TWO YEARS ago, as Berkeley City Council members gave City Manager Phil Kamlarz a hefty salary increase, they credited him with running a fiscally sound organization.

"We are in better fiscal shape than virtually any other jurisdiction in the Bay Area and I would suggest even California," Councilman Laurie Capitelli declared.

But a report by City Auditor Ann-Marie Hogan and new numbers from the California Public Employees' Retirement System show that the city has an unfunded liability for promised employee benefits of $310 million.

That's equal to more than two years of city general fund revenues. It works out to about $197,000 for every full-time city employee. Taxpayers must pay it off, at a cost of about $3,000 for every city resident.

The city has spent beyond its means, racking up huge debt that will be pushed onto future generations. They will be forced to choose between more taxes -- in a city that's already paying some of the highest -- and fewer services.

The biggest factors driving the debt are the city's unfunded liability for a pension plan that allows some workers to collect more in retirement than on the job; overly generous promises of health care coverage for police in retirement; and a ridiculous vacation and sick leave accrual policy that costs the city millions and enables employees to spike their pensions.

If anything, the estimates are conservative because the city's pension liability, the biggest part of the debt, is calculated by CalPERS. The state retirement agency's formulas don't yet include much of the investment losses of the past 21/2 years and make overly optimistic assumptions about future investment returns. Indeed, Berkeley's total debt might be as much as $200 million more.

As the full effect of investment losses is folded into the calculations, city benefit costs will escalate. They will also increase if the city begins to address its badly underfunded retiree health care program.

Hogan estimates those increases -- not the total annual payments, just the increases -- that are expected during the next five years will force the city to eliminate 63 full-time positions, or about 4 percent of the workforce.

Pensions

Because of the mounting pension debt, the city will be forced to divert more city funds to its retirement program in future years. For every dollar the city pays in police salaries, it pays another 36 cents for pensions. That number is expected to increase to 51 cents by 2016. For firefighters, the cost is 25 cents on the dollar, expected to rise to about 44 cents in five years. And for other city workers, the cost is 24 cents on the dollar, expected to increase to 34 cents.

Part of the blame can be placed on investment losses. But the cost is driven in large part by lucrative pension benefits that allow police and firefighters to retire starting at age 50 with 3 percent of top salary for each year of work. Thus the pension for a 30-year employee starts at 90 percent of salary and has an annual cost-of-living adjustment.

Other city employees can retire at age 55 and collect about 2.92 percent of salary for every year worked. Thus, someone who worked in government for 35 years can receive a starting pension of 102 percent of salary. That's right: That employee will collect more in retirement than on the job. (Kamlarz, the city manager, is one of those workers.)

Retiree health care

The city also provides retirement health care. The program for police is exceptionally costly because the city directly pays its retired officers with 20 years' experience an amount equal to the total cost of Kaiser coverage for two people, regardless of the rising costs of health care and regardless of whether the retirees have spouses or partners. That might have been affordable two decades ago, when the deal was first negotiated, but the rapidly rising price of health care has dramatically driven up the cost of the program.

Moreover, the payments continue at the full rate even after the retired officer becomes eligible for Medicare and could obtain a much less-costly Kaiser plan.

This poorly thought-out benefit is exacerbated because the money is paid to the retirees in cash rather than directly to the health care insurer, making the payment taxable to the retiree. In essence, a large chunk of the money is wastefully lost to state and federal taxes.

While promising these health-care benefits, the city has only set aside 13 percent of the money it should have to fund it. It's like promising a pension and not putting anything into savings in advance. As a result, future generations will pay for the health care of today's workers when they retire.

Vacation and sick leave

Berkeley city employees may accrue up to 320 hours of vacation time and 1,600 hours of sick leave. Firefighters and police can accrue up to 360 hours of vacation time and have no cap on accrued sick leave.

At retirement, they can cash out all vacation time and up to 50 percent of sick leave. Or, they can apply all their unused sick leave to service credit for calculating their pensions.

For someone with 30 years' service and the full 1,600 hours of sick leave that boosts his pension by about 2.7 percent for the rest of his life.

The accruals create two problems. First, they build up a liability that must be paid in the future. In 2009, the city paid departing employees $1.47 million for unused sick leave, vacation and related benefits. Second, they drive up pension costs. Both are bad.

And both are avoidable. Vacation should be taken each year and sick leave should only be for illnesses. "Use it or lose it" policies are common in the private sector. Berkeley should do the same.

Daniel Borenstein is a staff columnist and editorial writer. Reach him at 925-943-8248 or dborenstein@bayareanewsgroup.com.