LA council aims to replenish reserve fund meant for emergencies but used for liability payouts

By JOSE HERRERA

With liability payouts eating away at LA’s reserve fund and concerns rising over projected incoming revenues, the City Council on Tuesday approved a plan to replenish its emergency account and meet its financial obligations.

Council members voted unanimously in favor of recommendations proposed by Matt Szabo, the city administrative officer.

Under the plans, the city will retain its hiring freeze, which it enacted at the beginning of the year to address a budget deficit. Additionally, departments will be expected to limit overspending by sticking to their approved budgets, and adjust operations if necessary.

The City Council also instructed the CAO and City Attorney’s Office to report on additional actions toward meeting the city’s 5% minimum reserve fund policy, strategies to curtail liability payouts, and conduct a five-year analysis of past settlements.

“I’ve heard from attorneys that have worked cases in opposition to the city attorney, in particularly around police liability and police violence, and what those attorneys have shared with me is that sometimes they’ll offer to settle in the beginning, but the city attorney fights it and fights it, prolonging the case,” City Councilwoman Eunisses Hernandez said.

Instead of settling sooner, by extending cases it’s leading to an increase in lawyers fees, according to the councilwoman.

Councilman Hugo Soto-Martinez raised concerns about the city’s hiring freeze and critical priority hiring process, saying some positions the city committed to keep may now not be filled. The councilman asked for an analysis of which departments have traditionally gone over their budget to understand how services and operations may be impacted.

Szabo said there should be a discussion around having liability payouts covered by the department from which a claim originate — a topic that has been explored over the years. But he warned that the council should be “mindful of significant consequences it could have on basic services” if such a policy were implemented.

Councilman Paul Krekorian said needs to compare different types of liability cases — such as a trip-and-fall claim versus an employment case — to understand their impacts on the budget.

“Year after year, we were budgeting liability at around $80 million or $100 million a year, and then it bumped to about $120 million,” Krekorian said. “It’s more than doubled now in two years. This is stuff that has happened years ago that’s now becoming ripe for settlement or trial, and jury awards are going through the roof.”

Almost four months into the 2024-25 fiscal year budget, council members are grappling with a major spending issue — the reserve fund, an account that is supposed to be maintained at 5% of the budget and specifically used for emergencies, is at risk of falling to just over 2.75%. If that occurs, the city would be left with “extremely limited” options to address additional overspending this year, as well as unforeseen challenges or initiatives, according to a report from Szabo.

Additional use of “emergency reserve” funding would require a two-thirds council vote and the mayor’s approval, and a finding of “urgent economic necessity,” such as a significant economic downturn or natural disaster.

According to the CAO, there was a shortfall of about $50 million in the adopted budget, which contributed to the financial challenges.

“…We were feeling the effects. The local economy was responding to high interest rates. We’re seeing inflation come down because the high interest rates are doing their (job), but they were doing their job by slowing the economy and the slowed economy meant that there was less business tax, less sales tax, and our international tourism still has not rebounded fully.”

However, the main issue is that the city has committed nearly $260 million to address liability payouts, including about $80 million from the liability account, $20 million from the reserve for extraordinary liabilities, $59 million from mid-year adjustments and $23 million from the reserve fund.

Another $76 million in liability payouts is expected but requires council approval before it can be finalized, the CAO reported.

According to the CAO’s office, of the nearly $260 million in liability payouts, about $149 million was spent on claims related to the Los Angeles Police Department, $31 million from street services and $17 million related to transportation.