Los Angeles Has a Budget. It Doesn’t Have a Balance Sheet.

Every spring the City of Los Angeles announces that it has balanced its budget, and this year the announcement came with better news than usual. The deficit narrowed. The Reserve Fund was rebuilt to roughly $515 million. No layoffs, no furloughs, five hundred new positions, and enough hiring to keep pace with police attrition. City Hall called it stability.

I have spent thirty years underwriting buildings, and not once has a lender asked me whether I cleared debt service last year. They ask what happens in the bad year. How many months of cash. What the exposure is that I haven’t marked. A balanced budget is a statement about the past 12 months that went the way you hoped. Solvency is a statement about what happens when they don’t.

Los Angeles has the first. It does not have the second.

Everything that follows comes from the city’s own City Administrative Officer and Controller, the County Assessor, the four agencies that rate the city’s debt, and the docket of the Los Angeles County Superior Court.

Three weeks of cash

The Reserve Fund is about $515 million, compared with a General Fund of roughly $8.6 billion. That is six percent. Put in the terms any operator would use, it is somewhere around three weeks of general fund spending. Add the Budget Stabilization Fund and the mid-year cushion and the city gets to a combined nine percent — call it a month. The city’s own policy target is ten percent, and it has not been there in years.

Three weeks is not a reserve. It is a float.

And the drawdown that got us here didn’t come from an earthquake. Over two fiscal years, General Fund reserves fell from $648 million to $402 million — not because a disaster struck, but because lawsuits and departmental overspending ran past the budget in an ordinary year. The city rebuilt the fund by appropriating money back into it, which is the municipal version of moving cash from one pocket to the other and calling it a raise.

The $24 million tell

If you want to know whether an entity has a cash problem, don’t read the summary. Find the smallest thing it couldn’t pay for.

Los Angeles owed a $24 million transfer payment to the Fire and Police Pension Fund tied to Measure FF. It did not write the check. It amortized it — spread the payment over five years at a seven percent annual interest rate, adding about $3.5 million in interest to a $24 million obligation.

The city’s own Chief Administrative Officer recommended against doing it, on the record, in front of the Budget and Finance Committee, for exactly the reason you would expect: it adds accrued interest costs to an obligation the city already owed. The pension board approved the amortization on May 7. The adopted budget then added another $217,646 to cover the interest.

Twenty-four million dollars. On a $14.85 billion budget. Financed over five years at seven percent, over the written objection of the city’s chief financial officer.

I have been in rooms where a company stretched a small payable it could technically cover. It is never because the number is large. It is because the cash isn’t there, and every operator who has ever watched a borrower do it knows precisely what it means.

And it isn’t isolated. To fund its full annual pension contributions to both retirement systems at the start of this fiscal year, the city authorized the issuance of up to $1.5 billion in Tax and Revenue Anticipation Notes. There are legitimate reasons to prepay pensions with short-term paper — the systems give a discount for it. But look at the shape of the year: borrow a billion and a half up front to cover the pensions, and still stretch a twenty-four million dollar payment over five years.

That’s not a budget problem. That’s a cash flow problem, and they are not the same thing.

“But it owns LAX and the Port”

This is the first thing anyone says, and it deserves a straight answer because it is the load-bearing assumption behind every reassuring statement about this city’s finances.

Los Angeles owns Los Angeles International Airport and the largest port complex in the Western Hemisphere. Both are enormous, valuable, cash-generating enterprises. And the city cannot touch a dollar of either one to make payroll. Not shouldn’t — cannot.

The airport is fenced by federal law and by the city’s own charter. Every airport that has accepted federal grant money signs assurances that airport revenue stays at the airport. The City Charter goes further: Section 635 puts every fee, charge and rental collected at LAX into a dedicated Airport Revenue Fund and expressly exempts that fund from the year-end transfer provisions that sweep other city accounts.

We know exactly how this goes, because Los Angeles already tried it. In 1995, during an earlier budget squeeze, the city moved $58.5 million from the airport account to the General Fund. The FAA ordered more than $20 million of it returned. Congress got involved, conditioning federal transit money for the subway on the Inspector General certifying that no further diversion had occurred. That is what it looks like when this city reaches into its airport. It has been tried, it was reversed, and it cost the city standing it needed elsewhere.

The Port is fenced by state law, and the fence is older and higher. The Board of Harbor Commissioners holds the Harbor District in trust under the tidelands doctrine. Trust revenues may be spent on trust purposes only. The California Supreme Court, in Mallon v. City of Long Beach, struck down an attempt to divert harbor funds to general municipal use and identified the kinds of spending that don’t qualify — storm drains, libraries, parks, streets. Which is to say: the general fund. The list of things the Port’s money can’t pay for reads like a description of what a city does.

There is exactly one enterprise the city can legally tap, and it already taps it to the limit. The Department of Water and Power sends an annual power revenue transfer to the General Fund — about $220 million in this year’s budget. It is not a rainy day fund. It is recurring income, already counted and already spent, and it comes from the same utility now defending the fire litigation.

And while we’re here: the airport is not a piggy bank in the first place. The Automated People Mover — 2.25 miles of elevated track — was budgeted at $1.9 billion and has run roughly $880 million over, landing near $3.3 billion after a $550 million settlement with the contractor. Call it a billion and a half a mile. It was supposed to carry passengers in 2023. It did not, and the date has moved every year since. A county civil grand jury found that the contractor leveraged the change-order process by implicitly threatening litigation, knowing the city could not afford to leave it unfinished before the Games. That is the enterprise everyone assumes is the backstop, and it is over budget by more than the entire General Fund reserve.

So when someone tells you Los Angeles cannot be in trouble because it owns an airport and a port, be precise about what they are describing. Those are assets the city is legally forbidden to spend from. In a liquidity event, they are worth nothing.

Five hundred and fifteen million dollars. That is the whole of it. That is what stands between the City of Los Angeles and everything unbudgeted that can happen to a city of four million people.

What eats $515 million

None of this requires imagination. Most of it has already happened here.

A few bad weeks in the street. The anti-ICE protests in June of last year cost the city $32 million in roughly two weeks, by the Controller’s own accounting — $29.5 million of it LAPD overtime and citywide tactical alerts, the rest cleanup, fire response and repairs to City Hall. That figure excluded the lawsuits, which always follow. In 2020, the LAPD spent $40 million on overtime during the George Floyd protests, and the city has since paid more than $20 million in settlements over police conduct, with cases still open. Those were contained events measured in days. The 1992 unrest lasted five days and caused $775 million in damage in the dollars of the time — about $1.4 billion in today’s dollars.

One disaster, before the reimbursement lands. This is the part nobody outside government understands. When a fire or a quake hits, the city pays first — overtime, mutual aid, equipment, debris removal, shelter — and files for FEMA and state reimbursement afterward. That money comes eventually. Payroll comes on the fifteenth. The gap between those two facts is funded from the same $515 million, and the January 2025 fire is the living proof: an unbudgeted response going out the door while the tax base and collections went the other way.

One verdict. The city is already paying $287 million a year in liability claims against an $87 million budget — more than half the reserve every year — on sidewalks and use of force, even in years when nothing unusual happens. Now add the Palisades: thousands of plaintiffs, inverse condemnation, no obligation to prove the city did anything wrong, and no number anyone will say aloud. A single adverse ruling does not dent the reserve. It ends it.

The cases already filed. This is the one that should worry Angelenos most because it is neither hypothetical nor scheduled. Right now there are lawsuits pending against the City of Los Angeles that are not in any budget, because you cannot budget for a verdict you have not received.

Remember that $32 million from the protests? The Controller was explicit that it excluded legal costs. Those suits are now filed — journalists injured by police munitions, demonstrators hit at close range with less-lethal rounds, civil rights claims working through both state and federal court. The 2020 round of the same thing has already cost the city more than $20 million in settlements, with cases still open, and a single protester collected $1.5 million on his own. The current round is at the beginning of its life, not the end.

And the city’s own lawyers have told it where this goes. In a report to the Council, the City Attorney’s office noted that juries award an average of $2.4 million per lawsuit against the City — higher than against the County — and attributed the trend to aging infrastructure, rising case volume, jurors’ willingness to entertain far higher verdicts, and chronic understaffing in its own civil branch. The city is defending more cases with fewer lawyers before juries that are angrier than they used to be.

For scale, look at what an ordinary problem can become. A class of roughly 280,000 people with mobility disabilities sued over inaccessible sidewalks and curb ramps. It settled at approximately $1.37 billion — the largest disability-access settlement in American history — payable over 30 years, with a federal judge retaining jurisdiction throughout. Nobody at City Hall had a forecast line that read “one point four billion dollars, sidewalks.” It arrived anyway. And it did not solve the underlying problem: the city still paid $44 million in Street Services claims last year.

Now watch the city make it worse on purpose.

The state had committed more than $100 million to three mobility projects in Boyle Heights, Skid Row and Wilmington — sidewalk repairs, curb work, traffic calming, in exactly the neighborhoods that need them most and generate the claims. The city could not complete the pre-construction work inside the state’s deadlines. In April, it asked the California Transportation Commission for a six-year extension, citing staffing and funding shortages in its own public works and transportation departments. The Commission declined to put the request on its June agenda at all; a spokesman said the extension the city wanted exceeded what the rules allow.

Read that sequence again, because it is the whole disease in one paragraph. The city is under a billion-dollar court order to fix its sidewalks. It is paying $44 million a year to people whose sidewalks it injures. It cut staff to close a budget gap. Understaffed, it missed the deadlines on free money from Sacramento to do the very repairs a federal judge is supervising. And every sidewalk that does not get fixed generates the next claim, which comes out of the $515 million.

That is not bad luck. That is a city so short of people and cash that it can no longer collect the money other people are trying to give it.

The comforting answer is that the city would simply structure a big judgment over time, the way the school district and the county did. Understand what that actually requires. A city does not get to choose installments. It has to go into court, plead hardship on the record, and accept a schedule a judge sets — with interest running. That schedule then gets funded before anything a mayor or council member was elected to decide.

I will come back to that in Part III, because it is the whole mechanism. For now, it is enough to know this: the money to pay a verdict on the day it lands comes from the $515 million, and there is nothing else to reach for.

One event nobody can price. No city budgets for a mass-casualty attack. There is no line item because there is no honest way to write one. What is knowable is the shape of the bill when it comes: immediate and uncapped overtime, mutual aid the city reimburses, investigation, emergency medical, victim services, and then the cost of hardening every comparable site in the city afterward — followed, as night follows day, by litigation on the same dangerous-condition and inverse-condemnation theories that govern everything else this city owns and operates.

Federal money exists for this. It arrives later. In the weeks that matter, the money is the city’s.

And this is the part I want to be very clear about, because it is the whole argument. There is no second account. Not the airport — federal law and the Charter forbid it. Not the port — the tidelands trust forbids it. Not the utility — that transfer is already spent before the fiscal year begins. When any of the above happens, the City of Los Angeles reaches into one drawer, and there is $515 million in it.

Any one of these is survivable. The reserve does not reset between them, and nothing about the calendar suggests they will arrive politely spaced.

The claims are already bigger than the cushion

In fiscal 2025, the city paid $287 million in liability claims, exceeding the $87 million budgeted. Not a rounding error — a 228 percent overrun. The Police Department accounted for $152 million of it, Street Services for $44 million, and Transportation for $20 million. Trip-and-falls, sidewalks, use of force, harassment. This is the run rate, in a normal year, with nothing unusual happening.

The city has also borrowed to pay settlements. Judgment obligation bonds are a legitimate municipal instrument. They are also, in plain English, borrowing money to cover an operating loss, and every operator reading this knows what it means when an entity starts doing that.

Then there is the Palisades.

On February 19 of this year, a Los Angeles County Superior Court judge overruled the demurrer filed by the city and the Department of Water and Power in the master complaint over the fire. The claims — that the Santa Ynez Reservoir sat drained, that hydrants ran dry, that inspection policy was not followed — will be heard. Thousands of plaintiffs. And the theory that matters most is inverse condemnation, which in California does not require anyone to prove the city was negligent. It requires only that public infrastructure contributed to the loss.

Nobody credible will put a number on that exposure. What we know is the number on the other side of the ledger. It is $515 million, and it is three weeks of payroll.

It is not theoretical, and it is not finished

While that case moves, the next one is being filed. On July 16, a 36-inch Department of Water and Power transmission main more than a hundred years old ruptured under the Sunset Strip. Streets became rivers. Pavement buckled. A sinkhole opened in a sidewalk and swallowed two men. Roughly two hundred vehicles were destroyed, parking garages filled, Metro buses sat in water. One week later, a second main failed a few blocks away. Five breaks across the region in a single week, in Boyle Heights, in Venice, in Studio City.

Note where that happened. West Hollywood is its own city — but the pipe is the Department of Water and Power’s, so the claims come to Los Angeles. The city’s liability does not stop at its borders.

And the theory is the same one from the Palisades. Counsel is already advising owners on inverse condemnation, citing the line of cases that runs from Albers through Marshall v. Department of Water and Power — public improvements that physically damage private property, no proof of carelessness required. The visible damage may also be the smaller half; subsurface erosion under those buildings will surface as structural claims over the next several years.

A century-old pipe under Sunset Boulevard is not an accident. It is a budget decision arriving late. There are thousands of miles of that pipe under this city, every mile of it aging on a schedule somebody chose not to fund, and each one is a claim waiting for a date.

The neighbors have already stopped pretending

Here is the comparison that ought to end the argument.

Los Angeles Unified authorized $500 million in judgment obligation bonds in June of last year to settle decades-old abuse claims revived by AB 218, then came back in February for another $250 million. Roughly $750 million authorized; the district’s own estimate puts the all-in cost above a billion dollars, paid out of its general fund over at least a decade. Its superintendent said plainly that the district was exhausting its available funds.

Los Angeles County settled its AB 218 exposure for about $4 billion, using what its chief executive described as a combination of cash, reserves and borrowing — while cutting most departments three percent and tapping the rainy day fund for the first time since the Great Recession.

Two of the largest public agencies in America, operating over the same ground as the city, have each looked at their liabilities, concluded they cannot pay them out of operations, and termed them out over a decade. Both did it with minimal public discussion, which tells you something too.

The City of Los Angeles has used judgment obligation bonds, but at a scale that isn’t in the same conversation — a $60 million authorization against annual liability payments approaching $300 million. There is no set-aside for the fire exposure. No term-out. No structure on the table. The school district refinanced its liabilities. The county refinanced its liabilities. The city is holding $515 million and hoping.

That is not prudence. That is a balance sheet nobody has been asked to look at yet.

All four rating agencies now carry Los Angeles at a negative outlook. S&P has already taken the general obligation rating down to AA-, citing a weakening financial position and an emerging structural imbalance. When Fitch wrote about the fire liability, it said the scale would likely mean a multi-notch downgrade. That is not a market opinion about Los Angeles. That is Los Angeles, described by the people who lend to it.

Every number in this piece was published by the City of Los Angeles. All of it sat on the table in May, when the City Council reviewed the budget, called it stability, and went home. The information was never the problem.

So let me put Part I plainly.

The City of Los Angeles has about three weeks of cash. The City of Los Angeles has underbudgeted its lawsuits by $200 million per year for five consecutive years. The City of Los Angeles is defending a wildfire judgment that thousands of plaintiffs are litigating right now under a doctrine that does not require them to prove the City did anything wrong — and nobody in City Hall will put a number on it. The City of Los Angeles owns an airport and a port it is legally barred from spending a dollar of. The City of Los Angeles could not write a twenty-four million dollar check to its own pension fund.

Los Angeles Unified refinanced its liabilities. The County of Los Angeles refinanced its liabilities. The City of Los Angeles did not. All four rating agencies have noticed. The City of Los Angeles has not.

It will not take a catastrophe to break this. It will take one bad Tuesday.

Part II, Tuesday: the money that is supposed to refill that drawer, and why it is leaving. Downtown is not being marked down. It is being taken off the tax roll one tower at a time — and the buyers are governments.

— Christopher C. Rising