Mayor Matt Mahan said San Jose is facing a tough couple of years of slower revenue growth and rising costs of essential city services.

City Manager Jennifer Maguire reported to the City Council this week that growing uncertainties in the national economy could only make things worse.

Between now and June, Mahan said the council and Maguire will again have to come up with a plan to cover another big shortfall to balance the next year’s budget.

“The General Fund shortfall significantly limits the amount of new resources we can bring to bear to address our community’s concerns,” Mahan said.

Last year’s initial budget projection featured an estimated $53 million shortfall. The new budget projection unveiled by Maguire this week showed a projected $46 million shortfall, the equivalent of about 3% of the city’s $1.6 billion spending plan.

The mayor said the gloomy budget outlook is likely to continue into 2026-27, with deficits sliding again to $53 million.

A citywide hiring freeze, restrictions on overtime and limiting consultant services have helped balance city finances this fiscal year, Mahan said in a presentation shared today on his Instagram page.

Mahan praised council members and Maguire for their efforts to resolve this year’s shortfall without layoffs, by managing vacant positions, cutting back on some services and using reserves.

“This year’s budget outlook will require more difficult tradeoffs than last year, as costs continue to rise and low-hanging opportunities for savings have been realized,” he said in his annual March message about the coming fiscal year that begins in July.

The initial public hearing on the 2025-26 budget will be next Tuesday, followed by a council vote on a preliminary budget, with final adoption of a balanced budget in June.

The mayor’s 35-page budget message was released today. Maguire’s initial draft budget and five-year forecast were presented at Tuesday's City Council meeting.

This year’s message document has several proposals that Mahan called his “acts of accountability.” He said that as the city doubles its  supply of shelter capacity, it needs to “hold top officials accountable for opening these units quickly and homeless neighbors accountable for using them when available.”

 “Our residents are demanding results — it’s time we held ourselves accountable for delivering them,” said Mahan. 

The mayor’s first “act of accountability” is a Responsibility to Shelter initiative, which aims to address service-resistance by making it a misdemeanor to refuse safe, dignified housing three times in an 18 month period. The second is a Pay for Performance proposal that ties the mayor, council members and top administrators’ pay raises to measurable performance against adopted goals within each of the four core Focus Areas.

“I am grateful to the mayor and support his March Budget Message which prioritizes the pressing needs of our city. As we address this year’s budget shortfall, we remain committed to preserving the existing essential services our residents rely on, while preserving a strong and stable ity workforce to deliver those services,” said Vice Mayor Pam Foley.

Mahan said achieving a balanced budget over the next two years will require a multi-year strategy.

He directed Maguire to come up with a budget proposal that identifies “areas for efficiencies that have minimal impact on service delivery,” possibly through taking a second look at all city contracts, and by “cutting costs through the targeted reduction and elimination of services that – while likely important and impactful to some – may no longer represent the highest and best use of our services.”

Mahan said the goal is to be able to continue making progress in five main focus areas – reducing unsheltered homelessness, increasing community safety, cleaning neighborhoods, growing the local economy and building more housing.

Mahan said “unsheltered homelessness” remains a top concern of city residents, and of city government. He said building temporary shelters remains a top priority.

He reported that over the last two years, “historic investments” by the city will double the city’s shelter capacity by the end of 2025.

“While San Jose is proud to open more safe, managed placements than any other large city on the West Coast, we cannot end unsheltered homelessness on our own,” Mahan said. He called on the county, state and surrounding cities to “step up their efforts to ensure that every human being on our streets has a safe place to be.”

“We must prioritize greater efficiency within our shelter system and look to new partnerships” to support the city’s strategy. He added, “We must hold people accountable for accepting the shelter when offered.”

Maguire reported this week that the national economic outlook remains unclear.

“The incoming federal administration has outlined policies, including tariffs, deportations, tax cuts and deregulation; but these policies may face legal, political, and logistical constraints. If the tariffs that have been threatened come to full fruition – specifically on goods from Mexico, Canada, China and the European Union – they would have a massive impact on the economy.”

The city manager forecast that “the local economy is anticipated to grow, albeit at a much slower pace than historical standards.”

In addition, Maquire said that sales tax revenues are anticipated to grow, but at a much slower rate due to consumers’ spending less on taxable goods.

She predicted that property tax revenue would experience continued growth, though the pace of this growth will be significantly slower.

Highlights of the City Manager’s Draft Budget 

Revenue

General Sales Tax $277 million (up 3%)

Property tax $527 million (up 4.5%)

Electric, gas, water $144 million

Sales Tax $60 million

Franchise fees $56 million

General Business Tax $31 million

Waste Disposal Tax $12 million

Licenses, Fees $22 million

Cannabis Tax $12 million

Cardroom Tax $25 million

Utility Tax $17 million

Telephone Tax $22 million

Hotel tax $18 million

2025-26 projected deficit: $45.7 million

Projected General Fund budgets

$1.6 billion 2025-26 $45.7 million shortfall (37.6 projection 1 yr ago)

2026-27 $52.9 million shortfall (17.8 projection 1 yr ago)

2027-28 $   3.7 million shortfall (13.9 projection 1 yr ago)

2028-29 $   4.0 million surplus  ($6.7 projection 1 yr ago)

$1.8 billion 2029-30 $   1.2 million surplus

“While the first two years represent challenging shortfalls, these margins are relatively narrow when put into context of the size of the projected General Fund budget, ranging from 0.1% to 3.1% of the projected annual budget (based on expenditures), which ranges from $1.6 billion to $1.8 billion.," City Manager Jennifer Maguire.

General Fund

To increase from $1.59 billion in 2025-26 to $1.85 billion in 2029-30 (3.9% per year)

Spending highlights, 2025-26

• $697 million salaries, other compensation
• $383.8 retirement
• No additional police staff
• $143,000 new traffic infrastructure
• $1.574 million for new fire station
• $605,000 police training center

Retirement costs

In 2001-2002, retirement costs of $46.3 million accounted for 6.5% of the General Fund, while in 2024-2025, those costs of $366 million totaled 17.2% of the General Fund Adopted Budget. In 2025-26, they will rise to $383.8 million, then to $556.7 million by 2029-30.

Interim housing sites: $25 million (down from $71.2 million in 2024-25)

• Bridge housing communities/emergency interim housing
• Converted motels
• Supportive parking spaces

The largest 2025-2026 allocations in the City-Wide Expenditures category ($85.2 million in 2025-26, a decrease of $98.5 million from 2024-25)  include:

• Workers’ Compensation Claims ($26.9 million)
• San José BEST and Safe Summer Initiative Programs ($7.1 million) General Liability Claims ($6.0 million)
• Homeless Rapid Rehousing ($4.0 million)
•  Outreach Sanitation and Other Support Services (15% HSP) ($3.5 million)
• Sick Leave Payments Upon Retirement ($3.0 million)
• Property Tax Administration Fee ($2.8 million)
• Insurance Premiums ($2.6 million); Sidewalk Repairs ($2.5 million) Elections and Ballot Measures ($2.2 million)
• Property Leases ($2.0 million)
• San José Works - Youth Jobs Initiative ($1.9 million)
• Workers’ Compensation State License ($1.6 million)
• The Tech Interactive ($1.6 million)
• Senior Nutrition Program ($1.3 million).

San Jose Mayor Matt Mahan 2025-26 Budget Message

Three decades of journalism experience, as a writer and editor with Gannett, Knight-Ridder and Lee newspapers, as a business journal editor and publisher and as a weekly newspaper editor in Scotts Valley and Gilroy; with the Weeklys group since 2017. Recipient of several first-place writing and editing awards, California News Publishers Association.