San Jose’s economy is hurtling toward a recession as the coronavirus pandemic wreaks havoc in Silicon Valley and across the globe.
But while city officials are bracing for the impending downturn, they’re not sure exactly how long it will last or how deep the impacts will run. “There are no models that we can really use at the moment to accurately forecast where we’re going,” San Jose Budget Director Jim Shannon said via Zoom at Tuesday’s virtual City Council meeting.
The city’s 2020-21 budget outlook has changed dramatically over the last month-and-a-half as the number of COVID-19 cases in Santa Clara County has grown, prompting health officials to extend a stay-at-home order and shutter non-essential businesses through at least May 3. But when the restrictions are finally lifted, Shannon said the economy will most likely be slow to recover.
City officials estimate a $45 million decline in revenue for the fiscal year that ends in June and $65 million decline for the 2020-21 budget cycle.
With many retail businesses closed and dwindling earnings from those that are open, Shannon said that San Jose’s sales tax revenue is expected to take one of the biggest hits in city history, with a forecasted shortfall of $41 million.
“Sales tax is the big guy,” he said. “It’s the one that’s both the hardest to estimate and the revenue category that we will know the least about for the longest amount of time.”
To make up for the deficit, the city has enacted a few measures already, including a hiring freeze and the suspension of capital projects that have yet to break ground.
While much of the news today about San Jose’s upcoming budget was bleak, Shannon called a recent sales-tax sharing deal with eBay a “bright spot.”
Last September, City Manager Dave Sykes negotiated a 15-year-contract with the San Jose-based online marketplace that could bring in $440 million in net new taxes—at the expense of other cities. The agreement stemmed from a 2018 U.S. Supreme Court ruling that said states can require certain businesses without a physical presence in its borders to pay and remit sales tax. The bill was signed into law by Gov. Gavin Newsom last April.
Shannon said that from October to December last year San Jose received $7.3 million from the eBay pact. The total revenue for the 2019-20 fiscal year is estimated to bring in anywhere from $15 to $20 million. “Hopefully that will be of assistance as we try to balance the budget for 2020-21” he said.
Despite the tumultuous year ahead, San Jose remains focused on paying down its debt—a priority made in Mayor Sam Liccardo’s March budget message both this year and last. City officials will also draw from the budget stabilization reserve, the 2020-21 future deficit reserves and other one-time funding sources to offset lost revenue.
But as San Jose prepares to make cuts, Liccardo said he wants to utilize the existing employee suggestion program by calling on city workers for their ideas on how to deal with “budget reductions, revenue increases and cost savings.”
The mayor also noted that city officials needed to get creative in conducting outreach to those without wifi or computer access since everything is being done virtually amid the coronavirus outbreak. “We know they’ll be hard conversations with the public,” Liccardo said. “That’s the way it works in recessions when we have cuts to make, but it’s really important more than ever to be hearing from our community clearly.”
Councilwoman Sylvia Arenas advocated for the use of an equity screen in this year’s budget process. During the last budget cycle, the District 8 councilor was part of a group of lawmakers who proposed an equity fund to help level the playing field in San Jose’s poorest neighborhoods. Since then, city leaders have began studying how to best incorporate equity into their decision making.
“We were barely in the beginning discussions of equity, so I don’t know we’d gotten to that part where we’re going to talk about how equity was going to get built into the budget, and now we’re making decisions about how we’re going to reduce the budget,” she remarked via Zoom. “So I just want to make sure that in this cut back management approach ... that we just make sure that what we’re doing and the strategies that we’re choosing align with equity.”
Sykes is expected to roll his budget proposal in May before the council approves the final 2020-21 spending plan in late June.