Retired city employees this year will cost Palo Alto a projected $23.37 million — a tenfold increase from the $2.4 million liability of 2003.
Council members voted to explore, in conversations with staff, the possibility of attacking the problem through creation of a hybrid system that would allow at least some city employees to join the federal Social Security system and combine that with a lower city pension. The vote was 6-3, with council members Liz Kniss, Gail Price and Nancy Shepherd opposing, saying the move was premature before legislative changes are sought.
As part of the California Public Employees Retirement System, Palo Alto is bound by rules of that agency, and any meaningful change will require legislation, said Kathy Shen, the city's human resources director.
The council voted unanimously to pursue legislation to close loopholes in the 2012 pension reforms and also give cities more power over their retiree pay programs.
"The situation is not going to get any better until we take (legislative) action," Shen told the council.
As a newcomer to city government 18 months ago after 35 years in the private sector, Shen said her initial impulse was to have the city withdraw from CalPERS. But she was told an exit would cost the city $600 million to $1 billion and still leave the city with the task of finding another plan of its own.
Between current and past employees, the city is covering 2,940 people, Shen said.
"That's a lot of people, and we're going to be covering them for a long time."
Even with the state reforms — as well as a second-tier pension for new hires adopted by Palo Alto in 2008 — all but the newest employees remain under the old, more generous pension formulas, and it will take 30 years for them to work through the system, she said.
Under formulas in place until recently, a city worker who retires after 30 years with a salary of $70,000 would get about 80 percent of that — or $56,700 — in pension, plus health care coverage.
"Pension costs really limit our choices," Shen told the council.
"There's pressure on the size of our workforce, benefits and salaries. We have to prioritize our services because we can't do everything at once with those costs rising."
The concept of retirement has changed in the 100 years since California's public pension system was established, she said.
Back then, people retired at 65, typically had paid off their home and had no expectation of earning their working salary in retirement, or even 60 percent of it, Shen said.
"That's now turned upside down.
"Now we have people retiring at 55 or even 50 and at the same time the average life span is higher, so you could conceivably be retired for as long as you were working. That was never the paradigm when pensions were put in place," she said.