Bass to tap reserve funds to cover the shortfall

— Liability claims represented the largest area of overspending, exceeding the $87 million budgeted by $199 million — more than 228% — for a record total of $287 million during the fiscal year. Departments with the highest liability payouts included police ($152 million), street services ($44 million) and transportation ($20 million)

— Capital improvement projects accounted for the largest area of underspending, with the city spending $25 million, or 19%, of the $131 million allocated for the category

— Revenues increased by $234.9 million, or 3.4%, from fiscal year 2023-24, primarily due to higher property and business tax collections

— Expenditures rose by $63.8 million, or 0.9%, from fiscal year 2023-24, largely driven by increased salaries and employee benefits

Mejia urging city leaders to curtail prolonged overspending.

“Although we are halfway through the current fiscal year, the city continues to have General Fund budget challenges. The current fiscal year’s budget assumes modest revenue growth, however revenue has been relatively stable during the first half of the year,” Mejia said.

Unchecked overspending and liability claims will be the cause of financial troubles, Mejia added.

“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,” Mejia said.

The controller also recommended that elected officials adopt a two-year budget, implement a comprehensive capital infrastructure program and pursue a more transparent budgeting process.

He further urged Bass and the City Council to expand Los Angeles’ tax base rather than relying primarily on additional sales taxes, such as a vacancy tax or levies on rideshare companies and autonomous vehicle operators.

Mejia also called for stronger accountability measures for departments that overspend or generate liability claims, along with consideration of performance-based and participatory budgeting models.

“Guiding the city back to fiscal health will not be easy, but we can do it. I know we can. It will only get harder the longer we wait,” Mejia said.

In response to the controller’s annual report, Bass expressed appreciation for Mejia’s “diligence in forecasting revenues and anticipating trends that will impact our budget outlook in the next fiscal year.”

She pointed to what she described as promising trends — including rising property and business tax revenues — that could help bolster the city’s finances. Bass said the city will work to address “City Hall inefficiencies” and reduce costs.

She added that those efforts can continue alongside initiatives to reduce homelessness, lower crime, clean city streets, repair broken street lights and strengthen neighborhoods ahead of upcoming major events.

“I look forward to continuing to work in partnership with Controller Mejia on these priorities as we proceed into ’26-27,” Bass added.

In a statement, City Councilmember Eunisses Hernandez, a member of the council’s Budget and Finance Committee, said the report reinforces concerns that the city cannot rely on short-term fixes amid growing structural deficits.

“Years of draining reserves, soaring liability payouts, and underinvestment in infrastructure have left us in a perilous financial position that our communities are now forced to absorb. We need transparent, multi-year budgeting rooted in long-term planning and fiscal responsibility,” Hernandez said.

The full report is available at https://pafr25.lacontroller.app/.