San Jose is staring down a potential $60 million shortfall in the next fiscal year amid lagging sales tax revenue and increased costs.
With budget discussions at the City Council kicking off Tuesday, various departments are exploring reductions. Mayor Matt Mahan will ask his colleagues on the dais to support a permanent change to the city’s Measure E policy by continuing to allocate affordable housing funds toward building out San Jose’s interim shelter system – a move he said will help drastically slash the deficit while getting the city closer to its goal of ending encampments.
“The good news is that making our Measure E reallocation an ongoing policy of the council would eliminate roughly two-thirds so our shortfall is actually relatively modest when you factor in that … but the remaining $20 million or so that we need to resolve will be a bit more difficult to navigate,” Mahan told The Mercury News.
Declining sales tax revenue — the second largest contributor to the city’s general fund — has already begun to impact the city’s finances, with the current year’s approved budget facing a $25 million to $30 million shortfall.
Sales tax revenue has generally declined since the end of the 2023-2024 fiscal year, when revenues in the fourth quarter were down 9% compared to the previous year.
City Manager Jennifer Maguire noted in a memo to senior staff that the year-over-year reduction is estimated to be around 7.5%, leaving a significant gap between what was estimated for general fund revenues in the current year’s budget. The 2024-2025 approved operating and capital budgets combined total $6.1 billion.
The city implemented a hiring freeze in December with limited exceptions and has capitalized on lower-than-expected expenditures to help plug a substantial portion of the current year’s budget shortfall.
Even so, San Jose’s budgetary woes are sizably lower than those of its other big-city peers, who face substantially higher financial stress.
For example, Oakland recently laid off nearly 100 workers as it attempts to manage its $130 million shortfall.
“I think the overall best sign for our city is that we are not facing the kind of fiscal gap that many other cities are facing,” Mahan said. “I think we’re fiscally in a better position than many of our peers, but we’re not where I want to be, and I would like to see the local economy growing faster than our costs so that we can expand service levels.”
But with the city having to temper its revenue expectations, Mahan said the City Council will need to make some tradeoffs to help balance the budget.
He pointed out a number of avenues the city could choose to cut down on costs – including potentially deferring planning work, delaying the opening of the new police training center, reducing the number of vacant positions, and extending the city’s hiring freeze – with the goal of avoiding cuts to the city’s workforce.
“I can’t guarantee at this point that there won’t be any layoffs, but the goal would be not to have to do any,” Mahan said. “I won’t support layoffs of staff in police or fire.”
The City Council’s upcoming budget study session will focus on the city’s priorities for the coming year and strategic planning for how the city can take a more pragmatic approach to ending unsheltered homelessness.
In his first two years as mayor, Mahan has focused on ending unsheltered homelessness, improving public safety, cleaning up the city and making it an easier place to invest in jobs and housing because he said it is “the foundational formula for putting San Jose on a strong, long-term trajectory.”
Although Mahan faced pushback for using more Measure E dollars for interim housing solutions versus affordable housing projects, the city’s investments will see its shelter system nearly triple in capacity over the next year.
While he didn’t foresee any significant pushback to Mahan’s plan from the City Council, Bob Staedler, a land-use consultant and recent candidate for the District 3 council seat, said that no policy decisions involving Measure E funds should be made permanent because it would go against the purpose of the voter-approved initiative.
“That goes against the will of the voters,” Staedler said. “From time to time you can do that, but short-term solutions need to have long-term expectations and there is a danger of always looking at the short-term.”
Mahan said that while previous plans to end homelessness had some good strategies, he has been a vocal critic because he said it amounted to “wishful thinking” and lacked the financial resources to make it a reality.
“This plan shows how we would move toward that over the coming years if we have the partnership with county, state, and private partners, and the good news is it’s realistic,” Mahan said. “What I’m trying to push us as a city is to be extremely realistic about timelines, financial constraints, political constraints, and see if we can line up all of our partners to put together a plausible mathematically driven plan for ending unsheltered homelessness.”