San Jose’s financial outlook for the coming fiscal year may not be as dim as initially thought, with the city now forecasted to face around a $45.7 million shortfall that could be largely offset if the City Council grants Mayor Matt Mahan’s request to continue to use Measure E dollars for interim housing solutions.

As part of his March budget message, Mahan said next year’s finances would focus on five key focus areas — reducing unsheltered homelessness, increasing community safety, cleaning up neighborhoods, growing the economy and building more housing — all of which he hoped to make inroads with while minimizing impacts to the city’s workforce.

“There is still a little modest gap and we’ll have to get the latest data to know exactly how big it is,” Mahan said. “We believe we can achieve it without layoffs, but we’re directing the city manager to consider service reductions that … may not require layoffs of any kind, but may mean just trimming services that are nonessential… and to otherwise look for efficiencies in how we operate.”

The March message is one of the early steps in San Jose’s budget process, in which the city sets forth key priorities before releasing proposed capital and operating budgets late next month.

In the leadup to Wednesday’s release, Mahan had begun to announce policy initiatives he would like to introduce that centered around themes of accountability, fine-tuning approaches and making the most of the city’s limited financial resources.

For example, earlier this week, Mahan announced a proposal that would tie the merit raises for the city’s senior leadership and elected officials to performance metrics, arguing that they should not receive a bump in pay without making progress on the issues most important to residents.

A city survey found that homelessness remains the top concern for residents. This year’s budget has targeted once again increasing shelter supply while attempting to reduce development and operating costs.

In December, the City Council approved new data reporting requirements for its nonprofit homelessness providers to increase transparency and measure effectiveness. With cost the top factor limiting the city’s ability to fully build out its shelter system, the city has targeted at least a 20% reduction in its operating costs.

The budget message has also called for the city to examine how it may create a campus similar to San Antonio’s Haven for Hope, which offers the full continuum of shelter, housing and supportive services.

With an estimated 960 lived-in RVs parked along city streets, the city has also realized that the abatement pilot program it launched earlier this year is insufficient by itself to reduce impacts. One possible fix proposed is amending the city code to require vehicles to move at least 1,000 feet away every 72 hours, mirroring a similar ordinance in Fremont. Facing limited options for RV users to move their vehicles, Mahan has also proposed expanding safe parking options, including exploring partnerships with churches and schools and even asking Santa Clara County about using the old RV park at the Fairgrounds.

The decline in sales tax revenue, which prompted concerns about this and future years’ budgets, has also placed an increased focus on identifying new potential revenue sources.

As the office market continues to flounder, city officials have indicated that they plan to rely on San Jose’s experience economy, which has helped restore foot traffic on nights and weekends to levels that may exceed the pandemic.

With the region set to host the Super Bowl, FIFA World Cup and NCAA Men’s March Madness games next year, San Jose will make several one-time investments to boost safety and security, the fan experience and activation efforts to maximize the potential economic windfall.

While 2026 represents a huge opportunity, city officials are eying a long-term vision around creating a sports and entertainment district in downtown San Jose.

“Strategically, part of what we’re trying to do is position ourselves for lasting impact,” Mahan said.

The artificial intelligence boom and increased demand for data centers could represent a significant cash cow for the city with a 99 MW facility estimated to generate between $3.5 million and $6.4 million in annual general fund revenue. Should the city and PG&E reach a deal to improve grid infrastructure, the city could also fund new positions to attract data center investments.

Other future economic initiatives include more downtown office-to-residential conversions and streamlining special and conditional use permitting.

This year’s budget also focuses more heavily in building housing — a significant distinction from last year’s budget. One significant distinction from between this year’s and last year’s budget is lending more attention to building housing. Despite planning for 62,200 new housing units by 2031, the city is already well behind in terms of the number of new residences permitted.

To help speed up development, city leaders are proposing removing some of the barriers or adding more flexibility to rules that have elongated the building process, including allowing limited construction hours on weekends and longer entitlement periods and prioritizing California Environmental Quality Act reforms that otherwise have delayed projects or driven up costs.

While this year marked her seventh budget session, Vice Mayor Pam Foley expressed confidence that the city budget would prioritize and address San Jose’s most pressing needs.

“Frankly, this is the one that is most focused on doing the things that we need to do to be a more effective organization and provide the service that we need, that our residents have come to demand and require,” Foley said.