As far as I know, they AREN'T cutting back on LOSA. If anything, they're asking us for more observations. It is strange that they haven't hired any new losa pilots lately. They used to do it near the end of every year. I think they hired so many in the past, that they simply just didn't need any new ones. But a lot of losa pilots are either getting tired of it and dropping it, or flowing.
They sent losa pilots an email a month or so back, saying that they were going to open up the losa hiring window again. I'm not sure why they haven't yet, or when they'll open it though.
To answer the question, LOSA is a Line Observation Safety Audit. A LOSA pilot sits in the jumpseat and observes the flight. They make a no fault anonymous report (no crew names or flight number identifying the crew) of any risk, errors, or undesired states that occur during the flight. They aren't just observing crews, they're looking at every aspect of the flight, pilots, ground personnel, ramp, maintenance, ATC, weather, airport conditions, ect... They get paid 1.5 hrs per leg, plus IOE override for each observation done. The catch is, you can't do it on duty days unless it's a scheduled deadhead or at the end of a sequence (so that you won't mess up your legal duty day). So you can either do them on a day off, or after the end of your trip sequence. You do get to list on A passes to go to / from a losa trip, so that can help commuting at the end of a trip.