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Petaluma's police union and the city have tentatively agreed to a two-year pact that will reduce retirement benefits for new hires and require them to wait until they're older to get maximum pensions.

The agreement, which the City Council will consider at its July 2 meeting, institutes a two-tiered retirement system that provides no immediate savings but modest savings in the coming decades as the workforce turns over.

According to the city, the deal will provide an annual savings of $386,000 when the number of workers reaches a 50-50 mix of first- and second-tier employees. That amounts to a savings of less than 2 percent of payroll costs.

Both sides acknowledged the savings are neither instant nor dramatic, but said they were meaningful in the context of long-term changes to the retirement system.

"The point of pension reform isn't for an immediate reversal of the financial circumstances around the cost of pensions, it's to begin to put in place a different system that will over time pay dividends," said City Manager John Brown. "This is a major step in that direction in limiting the city's pension costs in the future."

The agreement requires new police officers wait until age 55 — instead of age 50 now — to receive the maximum retirement pay, 3 percent of their salary for each year worked.

Other employees will have to wait until age 60 — instead of 55 now — to be able to retire with a pension equal to 2 percent of their pay per year.

For both groups, the agreement requires the pension calculation to be based on a three-year average instead of the highest year's salary.

That eliminates pension "spiking," where workers increase their last year's pay and create expensive long-term consequences for the city.

Police employees, which include sworn non-manager police officers and civilian workers, agreed to forgo pay raises for the length of the agreement, which runs through June 2014.

No changes were made to employee retirement contributions. Safety employees contribute 9 percent of their salaries to retirement while miscellaneous employees contribute 7 percent. The city will continue paying the same health care contribution.

Paul Gilman, president of the Peace Officers Association of Petaluma, said the deal shows that the approximately 80 police employees recognized the city's precarious budget condition and were willing to pitch in.

"We realized pensions need to be fixed and this is definitely a step in the right direction," he said. "We're looking at the trends and what people say is sustainable."

Other groups represented by unions haven't reached agreements with the city, although talks continue. Brown said other agreements are pending.

Petaluma's deal shares similarities with two-tier systems being implemented in other cities, including Santa Rosa.

In Petaluma, salaries and benefits account for about 80 percent of the city's $32.5 million general fund budget. Police and fire department employees account for about three-quarters of total salary and benefits costs.

Councilman Mike Harris said the current pension model is unsustainable, so a second tier is prudent.

"We are keeping costs down in the near term with no salary increases, while helping the cost curve on future pension obligations," he said.

(Contact Staff Writer Lori A. Carter at 762-7297 or lori.carter@pressdemocrat.com.)