San Jose proposes FY25–26 operating budget to close $35.6M shortfall; fewer than 15 positions affected

San Jose city officials presented a proposed FY2025–26 operating budget at a May 7 study session that they said fully resolves a $35.6 million general‑fund shortfall while reducing a projected FY26–27 deficit by roughly half.

The proposed budget, presented by the city manager and budget director, follows direction in the March budget message and seeks a mix of revenue measures, targeted service and cost reductions, and one‑time reserve use to produce a structurally balanced 25–26 operating plan. City leaders said the plan resolves the current year shortfall and positions the city to cut an anticipated second‑year gap from about $52.9 million to roughly $26 million.

The proposal matters because the general fund supports day‑to‑day city services such as public safety, neighborhood services and parks. Officials said sales and property tax performance and federal funding uncertainty are the largest external risks to the plan.

Budget director Jim Shannon said the five‑year forecast began with a $35.6 million general‑fund shortfall, revised down from the $45.7 million estimate published in February, but with an additional $52.9 million shortfall anticipated the following year. The presentation noted a cumulative two‑year shortfall near $89 million and a five‑year forecasted cumulative deficit of about $87 million.

To close the gap, officials outlined a multi‑pronged strategy that includes reallocating certain costs, identifying near‑term and ongoing revenue, delaying or deferring some activations, and drawing limited reserves. Key balancing elements cited in the presentation include a reallocation of previously budgeted programs, an estimated $12.5 million of identified new revenue in FY25–26 (with $9 million ongoing), $11.7 million in cost and service reductions in FY25–26 and $15 million ongoing, and one‑time use of several reserves.

The proposed budget would reallocate $39.2 million in FY25–26 from the general fund to the real property transfer tax fund to support homelessness sheltering and supportive services (Measure E funding), a change officials said follows council direction. Additional revenue items listed in the proposal included a temporary delay in regulatory changes affecting cardroom business tax collections (producing about $5 million in FY25–26), a proposed first‑responder fee for fire services estimated to produce $2 million beginning January 2026 (with an ongoing estimate cited separately in staff materials), and a business‑tax amnesty expected to net roughly $1.5 million.

On the expenditure side, the budget presentation recommends deferring the activation of the truck company at Fire Station 32 and delaying activation of the planned South San Jose police substation, while still funding an engine company and the police training center. Officials said the city has ordered the truck and budgeted for it, but delivery and staffing constraints justify staged activation. The proposal also preserves core community services, with no reductions to library hours, parks maintenance, city‑run community center programming, aquatics, scholarships or senior nutrition.

Shannon and the city manager said the plan limits direct staff impacts: fewer than 15 positions would be affected by actions in the proposed operating budget and “there will be no layoffs for employees who have rights to other positions.” The administration said most affected staff can be reassigned, redeployed or transferred; the presentation also noted a small number of reductions that could affect an unrepresented classification (see separate staffing article).

Officials recommended targeted one‑time reserve use, including $7 million from the budget stabilization reserve and drawing on roughly $11.5 million from the community and economic recovery reserve, with $10 million of that set aside for potential FEMA non‑reimbursable expenses. The presentation warned that FEMA reimbursements are uncertain and that federal funding and broader economic conditions could create additional risk, including retirement system return shortfalls that would raise future pension contribution requirements.

Shannon noted general‑fund revenues are concentrated in sales and property tax (about 52 percent of general‑fund revenue), and described personnel costs as roughly 70 percent of general‑fund expenditures. The total proposed operating budget across all funds was presented at about $5.6 billion, with the general fund comprising roughly 25–26 percent of that total.

Shannon and the city manager closed by reminding council members this is a study‑session presentation: staff will continue department‑level briefings, community outreach and public hearings before the mayor’s June budget message and final adoption in mid‑June. The administration urged council members to use the study sessions to ask detailed questions about service‑level impacts, performance measures and departmental tradeoffs.

The council and staff scheduled follow‑up sessions to examine the capital improvement program, fees and charges, and individual city service areas in greater depth over the next week.