The city's proposal targets a group of 202 managers and professionals, the only major employee group that is not represented by a union. If the council were to approve the compensation plan for this group through a resolution, its benefit reductions would mirror those that have been accepted by the city's labor unions.
The management group has seen a major shift in personnel in recent years, as the city has undertaken a concerted campaign to trim employee benefits and require greater contributions from employees toward their health care. Dozens of managers have already retired and, according to a new report from the city's Human Resources Department, many more are expected to do so in the coming years.
Nearly half of the managers' group — which does not include utilities and police department managers, who have their own labor associations — are eligible to retire within the coming five years, according to Sandra Blanch, assistant director of the Human Services Department.
Now, as the city prepares to usher in a wave of managers, it is also looking to change the rules to promote more innovation, even at the expense of stability. The goal is to function more like a private company, with more flexibility and greater contributions from employees toward pension and health care expenses.
"It is no longer a workable paradigm to provide steady employment with a generous pension and health benefits in return for narrowly focused jobs that are carried out with pleasant and courteous service," Blanch wrote in a new report. "Dynamic times call for a workforce choosing to serve the city in order to better their community and to bring city services up to date with current good practices found in businesses and social institutions around the world."
Pension and health care expenses have been taking up an increasing share of the city's General Fund budget over the past decade. While benefits made up about 50 percent of salary in 2010, that ratio went up to 62 percent in 2012.
Among the most dramatic changes will be requiring managers to pay the full amount of the "employee" contribution to the California Public Employees' Retirement System, either 7 percent or 8 percent depending on the retirement formula the employee is enrolled in. Currently, employees pay 2 percent of the employee contribution and the city picks up the balance, according to Blanch.
The city expects the increased employee-paid pension contributions to save the city $271,932 per year. Employees will also now have to contribute 10 percent toward their health care plans, with the city picking up the balance (historically, the city had picked up the entire bill). The new contributions toward medical care are projected to save the city about $109,000 per year.
The proposed compensation plan is consistent with similar reforms that most other labor unions have accepted, with varying degrees of resistance, since 2009. Since then, workers represented by the city's largest labor union, the Service Employees International Union, Local 521, have agreed to increased medical contributions and accepted a second, less lucrative pension tier for new employees.
The city's firefighters and police officers have also agreed in the past year to accept a different pension tier for new employees and increased medical contributions.
In exchange for decreased benefits, the city is offering managers and professionals a salary increase of 3 percent in the new compensation plan. All newly hired managers and newly promoted department heads, assistant directors and other high-level managers will also now have "at-will" status, which means the city can fire them or ask them to resign any time, with or without cause.
In the new report, Blanch notes that managers have already made a series of contributions to help the city save money. These include scrapping a bonus program for managers, accepting a multi-year salary freeze and agreeing to pay for the health care premiums of active workers and future retirees.
In addition to signing off the compensation plan for managers, the council is also scheduled to approve on Tuesday the city's response to a July report from the Santa Clara County Civil Grand Jury. The grand jury recommended a host of pension reforms, including increasing the retirement age for employees; requiring workers to pay maximum employee contributions toward pension plans; and transitioning from "defined benefit" plans, in which pension payments are constant and guaranteed, to "defined contributions" plans.
The Grand Jury report concluded that "until significant modifications are enacted, there is no doubt that the escalating cost of providing benefits at the current level is interfering with the delivery of essential city services and the ultimate cost to the taxpayers is an unbearable burden." It alludes to several cities, including Vallejo and Stockton, that had been pushed to bankruptcy by staggering benefit obligations (San Bernadino had joined this group after the report came out), and cited San Jose, which had to reduce police and fire staffing levels and close libraries because of the rising employee costs.
Even with the recent reforms, Palo Alto officials have consistently returned to the need to do more to limit the city's pension and health care obligations. In July, four council members — Vice Mayor Greg Scharff, Councilwoman Karen Holman and Councilmen Greg Schmid and Pat Burt — submitted a memo calling for a broad community discussion centered on ways to cut employee benefits, which now make up 27 percent of the city's General Fund expenditures.
The memo states that in recent years "the cost of employee benefits and pensions has risen dramatically for the City of Palo Alto, reducing the funds available for our community's necessary and valued services and infrastructure."
The council is tentatively scheduled to discuss this memo and consider future reforms at its Sept. 18 meeting.