Faced with a "new fiscal reality" spurred on by dried up revenues and rising costs, city leaders Monday directed their budget axes toward city employee compensation.

At a special San Mateo City Council study session, officials discussed for the first time how to balance the budget over the next decade, which is expected to be far bleaker than the previous two, when tax revenues consistently soared.

Asked by city management how they would right the fiscal ship, council members said they did not want to further cut services or raise taxes and were nervous about putting off infrastructure maintenance for more than a year or two.

But their tones changed when the discussion turned to employee costs, which make up three-fourths of the city's $77 million budget. Although they took care to note that they valued the work the employees were doing, the council members characterized the current pay and benefits structure as "unsustainable."

Specifically, they agreed the city needs to look into corralling retirement benefits for new hires by signing collective bargaining agreements that force employees to either retire at a later age, receive a smaller pension, or both.

Currently, public safety employees can retire at age 50 and earn a pension equal to 3 percent of their salary for every year of employment. Non-public-safety employees can retire at age 55 and earn a pension equal to 2 percent of their salary for every year of employment.


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"It's absolute," Mayor John Lee said of the need for new retirement plans. "That has to happen. It's the right thing to do into the future."

Also discussed were cutting city-sponsored health benefits -- the No. 2 rising cost for the city behind pensions -- by having employees pick up a larger share of the tab.

The largest expense, though, is salary, and officials said they are not planning to give out any more pay hikes this decade beyond previously negotiated pay bumps scheduled to take effect over the next year and a half.

Councilman David Lim even floated an idea to cap executive pay at $200,000, which would lower the salaries of the city's top 14 earners.

Officials also expressed their desire for collective pay cuts as opposed to selective layoffs.

City managers will meet with employees Thursday and will be negotiating new deals with various unions over the next 20 months.

The hearing was the culmination of a three-month "financial sustainability" project featuring monthly reports and study sessions aimed at keeping the city in the black through the end of the decade. The shortfall for the fiscal year that ends in June is $2 million, and officials expect it to grow to $5.4 million next year and $7.1 million in two years.

Finance officials expect income to rise just 2.5 percent each year, or half the historical rate, while retirement and health benefit costs will continue to increase.

Although in the past the city has been able to "bridge" rough years with temporary cutbacks, City Manager Susan Loftus said officials must now focus on permanently reining in spending.

Contact Mike Rosenberg at 650-348-4324.