Long Beach closes fiscal year with $40M deficit; larger structural shortfall looms – Press Telegram

Long Beach city leaders are grappling with how to handle its worsening financial position as external economic forces — including federal and state funding cuts and declining tax revenue — put pressure on the city’s fiscal future.

The city ended fiscal year 2025 with a gaping $40 million deficit in its general fund, representing a major increase in Long Beach’s original projection of a $20.3 million structural shortfall when the budget was adopted in September 2024.

Since May, officials had been warning of increased pressure on the city’s budget, with City Manager Tom Modica issuing a memo directing all departments under his office’s authority to reduce their spending by 0.5% to 1% through the remainder of the 2025 fiscal year, aimed at generating as much savings as possible to roll-over into the FY26 budget.

But even with those measures in place, the deficit continued growing over the past year. While the $40 million gap in the FY25 was balanced with city reserves and one-time funds, concern for the city’s long-term financial outlook remains as the Long Beach’s projected structural shortfall for the upcoming fiscal year now sits in the $60 to $80 million range, according to a Tuesday, Feb. 17, city staff report.

The City Council approved several recommendations to balance the FY25 budget, which were outlined in that staff report, during its Tuesday meeting.

“I don’t think it is any surprise that we’re in a very turbulent economy right now, everything from tariffs to inflation to changing policies,” City Manager Tom Modica said in a Thursday morning, Feb. 19, interview. “And it really does have impacts on the federal level, the state level and then the local level.”

One of the key issues driving the deficit, Modica said, is lower-than-expected tax revenues. Long Beach’s revenue is derived from three main sources: property tax, sales tax and utility users tax.

But because Long Beach residents — like people across California and the nation — are experiencing higher costs-of-living, it means they’re spending less money and holding on to their assets when possible.

“When our residents are worried about their economic situation, they’re not spending a lot of money; they’re pulling back on purchases,” Modica said. “They may choose not to sell a home at this time; they may choose to just cut wherever they can. All of that affects the city as well.”

In total, those key general fund revenue sources ended FY25 at about $26 million less than what was anticipated, the staff report said. Total property tax revenue came in $9.3 million lower than expected, utility users tax fell short of the city’s estimates by $13.7 million, and sales and use tax came in at $4 million less than expected, according to the staff report.

“Our three top revenue sources are property tax, sales tax and utility taxes, all three of which are significantly below where they were expected to be,” Modica said. “And so part of that drives about a $26 million drop in revenue in the past fiscal year, which is pretty significant.”

Long Beach was also expecting higher revenue on utility users tax from Measure LB, which voters approved in 2024. That measure ended the UUT exemption for two large power plants in the city. Long Beach expected $7.5 million in new UUT revenue from Measure LB during fiscal year 2025, but it “did not fully materialize,” according to the staff report.

Since Measure LB was implemented midyear, the city counted on about half of the new revenue coming in during 2025, with the full $15 million expected to be realized during FY26, Modica said.

“We don’t know,” Modica said about why the $7.5 million didn’t come through. “That is very surprising (and) it’s coming in pretty low.”

The amount of tax businesses pay, Modica said, is proprietary information, but Long Beach shared its estimates about what the new revenue would look like with them, and the companies said the estimates looked accurate.

Besides the issues with tax revenue, Long Beach is also dealing with the loss of key federal and state funding. The city’s Department of Health and Human Services — one of three independent health departments in the state which has historically relied on grant funds instead of structural city funding — has been hit particularly hard by changes to federal and state funding.

Several health department programs, for example, shuttered in 2025 after the loss of federal funding, including some HIV and STI services, the Fundamentals of Fatherhood program, the department’s resource line and, most recently, the Healthy Active Long Beach, which had been in operation for more than 20 years.

And last week, the city lost another $9 million grant that typically paid for “health infrastructure,” including analytics and health studies, Modica said.

“We rely on a lot of dollars from federal, state, especially in the area of the health department.  There’s money coming from the state that provides some of the core services, but that has stayed flat for many, many years,” Modica said, “and the cost of providing those services keeps going up. Grants from the state, federal and (Los Angeles) county is what really funds health department services, and we’ve seen pretty dramatic cutbacks on the federal level and less opportunity at the county and the state level as well.”

In previous years, the city would typically need to allocate around $1 to $2 million from the general fund to support the health department’s operations, Modica said. But for FY25, because of those funding cuts, the department’s deficit rose to $14 million, requiring a $10 million infusion from the city’s general fund to keep its core services up and running — and contributing to the general fund deficit.

Long Beach has contracted Health Management Associates to conduct an evaluation of the health department’s programs, funding strategies and cost structures, and a cost-benefit analysis of existing grants, as well as to look into unfunded projects and programs that could be burdening the general fund, according to the staff report.

“(The study) will give a really good road map of the expenses in the health department and what some of the challenges are,” Modica said.

That report, he said, is expected to be released in the next couple of weeks.

The remaining $4 million gap “will come out of the rest of the health department fund balance,” Modica said. “That’ll be drawn down, and then that’s where the general fund steps in and takes any of the extra.”

As for balancing the $40 million general fund deficit for FY25, Long Beach relied on its reserves and some one-time funding.

“There really are kind of two different reserves: There’s the emergency reserve, which is absolutely not being touched,” Modica said, “and then there’s an operating reserve, which is designed kind of like a rainy day fund. You put money into it, then when you need to draw down from it — if you have a certain circumstance, like a big drop of revenue — then you can draw, and we are using the operating reserve this year.”

In total, 43%, or $7.8 million, of the city’s operating reserve was used to help balance FY25, alongside a variety of one-time set asides from various funds, including:

$20.3 million from the Long Beach Recovery Act’s “Securing Our City’s Future” fund.
$2.5 million from the Cannabis Tax Credit Pilot reserve.
$7.2 million originally set aside for Americans with Disabilities Act liability requirements (which are scheduled to be fully funded in the coming years, the staff report said).
$5.5 million from pandemic response set-aside funds (established with funds from the federal CARES Act).
$1.7 million originally set aside to support COVID-19 disaster response.
$1.4 million from Police Department savings originally earmarked to fund a new Police Crime Lab (the city plans to seek alternative funding for the project, which remains on schedule).
$600,000 originally set aside in FY23 to establish a funding source for facility repairs.

Those “set asides,” Modica said, is money Long Beach put away to cover potential liabilities in the future.

“It’s different than in an actual operating reserve, but it’s money just like in your own personal account. If you know you’re going to have to pay for college expenses, you might say, I’m going to put some money aside for college expenses,” Modica said. “And then if you don’t go to college, or if you got a scholarship, then you don’t have to use that money anymore — and that can be used for something else.”

But before Long Beach considered using city operating reserves and other set-aside funds to help balance the budget, the city “implemented a range of corrective actions to reduce the size of the deficit,” the staff report said, including reviewing expenditures, adjusting planned spending and reviewing unspent one-time funds.

While the city initially asked its departments to reduce spending by about 1% in May 2025, Modica said, that percentage was upped to about 3% in December when the declines in expected revenue came to light.

“Departments are working on how to defer certain expenses. They’re different (from) budget cuts — this is more tightening the belt,” Modica said. “It won’t be completely easy; whenever you do that, there will be some sort of impact. But our goal is really to have the least amount of impact on publicly facing services.”

And besides working to reduce spending, Long Beach has been trying to bolster its revenue generation over the past several years, including through the Grow Long Beach initiative.

That plan, approved by the City Council in 2023, outlines key strategies to grow the local economy and identify pathways to transition from oil reliance by bolstering other key industry sectors, such as aerospace and aviation, tourism and hospitality, health care, and education, among others.

Since then, the city has added more than 4,100 jobs to the local economy; bolstered its status as a hub for automotive and aerospace manufacturing, with investments from major companies like Toyota, Mercedes-Benz, Ford, Rocket Lab, Vast Space and Anduril; and implemented programs to support local business.

Long Beach also recently approved a new advertising opportunity, which will improve wayfinding and advertise local businesses in downtown, which is expected to generate about $1 million of new revenue yearly, Modica said.

One major investment Long Beach is making in the local economy, of course, is the new Long Beach Amphitheater. Construction on the temporary waterfront venue near the Queen Mary broke ground in January — and is expected to open this summer. The project is estimated to cost about $21 million, which is being funded by the city’s Tidelands Fund (which is largely composed of oil revenue) alongside public-private sponsorships, including a $650,000 annual investment over five years from the Port of Long Beach.

And as soon as the venue is up and running, the city said previously, it is expected to generate $2.5 million to $3 million in net operating income annually without any reliance on taxpayer money. There are already 25 events scheduled to take place during its inaugural season, with more than 40 events expected by 2027.

“We constantly get people saying, well, if you have a budget deficit, why are you building an amphitheater?” Modica said. “It’s completely separate funding sources — the money for the amphitheater cannot be used to help the general fund.”

And the amphitheater is expected to attract countless tourists to the downtown and waterfront, Modica said.

“It’s getting people to come into Long Beach from outside to pay expenses, to visit our restaurants, to stay in our hotels,” Modica said. “All of that helps.”

But despite those actions, there may be some tough decisions on the horizon as Long Beach begins the FY27 budgeting process, working to balance the projected $60 to $80 million general fund shortfall.

“And then during the FY 27 budget process, we’re going to have to have a conversation about what service levels can we afford at what levels,” Modica said, “and make that a very public process, and talk to the community and the (City Council) about that.”

In all, Modica said, the budget issue is largely revenue-based, and highly dependent on the health of the local, state and national economies.

“Just like our residents, we’re seeing some very uncertain things happening in the economy; they’re taking action and we are as well,” Modica said. “When the economy is not doing well, your revenue drops, and we have to adapt to that. This is something we go through.”

Budget deficits, Modica added, tend to go in cycles. Long Beach, in the past few years, has been able to maintain services and even grow them in some cases, he said — but the cycle has come back around.

“(City) management has experience doing these things and managing the budget, and the City Council has strong fiscal policies too, to make sure that we’re aligning expenditures with revenues,” Modica said. “But budget deficits tend to go in cycles. Due to the economy, we’re starting to see that, and we’ll make the corrections we need to.”

Information about the FY27 budget cycle, including community meetings, can be found at longbeach.gov/FY27.