Despite previous warnings from elected leaders about potential fiscal challenges ahead, San Jose is proposing a $5.57 billion budget for next year that limits impacts to city services and its already thinly staffed workforce.

Heading into budget season, city officials projected a modest shortfall for the coming year because of lagging sales tax revenue and increased costs.

Although the most recent projection improved to $35.6 million, the city was largely able to fill the gap by once again redirecting Measure E dollars from affordable housing projects to interim homelessness solutions.

“We are proud to deliver the 2025-26 proposed operating budget, which I believe is a very fiscally responsible and balanced budget and meets the important objectives of the City Council while also structurally aligning the general fund with minimal community or employee impacts,” City Manager Jennifer Maguire said.

Although several economic red flags remain — from the turbulence in the job market to the uncertainty bred from the Donald Trump administration’s on-again, off-again tariff policies to the continued lack of local building permits — the city’s financial picture appears less bleak than the one officials painted six months ago. At that time, they could not guarantee avoiding layoffs while prioritizing investments in reducing unsheltered homelessness, improving safety and cleanliness, growing the economy and building more housing.

Ultimately, the city’s workforce is expected to increase by five to 6,999 total budgeted positions.

Along with diverting the use of Measure E funds, budget Director Jim Shannon said the city identified other revenue streams, such as the Fire Department’s first responder fees for medical calls, and deferred some projects or reduced services to balance the budget.

The deferred projects include the full activation of Fire Station 32 and the South San Jose police substation.

Shannon noted that the budget would not cut community services like library hours, park maintenance, staff-led community center and recreational programming or senior nutrition.

“We work really hard to try to limit the impact to the community, to our employees and to not only just the community abroad but the different populations who we serve,” Shannon said. “A lot of what the city does is serve our most vulnerable communities, so when we’re doing reductions, it’s very likely that we’re going to impact the vulnerable communities.”

Shannon said the city also is planning on tapping into $11.5 million in funds from the community and economic recovery reserve, which the city had set aside for impacts from the pandemic that is no longer needed. The city will hold onto the bulk of those funds to shore up any reimbursements the city does not receive back from the Federal Emergency Management Agency.

Public safety services will get 27% of the operating budget, and environmental and utility services receive 30%. The city is also allocating 10% of its budget to neighborhood services and transportation and aviation services.

With homelessness and housing affordability among top concerns, the city plans to devote significant resources to operating its interim housing solutions and building affordable housing, including issuing a $60 million notice of funding availability.

Another highlight in this year’s budget is millions of dollars in funding for expenses, such as destination marketing and additional police staffing tied to the Super Bowl, FIFA World Cup and NCAA Men’s Basketball tournament coming to Silicon Valley.

While Shannon said the city’s final budget is likely to end up closer to $6 billion once the city rebudgets funds that have not been expended this fiscal year, the city’s propensity to carry over significant sums earmarked for projects that aren’t completed in one fiscal year has raised questions from the San Jose Police Officers’ Association over whether there is more money available than the city is letting on.

An analysis authored by the POA that was sent to San Jose Mayor Matt Mahan’s office, as well as other members of the City Council, makes the case that the city needs to take more of a zero-based budget approach. The analysis stated department heads need to justify their need for more funding, and the city should be asking why projects are not being completed.

“The mayor and each City Council member should reflect and ask themselves this question: During our local and national affordability crisis, does continuing to collect taxes and fees from our residents and businesses and not directing those dollars toward improving public safety, improving city services or addressing our crumbling infrastructure align with their morals?” SJPOA President Steve Slack said.

In an interview with The Mercury News, Shannon disputed that the city was sitting on hundreds of millions of dollars and said the projects, previously approved by the City Council, often span multiple years.

He also said there is no automatic process to rebudget funds and that the Council has multiple opportunities to vote on rebudgeting.

“The funding being rebudgeted, by and large, takes more than one year to spend the money on and not all funds are expended from July 1 to June 30,” Shannon said. “They might start on Jan. 1, and if it takes longer, so you can’t spend it all by June 30, it will bleed over. The natural force of doing business is that you have to ensure you’re carrying the funds to continue.”

Meanwhile, Mahan said he believed there was some merit to reassessing spending to ensure it fits the city’s overarching goals.

“As part of my Pay for Performance proposal, I’m asking that the council set its top priorities each year when approving the budget, set ambitious goals for those priorities, align spending with those goals and measure progress throughout the fiscal year,” Mahan said. “I believe this is the best way to increase accountability for converting our tax dollars into impact. To the POA’s point, we should absolutely look deeply at any funds that roll over from year to year to ensure spending is always aligned with our top priorities and not simply on autopilot.”