A report on Morgan Hill’s budget this week painted a dim picture of the city’s financial future, which is facing millions of dollars of deficit spending in coming years.
The shortfall leaves the City Council caught between cutting services to the public or raising taxes on its residents, setting up a potential uphill battle for a tax ballot measure in the city.
“If we continue in the route that we’re coming … then we’re looking at probably layoffs in the future,” said Councilmember Soraida Iwanaga. “Council is going to have to start swallowing those painful pills of talking about taxes.”
In a yearly budget report at Wednesday’s City Council meeting, city staff forecasted an ongoing shortfall of $4 million a year to keep current city services – though even at the current level, the city faces a shortfall of police officers.
While the city has been staring down a budget shortfall for years, most city leaders have sought to offset this by attracting businesses and driving up revenue for the city.
Even so, these efforts have not yet borne the desired fruit: the city saw sales tax fall nearly $1 million last year and expect a $1.2 million shortfall from sales taxes next year. While boosts in property tax have helped offset some losses, the city’s income has not been able to keep up with rising costs.
“That’s a big hit for us,” said Dat Nguyen, finance director for Morgan Hill, noting that the city faces the specter of ‘stagflation’ and economic uncertainty under the current White House tariff policy.
Until now, the city has been able to draw on its reserve fund to cushion the shortfall, but by the 2029 fiscal year, those reserves could be depleted to a point that would require emergency action by the council.
The somber financial picture leaves the city caught between cutting services to the public and finding a way to raise money.
“We have to take this very, very seriously,” said Councilmember Marilyn Librers, who recalled that in the late ‘90s, tight budgets forced the city to shut down its entire recreation department. “There is a history of actually closing a whole department, and that’s really scary.”
To avoid cutting services, city staff floated the idea of raising taxes to plug the financial bleeding. Morgan Hill collects less tax per capita compared to nearby cities, and unlike nearby cities like San Jose, it doesn’t charge utility tax or transaction and use tax – a specific sales tax that cities can levy with voter approval.
A 5% tax on utilities phased in over time could raise some $5.2 million a year, and an additional 0.25% sales tax could raise $2.9 million annually.
Despite the financial lifeline that those taxes might offer, they would need voter approval. Mayor Mark Turner noted that voters were likely to face a slew of ballot measures asking them to contribute from their pocketbooks in 2026. “We’re going to be facing multiple bond issues, tax measures, all of that,” he said. “It’s going to be a tough battle to fight.”
Others noted that the taxes, however helpful, would come at a difficult financial moment for many. “People are struggling right now. For us to go out and ask them to have the utility tax when we just had our utilities … go up. I don’t even know how to say that with a straight face,” said Councilmember Yvonne Martínez Beltrán.
The council moved to continue discussing the topic, and understanding in more detail what cuts might do to the services the city provides.
“We really need to consider and ask some really hard questions about ‘what do we do,’” said Turner, noting that the ultimate decision on a tax measure would lie beyond the council. “We’re going to be relying on the public …council doesn’t make the choice, it’s the voters that do.”