Long Beach city leaders are grappling with how to handle its worsening financial position as external economic forces \u2014 including federal and state funding cuts and declining tax revenue \u2014 put pressure on the city\u2019s fiscal future.<\/p>\n
The city ended fiscal year 2025 with a gaping $40 million deficit in its general fund, representing a major increase in Long Beach\u2019s original projection of a $20.3 million structural shortfall when the budget was adopted in September 2024.<\/p>\n
Since May, officials had been warning of increased pressure on the city\u2019s budget, with City Manager Tom Modica issuing a memo directing all departments under his office\u2019s authority to reduce their spending<\/a> 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.<\/p>\n 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\u2019s long-term financial outlook remains as the Long Beach\u2019s 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.<\/p>\n The City Council approved several recommendations to balance the FY25 budget, which were outlined in that staff report, during its Tuesday meeting.<\/p>\n \u201cI don\u2019t think it is any surprise that we\u2019re in a very turbulent economy right now, everything from tariffs to inflation to changing policies,\u201d City Manager Tom Modica said in a Thursday morning, Feb. 19, interview. \u201cAnd it really does have impacts on the federal level, the state level and then the local level.\u201d<\/p>\n One of the key issues driving the deficit, Modica said, is lower-than-expected tax revenues. Long Beach\u2019s revenue is derived from three main sources: property tax, sales tax and utility users tax.<\/p>\n But because Long Beach residents \u2014 like people across California and the nation \u2014 are experiencing higher costs-of-living, it means they\u2019re spending less money and holding on to their assets when possible.<\/p>\n \u201cWhen our residents are worried about their economic situation, they\u2019re not spending a lot of money; they\u2019re pulling back on purchases,\u201d Modica said. \u201cThey 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.\u201d<\/p>\n 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\u2019s estimates by $13.7 million, and sales and use tax came in at $4 million less than expected, according to the staff report.<\/p>\n \u201cOur 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,\u201d Modica said. \u201cAnd so part of that drives about a $26 million drop in revenue in the past fiscal year, which is pretty significant.\u201d<\/p>\n Long Beach was also expecting higher revenue on utility users tax from Measure LB,<\/a> 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 \u201cdid not fully materialize,\u201d according to the staff report.<\/p>\n 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.<\/p>\n \u201cWe don\u2019t know,\u201d Modica said about why the $7.5 million didn\u2019t come through. \u201cThat is very surprising (and) it\u2019s coming in pretty low.\u201d<\/p>\n 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.<\/p>\n Besides the issues with tax revenue, Long Beach is also dealing with the loss of key federal and state funding. The city\u2019s Department of Health and Human Services \u2014 one of three independent health departments in the state which has historically relied on grant funds instead of structural city funding \u2014 has been hit particularly hard by changes to federal and state funding.<\/p>\n Several health department programs, for example, shuttered in 2025 after the loss of federal funding, including some HIV and STI services<\/a>,\u00a0the Fundamentals of Fatherhood program,<\/a>\u00a0the department\u2019s resource line<\/a> and, most recently, the Healthy Active Long Beach<\/a>, which had been in operation for more than 20 years.<\/p>\n And last week, the city lost another $9 million grant that typically paid for \u201chealth infrastructure,\u201d including analytics and health studies, Modica said.<\/p>\n \u201cWe rely on a lot of dollars from federal, state, especially in the area of the health department.\u00a0 There\u2019s money coming from the state that provides some of the core services, but that has stayed flat for many, many years,\u201d Modica said, \u201cand 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\u2019ve seen pretty dramatic cutbacks on the federal level and less opportunity at the county and the state level as well.\u201d<\/p>\n In previous years, the city would typically need to allocate around $1 to $2 million from the general fund to support the health department\u2019s operations, Modica said. But for FY25, because of those funding cuts, the department\u2019s deficit rose to $14 million, requiring a $10 million infusion from the city\u2019s general fund to keep its core services up and running \u2014 and contributing to the general fund deficit.<\/p>\n Long Beach has contracted Health Management Associates to conduct an evaluation of the health department\u2019s 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.<\/p>\n \u201c(The study) will give a really good road map of the expenses in the health department and what some of the challenges are,\u201d Modica said.<\/p>\n That report, he said, is expected to be released in the next couple of weeks.<\/p>\n The remaining $4 million gap \u201cwill come out of the rest of the health department fund balance,\u201d Modica said. \u201cThat\u2019ll be drawn down, and then that\u2019s where the general fund steps in and takes any of the extra.\u201d<\/p>\n As for balancing the $40 million general fund deficit for FY25, Long Beach relied on its reserves and some one-time funding.<\/p>\n \u201cThere really are kind of two different reserves: There\u2019s the emergency reserve, which is absolutely not being touched,\u201d Modica said, \u201cand then there\u2019s 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 \u2014 if you have a certain circumstance, like a big drop of revenue \u2014 then you can draw, and we are using the operating reserve this year.\u201d<\/p>\n In total, 43%, or $7.8 million, of the city\u2019s operating reserve was used to help balance FY25, alongside a variety of one-time set asides from various funds, including:<\/p>\n $20.3 million from the Long Beach Recovery Act\u2019s \u201cSecuring Our City\u2019s Future\u201d fund. Those \u201cset asides,\u201d Modica said, is money Long Beach put away to cover potential liabilities in the future.<\/p>\n \u201cIt\u2019s different than in an actual operating reserve, but it\u2019s money just like in your own personal account. If you know you\u2019re going to have to pay for college expenses, you might say, I\u2019m going to put some money aside for college expenses,\u201d Modica said. \u201cAnd then if you don\u2019t go to college, or if you got a scholarship, then you don\u2019t have to use that money anymore \u2014 and that can be used for something else.\u201d<\/p>\n But before Long Beach considered using city operating reserves and other set-aside funds to help balance the budget, the city \u201cimplemented a range of corrective actions to reduce the size of the deficit,\u201d the staff report said, including reviewing expenditures, adjusting planned spending and reviewing unspent one-time funds.<\/p>\n 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.<\/p>\n \u201cDepartments are working on how to defer certain expenses. They\u2019re different (from) budget cuts \u2014 this is more tightening the belt,\u201d Modica said. \u201cIt won\u2019t 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.\u201d<\/p>\n 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.<\/p>\n 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.<\/p>\n Since then, the city has added more than 4,100 jobs to the local economy;<\/a> 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<\/a>; and implemented programs to support local business.<\/p>\n 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.<\/p>\n
\n$2.5 million from the Cannabis Tax Credit Pilot reserve.
\n$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).
\n$5.5 million from pandemic response set-aside funds (established with funds from the federal CARES Act).
\n$1.7 million originally set aside to support COVID-19 disaster response.
\n$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).
\n$600,000 originally set aside in FY23 to establish a funding source for facility repairs.<\/p>\n