In a steep financial challenge for San Jose, newly released documents show the city facing an estimated $56 million shortfall in the coming year.
San Jose has encountered its fair share of budgetary woes over the past few decades, primarily resolving deficits of around $800 million through reducing services and slashing its workforce to the point that the city now has the lowest full-time employees per capita among the major metro areas in the state.
The latest estimate poses one of the more difficult predicaments for the City Council in years and comes as it prepares to set budget priorities for the upcoming year.
Before the latest budget forecast release by City Manager Jennifer Maguire, city officials had estimated in December a $55 million to $65 million deficit due to stagnating revenue, leading to a hiring freeze and setting new priorities for some services.
Now San Jose must grapple with how to balance this year’s budget without further harming its already stretched workforce.
“While we anticipate that service reductions and position eliminations will be part of the solution to resolve the general fund shortfall, we will be working hard throughout the budget process to minimize both service impacts to the community and impacts to our workforce,” said Demetria Machado, chief of staff for the city manager. “This was a key reason why the city manager implemented a hiring freeze in December. Not only does it help control spending through the remainder of the current fiscal year, but the vacancies provide potential landing spots for employees that may see their positions eliminated.”
San Jose’s base forecasting model shows an overall $69.2 million shortfall over the next five years, driven by deficits that dwindle in size over the next three years before a surplus in 2029-2030. It assumes a slowly expanding economy, with increased revenue from property tax and hotel occupancy tax and limited improvements in sales tax revenue.
The upcoming year’s estimated sizable shortfall was driven in part by an increase in salary and benefits costs and an overall decline in revenues. While San Jose expects to see an increase in property and business tax revenue, a $22 million decline in sales tax and a $4.49 million drop in revenue from fees and service charges will result in the city’s overall revenue decreasing by an estimated $1.83 million.
San Jose is not the only Bay Area city facing fiscal challenges. Milpitas anticipates facing a multi-million dollar shortfall over the next five years. Walnut Creek plans to keep staff positions vacant to help fill revenue gaps. San Francisco Mayor Daniel Lurie also announced this week a plan to cut hundreds of city jobs to help manage his city’s deficit.
However, San Jose’s budget forecast does not account for several important revenue streams that could help and hurt the city’s bottom line in the coming years.
For example, new regulations on blackjack-style games for cardrooms that will take effect on April 1 could take a major chunk of revenue out of the city’s coffers.
In a letter to Attorney General Rob Bonta last month, Mayor Matt Mahan, Vice Mayor Pam Foley and Councilmembers David Cohen, Michael Mulcahy and George Casey asked the Bureau of Gambling Control to rescind the regulations, estimating a $32 million annual hit to the city’s general fund.
“A loss of this magnitude would not be theoretical; it would require real reductions in services,” the group wrote. “Police officers would be laid off. Fire response times would increase due to firefighter reductions. Homelessness response programs and supportive services would be cut back at a time when our city is working urgently to reduce unsheltered homelessness.”
While a more recent estimate lowered the potential losses to $25 million, the California Department of Justice responded this week — unmoved by the letter — and stated that cardrooms would have 60 days to submit compliance plans once the new regulations take effect. In the short term, the city could cover the cardroom business tax losses with reserve funds before revising its future revenue expectations.
On the positive side, the city’s forecast does not assume increased revenues from the upcoming transient occupancy tax ballot measure or business and utility taxes tied to new data centers currently in the development pipeline. Last month, the city reported that PG&E was on track to provide power to a dozen large-load projects by 2030. A single 50 MW to 99 MW data center could generate between $3 million and $7 million in annual general fund revenue once fully energized.
The June hotel tax measure that seeks a 2% increase could also generate $10 million in annual general fund revenue.
But among city workers, there is some concern about a lack of clarity about the shortfall from the city’s administration.
“When employees hear about a deficit of this size, the immediate questions are whether the City is planning hiring freezes, leaving vacancies unfilled, or asking departments to absorb additional work with fewer people,” said John Tucker, senior union representative for AFSCME Local 101. “San José already has a significant number of unfilled positions across departments, and that strain is felt every day in the services residents rely on.”
Tucker also noted that the city continues to move forward with major projects like the upgrades to the SAP Center and events tied to the major sporting competitions coming to Silicon Valley, yet has not released public cost estimates in the same manner as cities like San Francisco and Santa Clara.
He argued that if San Jose expends public resources on facility upgrades and global events, it needs a workforce to deliver city services and ensure those events function properly.
“Budget challenges are real, but so are the demands placed on city employees,” Tucker said. “San José’s ability to deliver services — and to successfully host the kinds of major events the City is pursuing — depends on maintaining a stable and adequately staffed public workforce.”
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