San Jose staff warn $60 million shortfall for FY2025–26; Measure E flexibility proposed to narrow gap

San Jose city staff told the City Council in a priority‑setting study session that the City faces a preliminary ongoing general‑fund shortfall of about $60 million for fiscal year 2025–26 and outlined options to close the gap before the March budget message and June adoption.

The March budget message will reflect council feedback from the session, Mayor Matt Mahan said, and staff described five broad strategies city leaders should consider: (1) permit more flexible use of Measure E revenues for homeless sheltering and services; (2) identify ongoing cost reductions; (3) use the budget stabilization reserve in a targeted way; (4) preserve gains from recent budget cycles where possible; and (5) allow a very limited set of new, strategic investments.

The nut graf: Staff stressed the numbers are preliminary and based on October data, but said the twin pressures of weak sales‑tax and modest property‑tax growth, plus continuing service costs and retiree liabilities, are producing a multi‑year budget challenge that will require tradeoffs. In that context city managers asked councilmembers to flag priorities and potential tradeoffs now, so the mayor’s March message can reflect them.

City staff explained the drivers in some detail. Jim Shannon, the city’s budget director, told the council that property and sales taxes — the two largest general‑fund sources — remain weak: sales tax performance slowed in 2023–24 and preliminary sales‑tax receipts through winter quarters point to lower growth going forward; property‑tax revenue is also moderating and carries a legal risk related to the Educational Revenue Augmentation Fund (ERAF) allocation the county and state are litigating. Shannon said the city’s preliminary estimate for Measure E revenue is about $55 million in 2025–26.

Shannon and City Manager Jennifer McGuire emphasized that retirement costs and personnel are the largest parts of spending: roughly 75% of general‑fund expenditures are for people, primarily salaries, benefits and retirement contributions. The pension unfunded actuarial liability (UAL) has been a large recurring charge on the general fund: staff presented historical actuarial charts showing the city’s retirement contributions rose sharply after the Great Recession, but staff said actuarial projections show contributions likely peaking and then gradually declining — though they cautioned future investment performance and wage growth make that uncertain.

On the revenue and balancing side, staff said re‑classifying Measure E policy (council policy 1‑18, section 22) to allow more flexible use of those funds for sheltering and support services could materially reduce the projected ongoing shortfall. Under one staff scenario, allowing up to 90% of Measure E revenue to be flexibly used in shortfall years for homelessness sheltering would shift roughly $30–39 million in available resources into the general fund’s service needs and reduce the ongoing gap in the near term. The staff presentation emphasized that the Measure E revenue remains dedicated by policy today to a mix of affordable housing and other homelessness purposes — change would be a policy decision for council.

Absent Measure E flexibility, staff said, the city would need deeper ongoing cost reductions. Departments were asked in December to prepare for roughly $50 million in reductions as part of planning, and staff presented a partial list of programs that might be considered for reductions (from non‑discretionary items to discretionary services). Shannon said many general‑fund costs are not discretionary — pension and certain mandated contributions, or fees tied to specific services — and that limits how much of the budget can be cut without affecting core services.

Staff also discussed drawing down the city’s limited budget stabilization reserve. The city’s reserve is a one‑time tool and would not sustainably cover an ongoing shortfall; staff said roughly $53 million exists but much is already spoken for. They urged a strategic pairing of one‑time reserve uses with one‑time investments and to preserve reserves for unexpected needs later in the budget cycle.

Councilmembers pressed for detail. Several councilmembers — including Councilmembers Ortiz, Campos and Cohen — urged preserving worker jobs and core services such as libraries, youth programs and public safety. Councilmembers emphasized prevention and equity priorities: Councilmember Ortiz specifically urged continued legal‑defense and rapid‑response support for immigrant residents. Councilmember Mulcahy pushed for revenue‑growth strategies and targeted promotions to increase local spending. Several councilmembers asked staff to restrict sweeping cuts to services for vulnerable residents.

What happens next: the city will release a formal five‑year forecast on Feb. 28 and the mayor will present a March budget message for council consideration. Staff said department budget proposals will be shaped by the policy direction council provides in the March message and noted community budget town halls and further study sessions before the June adoption.

Ending: Staff called the session a first step in a months‑long process and asked council for early tradeoff guidance that would inform the March message. Councilmembers agreed to continue discussions in the Budget Brown Act workgroup and to bring priorities forward to shape the upcoming budget decisions.