Palo Alto's effort to curb the exploding costs of employee benefits will hit a milestone this week, when the City Council officially reduces pension benefits for newly hired police officers and mulls other, more dramatic reforms aimed at shrinking the city's liabilities.
The council is scheduled to launch on Monday night what promises to be a long and complex discussion on ways to reduce employee costs -- a discussion prompted by a July memo from Vice Mayor Greg Scharff and council members Pat Burt, Karen Holman and Greg Schmid. The four council members argued in the memo that with costs of employee benefits rising dramatically, the council needs to provide "policy direction" regarding future changes to benefits.
One reform that the city has already implemented is setting up a second pension tier for newly hired workers in each of its major labor unions. On Monday night, the council is scheduled to officially implement this reform for its largest police union, the Palo Alto Police Officers Association. At the same time, the city is negotiating a similar agreement with the small group of police managers.
Under the new agreement, newly hired officers will be subject to a pension formula of "3 percent at 55" -- that is, 3 percent of the highest salary for each year of service, after retirement at age 55. In another change, the "highest salary" will actually be an average of the three highest years rather than the single highest year. Current members of the police union will remain subject to the "3 percent at 50 formula."
Though the changes to the police agreement will have little immediate impact on the city's fiscal situation, they are expected to pay off big in the long run. According to a new report from the city's Human Resources Department, the city expects to save about $11,000 in fiscal year 2015. The savings are expected to rise to $120,000 in 2022.
The change comes at a time when state and city officials throughout California are looking for ways to bring down rapidly rising pension and health care costs. Pension reform has been a major component of Gov. Jerry Brown's legislative agenda, and he scored a major victory last month when the state Legislature approved reforms raising the retirement age for newly hired state workers and requiring more contributions by employees toward their pensions.
Palo Alto officials have been pursuing pension and health care reforms since 2008 and reached their first milestone in 2009, when they added a second pension tier to their agreement with the Service Employees International Union, Local 521, which represents more than half of the city's workforce. The city subsequently reached similar agreements with its non-unionized group of managers and professionals, its firefighters union and, most recently, its police union.
The city has also been trying to get employees to pay for a greater share of their medical expenses. While the city has traditionally picked up the entire tab, its new agreements require employees to pay up to 10 percent of the medical costs. The topic of cost-sharing between the city and its employees is expected to loom large in the council's discussion.
Other questions that the four council members had posed in the memo and that the council is expected to start tackling next week include: "Should the city move toward fixed health benefit contributions?"; "What retirement age would make for a proper transition to Medicare coverage for retiree health care?"; and "How can the city provide greater employee choice in health benefits?"
The council members argue in their memo that the rising costs of benefits has reduced the funds the city has available for services and infrastructure. The proportion of employee benefits to salaries has risen from 23 percent in 2002 to 54 percent in 2010 to 63 percent in 2012. Benefit costs are expected to exceed salaries by 2022, according to the city's Long Range Financial Forecast.
According to the Human Resources Department report, an employee with a $50,000 salary received benefits valued at about $11,500 in 2002. Today, those benefits are valued at $31,500.
The Human Resources Department recommends holding three public discussions on issues related to "innovations in employee pension, medical, compensation" and "other benefits related to employee engagement, recruitment and retention strategies." The report stresses that the city's efforts to reduce costs should be coupled with a push to retain its workforce despite the less-lucrative benefits. Over the last three years, the city has seen a huge spike in retirements from workers in response to the benefit reductions.
"In the end, we are concerned with not only managing costs but support for a high quality of life in Palo Alto through delivery of quality services," the report states.
Schmid, who proposed the memo, said during a discussion in July that the idea for the public conversation was prompted by the reforms Brown had been pursuing at the state level. Scharff said he was glad the city's consideration of future reforms for employee compensation will take place in a public forum rather than in closed sessions, as is typically the case.
"That's a rare opportunity to think of this from a more holistic approach of what we're doing as a city, what challenges we're facing in terms of long-term deficits (and) how we're going to retain services in the face of pension and medical-care costs that are increasing dramatically compared to the revenues we're getting," Scharff said at the July 2 meeting.