The sky may not be falling, yet the City of Morgan Hill is in a tough spot regarding its budget. City officials recently warned the council 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 the city on track to fall below its minimum reserve requirement by Fiscal Year 2027-28 without intervention.
The challenges stem from several factors, including sales tax revenue falling nearly $1 million below projections. For the next fiscal year, officials project an additional $1.2 million reduction in sales tax revenue.
In addition, Transient Occupancy Tax revenue has also underperformed, coming in $200,000 lower than budgeted as the hospitality industry continues recovering from the pandemic.
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 about $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.
The city is also considering a quarter-cent sales tax increase that could generate close to $3 million annually, though with greater potential volatility.
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.”
Nguyen said the city needs to engage with the community to explain the problem.
“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?”
Those services could include road and sidewalk maintenance, weed abatement and parks and recreation programs. Seemingly innocuous programs, but vital to a community’s quality of life.
Raising taxes on the public is something every council member has campaigned against in the past, so swallowing that pill will very likely upset constituents.
Likewise, laying off workers thus reducing services is not something else that will go over well.
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.”
He’s right about that.
But there are other options besides raising taxes or cutting jobs. The city could ask unions to come to the negotiating table to discuss a hiring freeze, foregoing future increases or temporarily reducing salaries. Spreading the pain throughout the city workforce might be more palatable than laying off a certain number of employees and either reducing some services or making those remaining employees take on extra work.
They could look at cutting back on travel, cut non-essential projects and perhaps send a message that they are in this with us, look at cutting their own salaries.
The city could also look at updating the City Ordinance on Business License and Fees. Because it is a tax, voter approval would be needed.
Currently, anyone doing business in the city needs, at a minimum, to have a business license. Right now, for fixed places of business, the tax is based on the number of full and part-time employees. The rate per employee is the same no matter if you are Walmart or a small business like BookSmart. Adjusting the rate paid per employee based on gross receipts or some other measure (square feet) could support local businesses while charging larger national retailers for the greater impacts they have on our community. Other fees for specific industries could also be updated.
Finally, residents and those who work in the city can also help by shopping locally, thus increasing tax revenue.
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. A utility tax would need a two-thirds majority to pass.
At this point, city officials need to turn over every rock and elected officials must demonstrate fiscal responsibility before putting the burden on residents.
The City must act?
What a title!
Where’s the reporting been on the FAILURE to act that directly led to this point?
This administration, led by a City Manager and Senior Staff that have survived multiple City Council’s have recommended budgets that a clueless city council majority barely questioned that FAILED TO ACT on structural budget issues that predictably led to this crisis.
Four million?
Where is the reporting on the millions of dollars of “unfunded needs” for critical public services and infrastructure that are kept off-budget?
When the City “engages” with the public it will be through half-truths and false choices. The $4M is NOT a plan, it’s a stopgap number they hope the public will swallow to allow this administration to continue doing what they’ve been doing : championing uncontrolled growth that puts vested interests far ahead of public interest, often knowing the net PUBLIC fiscal benefit is negative.
This paper won’t tell the real story either. Residents need to look at the facts for themselves. Giving the public employees, who are supposed to make decisions based on what is best for most and have failed to act , more money so they can keep doing what they’ve been doing, including giving themselves undeserved and skyrocketing wage and benefit increases, would fit the classic definition of insanity.
Don’t believe the false choices that an administration that has FAILED TO ACT will present to you.