Los Gatos faces multi-million dollar budget shortfall
The corner of North Santa Cruz Avenue and Main Street in Los Gatos. Photo courtesy of Wikimedia Commons.

Multiple tax increases may be required in the town of Los Gatos as a budget deficit looms in the near future.

While the Los Gatos Town Council voted last week to put a measure before voters in November to raise about $1 million annually by sharply increasing business license taxes, that may not be enough to close the gap. Town officials are also considering a parcel tax in the coming years to help address a growing multi-million dollar annual budget deficit. The town is predicting a roughly $4 million annual deficit beginning in 2023-24.

“We need to have a parcel tax on the ballot in 2024 or we are going to have to seriously cut services,” Mayor Rob Rennie told San José Spotlight, though it’s not yet clear what kind of services could be on the chopping block.

Los Gatos’ projected deficits have increased substantially in part due to the ongoing hit to key revenue streams the town leans on, including hotel and sales taxes, due to the COVID-19 pandemic.

The town is also struggling to keep up with higher labor costs after the council approved significant wage increases and one-time pandemic bonuses for all employees in June. The increases added about $2.3 million more to the town’s ledger for fiscal year 2022-23, bringing general fund spending to roughly $52.6 million.

The police union received a 10.25% salary bump over this year and next, along with a $5,000 one-time bonus payment. The general town employees union received an 11% salary increase over this year and next, among other benefits. Managers got a 6% bump, while others including HR analysts and executive assistants received 11% over this year and next.

All town workers employed in 2021 also received a separate, one-time $2,500 pandemic bonus payment this year.

Covering the costs

To help cover the increased deficit for this budget cycle, the council agreed to pull about $900,000 from its retirement benefits trust fund to help cover medical benefit costs. The town also will use $700,000 from Measure G sales tax funds to help patch the holes, along with $1.6 million from federal American Rescue Plan funds. Measure G is a one-eighth-cent sales tax approved by voters in 2018.

In the coming five years through fiscal year 2027-28, salary increases are expected to contribute roughly $7.3 million to a nearly $20 million cumulative deficit, according to a partial five-year forecast city staff brought to council late last week.

But the latest forecast only accounts for the higher labor spending, and could change as the town learns more about savings it could see from staff vacancies, among other factors.

“We’ve had forecasts in the past showing deficits and we’ve found ways to cure it,” Arn Andrews, assistant town manager, told the council at a meeting last week.

Rennie noted the town tends to budget conservatively and could see savings of up to $2 million at the end of each fiscal year.

Even though the town expects to have about $20 million in reserves by June 30 of next year, with about $20 million in projected deficits over the coming five years, some residents are raising alarm bells.

Phil Koen, a resident and member of the group Los Gatos Community Alliance, said he wants more clarity on the town’s financial picture than the partial forecast provided.

“What is the public supposed to glean from this?” Koen told San José Spotlight. “Are we really going to be running a deficit of $20 million over the next five years, or is it closer to $5 million?”

Andrews told San José Spotlight updating the forecast “seemed like the transparent thing to do” after the town council approved new employee contracts.

Rennie agreed it was the right move.

“If you didn’t put out the forecast, how would you know you need to close the gap?” Rennie told San José Spotlight.

The council asked staff to work with the town’s finance commission to try to pinpoint the deficit for the coming years, and come up with ideas of where to cut costs and raise revenue.

Koen said city officials must “earn the right” to ask residents to pay more taxes.

“And you earn that right by showing that you run the town well,” he said.

Contact Joseph Geha at [email protected] or @josephgeha16 on Twitter.

Editor’s note: An earlier version of this story incorrectly reported a salary increase percentage for some town employees and a figure for some reserve spending.

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