LA and Santa Monica: Looming bankruptcy?

Could L.A. go broke?

Los Angeles has weathered a hellish menu of calamities over the decades, from firestorms, riots, earthquakes and floods to COVID shutdowns, smallpox epidemics and corruption scandals. The disasters date to the smog siege of 1955 and the St. Francis Dam collapse in 1928.

But bankruptcy?

So far, no city in Los Angeles County has ever petitioned for Chapter 9 municipal bankruptcy protection. But as fiscal stresses mount, the threat lurks--especially for the cities of L.A. and Santa Monica and for the county itself.

Less visibly dramatic than fire or flood, public entity bankruptcy is a silent, shadowy financial menace that wreaks havoc often by forcing cuts to public services, slashing municipal workers' pay and pensions, increasing local taxes and fees, and inflicting a hard-to-shake reputational stigma.

Life gets harder. A federal bankruptcy judge takes charge, sometimes clashing with elected officials. Residents flee, and the tax base erodes, as real estate sales plunge.

With the firestorms behind it and the 2028 Olympic Summer Games in sight, Los Angeles would like to put on a happy face.

Yet for the City of L.A. and L.A. County and Santa Monica, the signs seem ominous. 

For one thing, a lawyer suing the city over the Palisades Fire said those claims could inflict serious financial damage. 

"Bankruptcy is certainly a potential outcome," said Alexander Robertson IV of Robertson & Associates LLP, a liaison counsel for plaintiffs. He noted that more than 10,000 tort claims have been filed as precursors to lawsuits. "We're hopeful the city will negotiate with others for a global settlement for victims as in the Maui fire." Grigsby et al. v. City of Los Angeles et al., 25STCV00832 (L.A. Super. Ct., filed Jan. 13, 2025).

No representative of the city attorney's office responded to a query about whether Chapter 9 restructuring is under consideration. 

But as finances deteriorated this year, the City Council set up a new crisis advisory group on the city's long-term fiscal health. One member is Ron S. Galperin, an attorney, former city controller and longtime critic of L.A.'s finances. The group is set to meet for the first time at the end of November. 

Galperin is wary of discussing insolvency. "We have some real problems, but I don't think bankruptcy is a useful conversation to have," he said.

Still, bankruptcy remains a live issue in part because L.A. County itself raised the prospect earlier this year in a pleading to the state Supreme Court. Its lawyers, backing Ventura County's challenge, invoked the specter of ruinous liability unless the justices granted relief from AB 218, the legislation that in 2019 opened a three-year lookback window for previously time-barred childhood sexual assault claims. Thousands were filed.

"It is not an exaggeration to call the stakes existential for the County," Los Angeles County's lawyers wrote. "If all these cases were to proceed to trial, the estimated liability could be in the tens of billions of dollars and bankrupt the County." County of Ventura v. Superior Court, S289121 (Ca. S. Ct., L.A. briefing filed Feb. 3, 2025).

The high court denied relief and L.A. County settled claims in two cases for a total of $4.8 billion, covering 11,400 plaintiffs. Another case of 2,500 plaintiffs is pending. The L.A. County Counsel's Office did not respond to a request for comment on a 9 filing.

Speculation about another potential municipal bankruptcy was revived in September when Santa Monica declared itself in a state of "fiscal distress," largely due to a $229 million sexual abuse settlement and a large decline in general fund revenue.

Former Santa Monica Mayor Phil Brock has been critical of how his successors are handling finances. "The city will either have to issue high interest bonds, a type that may be used for current expenses," he said in September, "or they will have to consider bankruptcy options."

A spokeswoman for Santa Monica declined to comment on a possible Chapter 9 filing. "While I don't have speculative information, what I do have is action that the city has taken to develop a financial distress tool and stabilize its budget," Tati Simonian, the city's public information officer, emailed.

The fiscal distress declaration "would help strengthen the city's arguments and appeals for regulatory relief, limiting ongoing liability, and pursuing funding opportunities, especially when interfacing with various grant funding, regulatory, and governmental entities," Simonian said.

Chapter 9 is a last resort. "Bankruptcy is the worst option until it is the only option," is how Marc A. Levinson put it in a Daily Journal interview a few years ago. 

Levinson, an Orrick, Herrington & Sutcliffe LLP senior counsel in the firm's restructuring group, this year published a lengthy report on municipal bankruptcy in times of fiscal stress.

Why now? Municipalities are experiencing the strain of increased costs while revenue streams haven't recovered from the COVID shutdowns. "In the face of such pressures, the possibility that some may want or need to seek Chapter 9 protection has increased." Levinson and his co-authors wrote. He declined to be interviewed for this story.

What are the odds that insolvency threatens? Alarms have long sounded. Richard Riordan, a Los Angeles mayor during much of the 1990s, predicted in 2010 that rising pension costs would bankrupt the city by 2014. The American Bankruptcy Institute agreed. 

They were wrong. City finances stabilized, thanks in part to pension reforms. But then the city ordered businesses shut down for months because of COVID, the firestorms arose, and in 2025 City Controller Kenneth Mejia warned, "Financially, we are in trouble."  

A projected shortfall of nearly $1 billion in a $13.9 billion 2025-26 budget made "thousands" of layoffs "nearly inevitable," City Administrator Max Szabo told the City Council in March.

Wildfires in 2024 caused a loss of property tax revenue, and the January 2025 fires in Pacific Palisades and Malibu did the same, while also opening the city to thousands of claims over its actions before, during and after the fires.

"Skyrocketing liability payments from legal settlements involving city employees and infrastructure have created extreme unexpected costs," the proposed budget stated. Szabo estimated $320 million was paid to plaintiffs in the 2024-25 fiscal year.

After AB 218 took effect, a spectacular trial verdict spooked officials by demonstrating how high individual case payouts could be. In 2023, a jury in Riverside awarded $135 million to two sixth grade boys who'd been sexually assaulted by their public-school teacher in the 1990s. 

When the state Supreme Court let AB 218 stand, municipalities around the state petitioned the Legislature for relief. They found a champion in state Sen. John Laird, a Monterey County Democrat, who introduced reform amendments in SB 577.

In September, just as Santa Monica declared fiscal distress, the California State Association of Counties and the California School Boards Association urged passage. They issued a joint statement:

"We've seen what's happened to Los Angeles County and - just today - Santa Monica. So, let's be clear: If Sen. Laird's critical amendments to SB 577 are blocked by special interests who'd rather protect exorbitant payouts to trial lawyers than core local services, your city, county or school district will be next."

Laird's bill failed. Sponsors said it proved impossible to balance the interests of victims, public entities and the plaintiff bar. 

"The forces against relief for local governments were too strong to overcome," said Ben Adler, the public affairs director for the California State Association of Counties.

The group plans to seek relief again next year. It wants limits on awards and attorney fees; a better alignment between public agency responsibility and its share of liability; and a state victims' compensation fund to ease the pressure on local entities.

"Survivors deserve justice without ripping apart county budgets," Adler said.