San Jose council approves midyear budget adjustments after warning of $25M–$30M sales‑tax shortfall

San Jose City Council on Feb. 11 approved a midyear budget review for fiscal year 2024–25 that recognizes new grants and reimbursements, increases several cost lines and draws on the budget stabilization reserve after staff projected a $25 million to $30 million sales‑tax shortfall.

The midyear package, presented by Jim Shannon of the city budget office, includes recognizing $9 million in state revenue tied to the Cherry EIH agreement, a forthcoming insurance payment tied to the History Park fire, and a set of technical adjustments for operating and capital funds. The council voted 10–1 to adopt the staff recommendations; Councilmember Kamay voted no.

City staff said the shortfall stems largely from weak sales‑tax receipts through the first quarter of collections, with staff noting only one quarter of payments (July–September) was available at the time of the report and that most retail sectors and business‑to‑business receipts were down. Jim Shannon, budget office staff, told the council that the administration is projecting a tentative $25 million to $30 million shortfall in sales tax for 2024–25 but is relying on expenditure savings and reserves to end the year balanced.

Shannon said ongoing expenditures are currently tracking to produce about $10 million in savings and that the city manager issued cost controls, including a limited hiring freeze, to limit service impacts. To cover recommended adjustments, staff proposed using one‑time resources that would reduce the budget stabilization reserve from $61 million to about $53 million.

Key adjustments described in the midyear packet include recognition of the $9 million state payment for the Cherry EIH agreement; additional workers’ compensation payments of about $4.5 million; nearly $1 million to cover underbudgeted electricity costs for street lights and traffic signals; an unanticipated emergency capital appropriation to replace end‑of‑life batteries that power police backup systems; $570,000 for an ongoing tow contract previously funded with one‑time carryover dollars; and a $1.25 million temporary reduction to the cultural facilities capital maintenance allocation.

Union representatives who spoke during public comment urged the council not to pursue layoffs. Riley Knight, supervising environmental service specialist in the Environmental Services Department and member of IFPTE Local 21, said the city routinely ends with surpluses and urged the council to avoid cuts to city jobs: “I urge you not to cut any vital city services or city jobs,” Knight said. Christa Dela Torre, a representative with IFPTE Local 21, pointed to growth in several revenue streams outside sales tax and said expenditure savings plus those revenues should help offset the shortfall.

Council discussion touched on how one‑time reserves and ending fund balances are used. Shannon and councilmembers noted council policy expects one‑time year‑end savings to be used for either a future deficit reserve or the budget stabilization reserve, and that the city’s combined contingency and claims reserves are below the policy target of 10% of general fund operating expenditures. Shannon said the sum of the contingency reserve, workers’ compensation reserve and the budget stabilization reserve currently equals about 7% of general fund operating expenditures, below council policy and well under the higher GFOA guideline mentioned in the audit report.

Councilmembers asked for additional details during the budget season: a clearer breakdown in dollars (not only percentages) of which sales‑tax sectors are driving the weakness, and a final accounting of reserve encumbrance liquidations that staff expects to report in the next bimonthly financial update or in the proposed budget. Shannon said the final liquidation work remains, in part, a manual reconciliation of the financial management system and should be completed in a month or so.

A separate exchange focused on insurance proceeds from the History Park fire and a request from a councilmember to hold $150,000 of those proceeds to help move and rehabilitate the Sakauye house at History Park. Councilmembers debated whether to make that allocation now or wait until spring when History San José’s fundraising results are clearer; the proposal was withdrawn and council did not earmark the $150,000 at the Feb. 11 meeting.

The adopted midyear actions are presented as technical and one‑time adjustments intended to align the FY 2024–25 budget with more recent information; staff said they did not recommend lowering the sales‑tax revenue estimate at midyear because only limited quarterly data were available. The council’s adoption moves the midyear package forward into the standard budget development timeline: staff will return with the March budget message and the proposed budget documents in April–May, followed by study sessions, hearings and final adoption in June.

Votes at a glance

• Midyear budget review and associated ordinance/resolution amendments — Approved 10–1 (Councilmember Kamay voted no).