San Jose officials outline $60 million shortfall, urge council feedback on Measure E flexibility and cuts

City officials told the San Jose City Council during a Feb. priority‑setting study session that the preliminary general fund forecast for fiscal year 2025–26 shows a tentative ongoing shortfall of about $60 million, driven mainly by weaker sales tax receipts and slowing property transactions.

The budget director, Jim Shannon, told the council the city’s two largest general‑fund revenue streams — property tax and sales tax — are underperforming compared with earlier forecasts and that staff built the preliminary estimate from October data that will be updated before the formal May release. He said the city’s retirement costs have begun to stabilize but remain a substantial long‑term pressure on the general fund.

The city manager, Jennifer McGuire, and assistant city manager Lee Wilcox framed staff’s recommended approach around five broad strategies: (1) consider a policy change to allow Measure E revenues greater flexibility to pay for homelessness sheltering and support; (2) identify ongoing cost reductions, guided by a department reduction target the manager earlier issued; (3) limit and target one‑time use of the budget stabilization reserve; (4) preserve gains from recent budget cycles where feasible; and (5) allow a very limited set of targeted new investments. Staff showed a range of model scenarios that reduce the projected gap the most if Measure E could be used for sheltering and outreach in years with general fund shortfalls.

Shannon and the city manager emphasized the preliminary nature of the numbers and repeated that department proposals, hearings and council direction will refine the plan. Shannon warned the council that if weaker sales tax performance continues, the $60 million shortfall could drive an additional multi‑year structural issue that persists into 2026–27 and beyond unless new revenues or substantial cuts are identified.

Council members used the session to give early direction. Councilmember Antonio Ortiz and others said workforce preservation and minimizing layoffs for public‑safety and social‑service staff are top priorities. Several members pressed for protections for libraries, youth services and programs that serve immigrant communities. Multiple council members also asked staff to prioritize prevention programs and to examine the relative long‑term costs of emergency interventions versus permanent housing investments.

Staff supplied a menu of potential actions but did not ask the council to decide during the session. Those options included fee adjustments, reserve draws, staging of one‑time investments (for example to prepare for major 2026 events), targeted reductions (staff cited examples such as some community programs and a potential theoretical impact on up to about 80 full‑time positions in a high‑cut scenario), and policy changes to redirect Measure E allocations. The staff presentation noted a preliminary Measure E revenue estimate of about $55 million for 2025–26 and illustrated how changing allocation percentages could significantly reduce the projected shortfall.

The council scheduled formal decisions later in the process. Staff said the city manager’s budget request and a five‑year forecast will be released on Feb. 28, followed by the mayor’s March budget message and public budget hearings in May and June. The council will vote on the adopted budget in June.

The presentation included reminders of legal and structural limits: about half of general fund expenditures are not discretionary, the city’s retirement contribution remains a major fixed obligation, and some revenue categories (transportation‑restricted sales tax, certain grants/fee‑offset services) cannot be repurposed without legal change. Staff also asked council members for early trade‑off guidance so the mayor’s March message could reflect council priorities.

The study session closed with council comments and a timed transition into the second half of the meeting, which focused on homelessness strategy and data. Public comment followed later in the meeting.