After years of paying higher and higher costs for salary and pension benefits to its public safety employees, Palo Alto finally gained some leverage when voters approved repeal of binding arbitration last November.

But now, with moderately increasing revenues wiped out by higher pension commitments and other obligations, the city is facing a projected $2 million shortfall in fiscal year 2013 and deficits of $3.7 million and $4 million in the following two years. Back in 2006, the cost of public safety, made up almost entirely of personnel costs, was 25 percent of the city's General Fund. By fiscal year 2011 the cost had increased to 36 percent of the General Fund, a trend that cannot continue.

The challenge for city labor negotiators is convincing all unions to roll back wages and begin to pay for more of the cost of health and pension benefits now so this structural budget deficit can be brought under control. City Manager Jim Keene has already achieved that goal with fire fighters and the Service Employees International, the city's largest union.

But talks that started six months ago with the Palo Alto Police Officers Association have stalled. As a result, last week the city's chief negotiator, Darrell Murray, declared an impasse. This means the union, which by law cannot strike, may have to accept the city's final terms, although several steps remain, including a request to seek fact-finding or even the courts. Nevertheless, without binding arbitration, the police and firefighters' unions will find it more difficult to continue pushing their wages and pensions upward.

Under the current contract, the city says the average police union member receives an annual salary of $104,013, but when benefits are added, the total jumps to $185,616 a year. And even after retirement at age 50, officers can receive 90 percent of their highest pay for life and receive a full compliment of health care and other benefits. Municipal governments all over the state are beginning to come to grips with this huge, often unfunded, liability. But if Palo Alto and other small cities are to recover, the growth in these extraordinary wages and pensions must be brought under control, and if possible rolled back. Rising salary and pension expenses are expected to continue to grow at an alarming pace.

For example, in a new long range financial forecast released this week, the city projects the cost of all employee health care and pension benefits to grow from $36.8 million this year to $51.2 million in 2017. This is driven by health care spending, up 126 percent in the last 10 years, from $6.6 million in 2002 to $14.9 million this year. Pension costs are following a similar trend, from $15.6 million in 2005 to $23.9 million this year. In addition, a recent actuarial valuation found that the city needs to set aside an additional $2.7 million this year and another $3.5 million next year just to cover this growing backlog of the city's unfunded medical liability.

City Manager Keene is correct when he asks every labor group to take on more of their members' health care and pension costs, which in prior years have been entirely covered by the city. Most groups have agreed to or have been forced to shoulder some of the load. The Service Employees International, Local 521, the city's largest union, already has agreed to, among other things, establish a second tier of pension benefits for new workers and require current members to pay a portion of their health care costs. Firefighters agreed to similar rollbacks last fall.

But the city may have a fight on its hands with the police union, which claims it is being asked to give back more that the firefighters, a move negotiator Peter Hoffman says could amount to a loss of $20,000 or more for each rank and file police officer. Hoffman says the police union simply wants to match the rollbacks given up by the firefighters. It is not clear what the union's next step will be but Hoffman did not rule out attacking the city's bargaining tactics in court.

Now, as the city manager seeks to settle contracts with all the city's unions, there is increasing pressure for the police officers association to accept reduced pay and benefits. In his explanation of why the city declared an impasse, negotiator Murray said:

"Even the Firefighters Association eventually accepted a package that took their 2009 wage increases into account, effectively rolling back the 2009 increase and assuming an additional total compensation reduction of nearly 4 percent."

The police association simply wants a similar deal, Hoffman said, who added that the request fell on deaf ears during negotiations.

At this point, it does not appear that the police will be willing to give up more than the firefighters to help the city balance this year's budget. The union says members are willing to accept lower wages and pay a share of their health insurance costs, but believe they should only pay a fair share. Now the question is whether the ultimate outcome will produce enough savings for the city to reach its goal of delivering more sustainable budgets in the years ahead.