FY 2425 2526 Recommended Operating Budget

While the COVID pandemic years are behind us, certain segments of the City’s revenue continue to remain below the 2019 (pre-COVID) levels such as Transient Occupancy Tax (TOT). We do not expect TOT to get back to the pre-COVID level of about $3.0 million annually until FY 25-26. Revenue from Recreation Services, which was adversely impacted from the pandemic, is expected to reach the pre-COVID level in FY 24-25. However, the cost to provide recreation services has drastically increased, resulting in a projected net impact to the General Fund of $1.9 million in FY 24-25 and $1.6 million in FY 25-26. Overall, revenue continues its upward trajectory despite uneven growth in different segments and challenges ahead. The cost of providing City services is high, which can be attributed to high inflation and supply constraints, and Morgan Hill is no exception. Recovery from the COVID-19 pandemic recession led to significant supply shortages across many business and consumer economic sectors. The inflation rate in the U.S. peaked in the second half of 2022. Though inflation has declined quite significantly from the peak, it continues to remain elevated. Most recent data shows a lack of progress this year on reaching the Federal Reserve’s inflation goal of 2%, requiring more time before the Federal Government can lower interest rates. However, a series of recent reports on jobs, manufacturing, and spending have reaffirmed that the U.S. economy remains strong, while inflation also remains stubbornly high, adding more uncertainty to hopes for interest rate cuts this year.

BUDGET MESSAGE 13