The numbers would've been even higher if not for the fact that the council trimmed the city's ongoing expenses by $7.3 million last year and instituted salary freezes on most city workers to close recent budget gaps. But city officials pointed to the new forecast as an indicator that city employees will have to make further sacrifices in the years to come.
"We need additional contributions by our employees," Administrative Service Director Lalo Perez told the council. "It's not going to be possible for us to close these deficits unless we have future participation."
Public-safety workers — notably the firefighters — present a particular concern to finance officials. Perez said if the city's public-safety unions agreed to the same type of concessions that other bargaining groups have accepted, the city would not have a deficit in fiscal year 2012. Under the current projections, Palo Alto is slated to have a deficit of $937,000 in the current fiscal year (which ends June 30) and deficits of $2.3 million and $6.7 million in the next two years, respectively.
"We must have participation by all bargain units," Perez said.
City Manager James Keene pointed to the new forecast as an indicator that the city will have to continue to make cuts in the years ahead.
"What it really means is hard choices and every year that goes by, the hard choices get harder because they got preceded by other choices," Keene said.
The forecast assumes that after three years of salary freezes, city workers would see a 2 percent increase in their salaries starting in 2013. It also assumes that health-care costs would rise by 10 percent every year and that pension costs would go up by 3 percent between 2015 and 2020.
Overall, pension payments are slated to climb from the current level of about $20 million per year to about $29 million in 2015, according to staff projections.
Councilman Pat Burt said rising costs such as health care and pensions are factors other cities are also wrestling with and are largely out of Palo Alto's control. The council had already instituted a two-tier formula that lowers future pension payments for new workers, but while this reform is expected to help the city keep its costs down in the long-term, it will do little to eliminate the short-term deficit.
"We're going to have some of these issues even if we make structural changes beyond what we made in the last two years — which were out ahead of every city in the region," Burt said.
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