Los Angeles officials are warning that dramatically expanding liability expenditures driven by large settlements and outside counsel costs have drained the city’s reserve fund well below its usual minimum level of 5%.
In an Oct. 25 initial fiscal status report for the fiscal 2024-2025 year, City Administrative Officer Matthew Szabo said the size of the dwindling reserve account was expected to approach 2.75% in the coming months even as the City Council last month approved recommendations to curtail spending.
“This continued reduction is largely driven by liability expenditures that will dramatically exceed the budgeted levels,” Szabo’s report states. “In the 2023-24 First FSR (Financial Status Report), we identified $103.32 million in general fund spending for liability claims, and in this FSR we have identified $274.32 million in liability costs, which is a 165.5% increase from the same period last year and demonstrates the continuing trend of significant increases in these costs.”
Szabo’s report said the city anticipates additional liability costs will continue in the current fiscal year as a result of ongoing civil cases and legal settlements.
The City Attorney's Office stressed that while the office will continue to work with the Mayor's Office, City Council and city departments to reduce litigation costs, a number of issues have caused the recent increase.
"A portion represents an adjustment to the decline in liabilities and resolution of the backlog that resulted while the courts were closed during Covid, and a portion is due to the ever-increasing amounts awarded by juries in civil liability cases on a local, state and national level," the city attorney's spokesman, Ivor Pine, said in an email to the Southern California Record. "For example, just five cases this year resulted in an aggregate $78 million of jury awards against the city. Increases in verdicts like these have a ripple effect and cause a rise in the perceived value of cases by claimants, resulting in higher settlement values per case."
Over the past four fiscal years, the number of civil lawsuits filed against Los Angeles has risen 20% annually, while staffing levels have not risen at the same rate, Pine said.
"The $80 million listed in the city’s approved budget for liability payouts represent just 0.0625% of the city’s $12.9 billion budget for fiscal year 2024-2025," he said. "The $80 million is less, both in absolute dollars and in percentage of the approved budget, than the amount of these liabilities in any of the last five years."
The CAO's current fiscal concerns appear to have been caused by a number of different factors, such as a more than $220 million shortfall in anticipated revenue, according to Pine.
The City Counsel–passed measures to curtail spending include instructions to city departments to absorb any overspending and a request to the CAO and the City Attorney’s Office to report on strategies to limit spending on outside attorneys in the future and to examine litigation trends in both the city and Los Angeles County as a comparison.
In last month’s FSR, Szabo’s office identified spending that went beyond fiscal targets of $215.96 million. This includes the current growth of liability expenditures, which are now hovering just below $91.69 million, according to the CAO.
A recent post on X, formerly Twitter, from Los Angeles City Controller Kenneth Mejia, said the city had surpassed its annual liability claims budget – earmarked at $87 million – in just the first three months of the current fiscal year. Such spending reached $97 million as of October, the post said.
In addition, Mejia identified the top three city departments in terms of liability claims: police, $59.4 million; miscellaneous, $21.7 million; and street services, $6.1 million.
And he indicated that among the approximately 400 accounting transactions that make up the miscellaneous category were $10.5 million to settle an action resulting from a street lamp fixture falling on a person’s head and $7.5 million to settle the case of a person who lost an arm after an attack by an adopted shelter dog.
Mejia put the fiscal situation in stark terms, saying that the city was “going broke.” Liability payouts are not taken out of the budgets of individual municipal departments but come from the general fund, which the city also uses to provide essential city services, according to Mejia.
Other recommendations the CAO is currently pursuing to ease the spending crunch are delaying contracts and infrastructure additions, shifting employees from positions paid through the general fund and cutting appropriations.