Los Angeles is facing a $224-million budget deficit heading into next fiscal year, a sign of the mounting financial issues facing City Hall leaders.

Recent labor agreements, costly court settlements and funding for combating homelessness are driving up expenses and could hamper plans to expand city services in the coming years, a new City Administrative Office report suggests.

Despite an improving economy in Los Angeles, the report warns of “renewed fiscal challenges” for the city.

The analysis, released Thursday, says that the city’s reserve fund — known as L.A.’s emergency fund — is “lower than it has been in past years [and is] unlikely to be available as a source of one-time revenue as it has been in each of the last three years.”


Assistant City Administrative Officer Ben Ceja, who helped prepare the report, said Friday the city needs to scrutinize both its revenue and spending.

“The big picture is that there’s still pressure on our financials that are going to have to be resolved,” Ceja said.

The $224-million deficit “might impact service restorations that people were expecting, and it might result in some trims in the budget,” Ceja added.

The report comes weeks before Mayor Eric Garcetti releases his 2017-18 budget, a spending plan expected to allocate billions of dollars toward street repairs, tree trimming, police patrols and other city services.


The mayor is legally obligated to present a balanced budget.

Such a large deficit at this point in the year isn’t uncommon, Ceja said, but is exacerbated by several new and large financial commitments facing the city.

The city must now pay $31 million annually to fix its sidewalks and $20 million annually to pay for handicapped-accessible housing. Both expenses are related to recent settlements of lawsuits brought against the city.

Other costs include salary increases from new labor agreements with firefighters and city attorneys. City Hall has also committed to spending tens of millions of dollars each year to help the homeless.


“There is no question that the increase in costly litigation against the city creates significant challenges for the budget and the city’s ability to deliver services,” said Garcetti spokesman George Kivork.

He said the mayor’s upcoming budget will fund “critical services and priorities, including the city’s unprecedented effort to address the homelessness crisis.”

The CAO report comes as several unions, including the one representing police, want to increase staffing levels.

Several civilian unions also want the city to keep hiring following a commitment by City Hall leaders to hire 5,000 employees by summer of 2018.


The CAO report also warns that city’s reserve fund is at 4.98% of the Adopted General Budget, below the 5% threshold the city seeks to maintain.

Ceja said the reserve fund, now at $277 million, hasn’t dipped below the 5% threshold since fiscal year 2011-12. At that point, the city was clawing back from the Great Recession.

The City Council voted earlier this year to borrow up to $70 million in bonds to help ease the costs of rising legal settlements and court judgments. Those bonds will help restore the reserve fund, the report states.

Richard Close, president of Sherman Oaks Homeowners Assn., said Friday the news about the lowered reserve fund is “absolutely troubling.”


“If we have a catastrophe, like an earthquake or rioting, the city is going to have problems,” Close said.

The report also notes several revenue shortfalls facing the city in fiscal year 2016-17.

Property tax and parking ticket revenue are both coming in lower than expected. Taxi franchise revenue also is falling short, according to the report.

On the positive side, a transient occupancy tax collected after a new agreement with Airbnb is boosting revenue, the report states.


dakota.smith@latimes.com

Twitter: @dakotacdsmith