The City of Morgan Hill faces a structural budget deficit that will require either new revenue, significant service cuts, or both, City Manager Christina Turner told residents at a recent public meeting.
The “Budget Roundtable” meeting held on March 25 was intended to be a mechanism for members of the public to learn about and offer their feedback on the direction of the city’s budget. Turnout was low, with only three residents in attendance at the roundtable.
While Morgan Hill currently enjoys a healthy general fund reserve of $27.1 million, the city’s expenditures are outpacing revenues by roughly $4 million per year, a gap that threatens to erode that cushion over time.
“We’re not in imminent danger of needing to make drastic reductions right now,” Turner said. “But it’s clear that something needs to change.”
Turner noted the downward trend is not new.
“I started here in 2016, and the graph looked just like that,” she said, adding that conservative spending, better-than-expected revenues and the decision to contract fire services to Cal Fire have allowed the city to kick the can down the road. “Because of those reasons, those years have been pushed out. But it’s clear that we need to do something.”
The city’s $63.8 million general fund covers core services including police, fire, parks, streets and recreation. Of that, only $45.2 million is discretionary, and 78% of that goes to police and fire—essential services that are already underfunded, according to city staff.
This leaves limited room to maneuver in the remaining funds—less than $10 million—to be shared among administration ($3.7 million), recreation and community services ($1.4 million), street and park maintenance ($1.9 million), economic development ($1.1 million) and other expenses ($1.7 million).
Morgan Hill also receives less tax revenue per capita than any other city in Santa Clara County, lacking a utility user tax and receiving a smaller share (just 10%) of property tax than neighboring cities. The city also charges no additional sales tax beyond the base tax rate, with the current 9.125% rate set by state and county taxes. This will rise to 9.75% April 1 due to a countywide measure.
Turner said the city has taken steps in recent years to shore up its finances, including updating development service fees, freezing some vacant positions rather than automatically filling them and securing cost savings through its Cal Fire contract. A new municipal solar project is expected to save the city about $1 million annually in energy costs once fully operational.
Still, Turner was candid that those measures alone won’t be enough.
“The ability to maintain robust services into the future is going to require additional general fund revenue growth to meet increasing costs,” she said.
In an effort to gauge the community’s budget priorities, the city launched an online budget simulation tool called “Balancing Act” in November 2025, which allows residents to explore revenue and spending tradeoffs. City staff presented data from the survey at the council’s goal-setting workshop on Feb. 6, at which time the tool had drawn 130 completed submissions.
The results showed residents are broadly resistant to service cuts, preferring instead that the city look at internal efficiencies and take a measured approach to any reductions.
On specific revenue options, community feedback was notably skeptical. Sixty percent of respondents selected “no” when presented with a proposed 0.25% sales tax increase, though Turner cautioned the tool is not a scientific survey.
Residents also expressed reservations about parcel taxes and utility user taxes, while showing slightly more openness to a hotel tax increase.
On the spending side, residents consistently pushed back against reductions to parks, recreation, police and fire. Scenarios such as closing a fire station, reducing police staffing or eliminating playground operations drew strong opposition.
The city is weighing whether to bring a revenue measure to voters in November 2026 or 2028. Staff anticipate requesting direction from the city council at the April 1 city council meeting to begin preparations in the case the council decides to move forward with placing an item on the 2026 ballot.
City officials said a local sales tax add-on of 0.25% would generate about $2.9 million annually—not enough to close the revenue gap on its own. A general tax measure would require a simple majority to pass, while a public safety tax limited to funding police, fire and roads would require a two-thirds supermajority.
The city has also weighed a utility user tax of between 2-5%, which would bring in between $2 million and $5 million annually. A hotel tax increase would generate more modest revenue at about $250,000 per one-percent increase, with limited room to maneuver in order to keep prices competitive.
Turner said a decision on whether to pursue a 2026 measure needs to come soon.
“If the council wants to proceed with a revenue measure for 2026, that decision is going to need to be made pretty quickly,” she said, noting that community education and outreach must precede any ballot effort.
If no new revenue is secured, Turner said the city would face reductions across parks, recreation, administration and potentially public safety, with every cut carrying painful consequences.
“We can’t just cut people and then assume that everything stays the same,” she said. “People are providing the services. We’re in the people business.”
Mayor Mark Turner echoed the urgency in his State of the City address March 11, emphasising that the city can only cut back so much before service must be reduced to unacceptable levels.
“The fact is, we have stretched every dollar, deferred costs, and operated in a very lean manner,” he said. “But now, after years of doing more with less, we have reached the point where we must take a serious look at additional revenue. This is not about expanding government for its own sake … it’s about maintaining the level of service our residents demand and expect.”
The city plans to continue collecting public feedback on the budget process through May, and encourages interested residents to attend upcoming budget-related public meetings, beginning with a budget update to the city council on April 1, the release of the recommended budget on May 1 and subsequent presentation to the council at the May 6 city council meeting.
These are followed by a Town Hall-style budget meeting May 16, for which the time and place have not yet been announced. A final budget hearing and adoption vote is scheduled for June.
Residents can also still engage with the Balancing Act tool online, which can be found on morganhill.ca.gov/463/Budget-and-Financials along with more information about the budget outreach process. The city plans to share updated results from the tool as the budget process continues.
