City of Morgan Hill officials warned the city council in a meeting June 4 that the local government faces a structural budget deficit, requiring $4 million in additional annual revenue to maintain current service levels and avoid potential layoffs in the coming years.
Finance Director Dat Nguyen presented a mid-cycle budget review showing the city’s revenues are not keeping pace with expenditures, putting Morgan Hill on track to fall below its minimum reserve requirement by Fiscal Year 2027-28 without intervention.
The budget challenges stem from several factors, including sales tax revenue running nearly $1 million below projections. The city budgeted $12.9 million in sales tax for fiscal year 2024-25 but now anticipates collecting only $12 million. For the next fiscal year, officials project an additional $1.2 million reduction in sales tax revenue.
Transient Occupancy Tax revenue has also underperformed, coming in $200,000 lower than budgeted as the hospitality industry continues recovering from the pandemic. Nguyen noted that hotel owners in the region have struggled to rebound since the pandemic.
City Manager Christina Turner emphasized that Morgan Hill has maintained a healthy reserve fund over the years. However, she warned that the city’s two-year budget cycle requires early intervention to avoid reaching crisis levels.
“We cannot reduce costs unless we are reducing positions,” Turner said, noting that personnel costs make up the vast majority of the city’s budget. “There is a direct correlation between reducing bodies and reducing services.”
To address the deficit, city staff are exploring several revenue options, with a utility user tax emerging as the most likely recommendation.
A 5% utility user tax could generate approximately $5.2 million annually, according to projections. About 150 cities in California have such taxes, including nearby communities like Sunnyvale, Cupertino, Mountain View, Los Altos, Gilroy, Palo Alto and San Jose.
Nguyen told the council that utility taxes are less volatile than sales taxes because they’re based on necessity items that residents require regardless of economic conditions, while sales taxes tend to fluctuate.
The city is also considering a quarter-cent sales tax increase that could generate close to $3 million annually, though with greater potential volatility.
Morgan Hill finds itself at a significant disadvantage compared to neighboring cities when it comes to revenue generation, according to city staff. The city ranks at the bottom of Santa Clara County in tax revenue per capita, collecting barely half the county average of $1,300 per resident.
“Morgan Hill is one of few cities that does not have additional revenue sources, whether it is a utility tax or additional sales tax, or any other revenue sources,” Nguyen said.
Seven cities in the county have utility user taxes, while four have additional sales taxes. The city also receives a smaller share of property tax revenue than neighboring communities.
Council members acknowledged the severity of the situation during the June 4 meeting.
“We’re looking at probably layoffs in the future,” if additional revenue is not found, said Councilmember Soraida Iwanaga. “Really what we need to start talking about as a council is we’re going to have to start swallowing those painful pills of talking about taxes.”
Mayor Mark Turner noted that the 2026 election cycle will likely feature multiple ballot measures for transportation and other issues, making the proposal of an additional tax “a tough battle to fight.”
City staff indicated they would return to the council after the summer recess with specific recommendations. Any new general tax measure would require voter approval of 50% plus one vote in order to pass.
“We definitely need to talk with the community, engage with them, maybe have sessions to explain … this dilemma,” Nguyen said. “Will you be willing to support this through a utility tax or sales tax, or will you rather sacrifice services as opposed to raising taxes?”
Councilmember Marilyn Librers reminded colleagues of the city’s history with budget cuts, recalling the complete closure of the recreation department in the 1990s, and layoffs in 2008 following her election to the council.
“It was a sad time at the city, let me tell you,” Librers said of the 2008 layoffs, which affected employees “from management on down.”
Without additional revenue or service cuts, the city projects it will fall below its mandated 15% reserve requirement by fiscal year 2027-28, triggering a requirement for immediate council action within 90 days that would likely require significant cuts to services and staffing.
Calvin Nuttall is a Morgan Hill-based freelance reporter.
While Morgan Hill residents are being told to brace for a projected $4 million budget deficit, it’s hard to ignore that our city leaders—including Mayor Mark Turner—recently approved up to $6 million in tax breaks for Frank Leal’s Granada Hotel project (also known as Hotel MOHI).
This so-called “tax-sharing agreement,” passed by a narrow 3–2 vote, will funnel millions of future hotel and sales tax revenues back to a private developer under the premise of economic development. Yet now, essential city services, staffing, and programs may be on the chopping block because we “don’t have enough money.”
It’s fair to ask:
• Why are we giving away millions to a luxury hotel developer during a budget crisis?
• How do we justify subsidizing a private project when public needs are underfunded?
• Shouldn’t financial sustainability start with making choices that prioritize the community over special interests?
Mayor Turner praised Leal’s “continued investment in Morgan Hill,” but perhaps it’s time he—and the City Council majority—reconsider whose investments truly matter. Because right now, it looks like residents are being asked to pay the price for political generosity to well-connected developers.
Name one city that balanced the budget by increasing its population. Housing growth does not necessarily cause a net increase in revenue. A pre-req to being in city government should be to build a self-sustaining city in the classic Sim City game 🙂
Karen- Great observation and the Granada is the posterchild for the root of these ecomomic issues.
“The city also receives a smaller share of property tax revenue than neighboring communities.” which is a result of the City’s use of the Redevelopment Agency (RDA).
The City purchased the Granada at an inflated price and then subsequently sold it at $0.15 on the dollar to Frank Leal and has been subsidizing it ever since. I believe that the taxpayers onlyhave to makepayments on the bonds for that tand the other RDA properties for another 5 years, so there’s that.