The self-styled capital of the American West faces a governance crisis that should alarm urbanists and municipal bondholders alike. Los Angeles teeters on the brink of fiscal emergency, not from some big external shock, but from the predictable consequences of years of financial mismanagement.

The immediate trigger is $258 million in liability costs, largely stemming from police misconduct and personal injury lawsuits. Yet this relatively modest sum—barely 3 percent of the city’s $8 billion general fund—threatens to push America’s second-largest city into crisis precisely because its finances were already precarious.

The root cause of the city’s fiscal woes are familiar to municipal finance observers: unsustainable employee-compensation commitments. Mayor Karen Bass recently approved $1 billion in new contracts, including substantial police pay raises, even as financial advisors warned of hiring freezes and service cuts. L.A.’s public-employment costs rose nearly 85 percent between 2010 and 2023, and tax revenues simply have not kept pace.

The consequences are visible on the streets. Infrastructure is crumbling. Parks are unmaintained. Basic services are ossifying, as the city cannot afford new technology or job training for new public employees. The city’s police force has shrunk from about 10,000 officers in 2009 to 8,967 last year. The violent crime rate is nearly double the state average. In a desperate move to recruit more officers, the city’s “bounce program” rehires retired officers, who “double dip”—simultaneously drawing both salary and pension.

To circumvent the state’s balanced-budget requirement, L.A. officials employ an array of fiscal devices: leaving positions vacant, postponing maintenance, and depleting reserve funds. When these prove insufficient, they resort to increasing user fees on everything from trash-collection to sewer services to streetlights—a regressive form of taxation that disproportionately burdens lower-income residents.

This governance failure carries broader implications. The city, slated to host the 2028 Olympics, cannot even maintain its sidewalks or streetlights. What’s more, its public-sector unions have effectively captured the municipal government, undermining residents’ ability to govern themselves.

The irony is that deteriorated government services most harm the very constituencies that progressive politicians claim to champion. While affluent Angelenos can insulate themselves from municipal dysfunction, working-class residents depend on effective public services.

The fiscal future looks bleak. Los Angeles increasingly relies on uncertain revenue growth to fund its structural spending commitments—a strategic gamble that carries significant hazards. Indeed, the erosion of the city’s public services undermines the very business environment upon which Los Angeles’s revenue hopes depend. And as services worsen, the public and the business community may lose confidence in municipal governance. This should be a particularly acute concern for progressives, who champion the role of government in improving people’s lives.

Los Angeles’s opaque fiscal governance also raises serious concerns for democratic oversight. The city reached billion-dollar labor agreements with its public employees behind closed doors, beyond public scrutiny. This, combined with the municipality’s reliance on nearly undetectable fee hikes to bridge funding gaps, has eroded democratic accountability.

This twin assault on transparency—backdoor wage negotiations followed by opaque revenue measures—represents a troubling evolution in Los Angeles’s governance. In pursuing short-term fiscal expedients, the city could undermine both its revenue base and its progressive ideological commitments.

Los Angeles’s predicament offers a cautionary tale for other major cities. Without structural reforms, America’s urban centers risk becoming vehicles for employee compensation rather than providers of essential public services.

Photo: steinphoto / E+ via Getty Images

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