San Jose city officials are contemplating a hiring freeze and service reductions in order to reduce a projected $11.6-million deficit for fiscal 1987-88. City Manager Jerry Newfarmer said he submitted a $20-million package of cuts that the City Council can narrow down before formally enacting the budget July 1. One proposed option is to not fill 200 vacant city jobs, which would save approximately $1.5 million, he said. City employees number about 5,200, and 470 of the positions were added between 1984 and 1986. "Basically," Newfarmer said, "we've got two options: We can raise our revenues or lower our spending."