Despite rebounding tax revenues, Petaluma is facing a major spike in its annual pension payments — meaning that the city's new funds will likely be used to pay employee retirement costs rather than restoring public services like streets and parks maintenance.

"It will most likely mean that the (financial) bump the city was anticipating from the Target and Friedman's shopping centers will largely get chewed up by retirement and rising employee healthcare costs," said Councilmember Mike Healy. "We realistically don't have the ability to bring back city services."

Petaluma, like many other jurisdictions across the state, is not alone in this predicament. Many cities are now facing the ramifications of generous salaries and retirement packages given to public employees in the 2000s, after Gov. Gray Davis and state legislators passed a bill that gave state workers dramatic benefit and salary increases in 1999. The compensation hikes at the state level, primarily in response to a sharp increase in tax revenues that stemmed from a time of economic growth and expansion, forced local jurisdictions to follow suit in order to remain competitive in the job market.

When the economy sputtered and investments didn't perform, the California Employee Pension Retirement System — the state's largest public pension system covering Petaluma's law enforcement, fire and city employees — found itself unable to keep up with the funds needed to one day pay the retirement plans for all its members. The resulting gap is known as unfunded liability. While carrying an unfunded liability is typical for most employers, CalPERS' underfunded portion has skyrocketed to more than $87 billion, forcing its members to pay more and more into the system, instead of relying on investments, assets, and savings to weather the financial storm.

Petaluma, and most other jurisdictions throughout the system, has been forced to increase its payments to CalPERS to keep up with its portion of unfunded liability. But a recent decision by the CalPERS board to bill cities substantially more each year in an effort to fully fund the system means that Petaluma will be forced to dedicate even larger portions of its general fund budget to pension costs in the near future.

With the recently approved increases set to take effect in 2015, Petaluma is projecting a General Fund budget deficit of approximately $2.3 million by 2017. According to Petaluma Finance Director Bill Mushallo, the City of Petaluma could see a 10 percent increase in its yearly bill from CalPERS in 2015, and face additional annual increases for several subsequent years.

"Starting in fiscal year 2015, Petaluma could be looking at a $700,000 increase in its CalPERS payments," said Mushallo, who also estimated that the pension bill for 2016 could jump by another $900,000. That's on top of the already forecasted hikes the city plans on seeing each year, Mushallo said.

Over the past decade, Petaluma has seen its CalPERS bill more than double from about $2.9 million in 2003, to more than $6.1 million in 2013. That means that the city's pension obligations have risen from 5.8 percent of the city's annual general fund budget ten years ago, to 17.5 percent this year.

While many have applauded CalPERS' efforts to become more financially stable, most agree that the financial impacts for cities will be significant. "The good news is that this isn't happening until 2015," said Mushallo. "But we are going to have to look at alternatives to cover the costs as we get closer."

Last June, in an effort to stem rising pension costs, the city implemented a "two-tier" pension system that offers newly hired employees less generous retirement packages than existing employees. For police and fire, the second tier new hires can retire at age 55 with up to 90 percent of their salary, rather than at age 50, as is the case for current employees.

The state then adopted further pension reform in September, capping the percentages cities can offer employees at an even lower rate than what Petaluma had negotiated. But none of these reforms help the city with its current shortfall, as they will only result in significant savings when a large number of new employees has been hired.

The city will soon enter into contract negotiations with its fire department, as the terms of last year's two-tier deal were only good for one year.

Firefighters union spokesman Ken Dick could not be reached for comment.

Meanwhile, Petaluma is closely watching two lawsuits related to pension reform that was achieved through voter-passed initiatives.

Last year, voters in San Jose and San Diego passed independent pension reform measures by large majorities.

In San Jose, almost 70 percent of voters approved a plan that gave workers the choice between increasing their pension contribution to 13 percent of their pay — Petaluma employees already contribute between 7 and 9 percent — or switching to a lower-cost plan with reduced benefits.

In San Diego, a 66 percent majority voted to eliminate standard pensions for new workers and instead offer them a 401(k) plan, except for police officers, who retained regular pension plans.

Mayor David Glass has said in the past that the decisions that come from those two cases will affect what kinds of additional reforms cities like Petaluma can seek in the future from their unions.

To further tackle current costs and restore services, city officials have been looking at a sales tax increase. A half-cent tax increase could raise up to an additional $5 million annually. City officials have expressed a desire to examine putting such a measure on the ballot in 2014.

"That might be a conversation we want to have," said Healy, who pointed out that sales tax measures can only be put on the ballot in council election years.

(Contact Janelle Wetzstein at janelle.wetzstein@arguscourier.com.)