As Palo Alto's management and firefighters prepare to take their simmering labor dispute to arbitration, city leaders are also pondering whether it's time to kill the binding-arbitration provision in the City Charter altogether.

The City Council considered putting the repeal on last November's ballot but backed off after the police union voiced opposition and some council members said they'd like more information before making a decision. The council ultimately voted 4-5 in August, directing staff to come back with further analysis.

The topic of binding arbitration will return to the table Tuesday night, when the council's Policy and Services Committee discusses whether the city should amend or repeal the 1978 provision, which is encoded in Chapter V of the City Charter. Sandra Blanch, interim director of the Human Resources Department, said in an email that at the May 10 meeting, staff will "provide background information, describe the City's previous experienced with Binding Interest-Arbitration and provide analysis of the options to modify or repeal Binding Interest Arbitration."

During previous discussions, council members characterized binding arbitration as a major obstacle to the city's long-term financial health. Councilwoman Karen Holman, who proposed placing the issue on the 2010 ballot, called it "one of the more significant aspects of how the city does or does not control of its own density." Councilman Greg Scharff agreed and argued it's "antidemocratic" to have an elected council negotiate with the union, only to turn over the negotiation to an arbitrator.

"If you really want structural changes, like with SEIU (Service Employees International Union), you're not going to get that with binding arbitration, or it's going to be difficult," Scharff said.

Historically, the arbitration panel made some findings in favor of the city and others in favor of the union. But when it comes to pension reform, arbitrators have sided with the unions each time the issue has come up. In 1980, the arbitrators sided with the firefighters union to preserve status quo after the city proposed instituting a second tier in the pension formula to be applied to newly hired workers. In 1981-82, the panel sided with the police union and changed pension calculations so that the highest-salary year is used to determine pensions (as opposed to then-status quo of highest 36 months).

The panel also sided with the police union in 1983, when it determined that the city should pay both the employer's and employees' contributions for pensions.

Palo Alto management and the firefighters' union have already set up the three-member arbitration panel that will resolve their dispute. The panel includes Tony Spitaleri, president of the firefighters' union; Richard Whitmore, the attorney representing the city; and Katherine J. Thompson, an attorney who was chosen by the other two panelists.

Palo Alto isn't the only Bay Area community to consider repealing its binding-arbitration ordinance. Vallejo voters repealed their city's ordinance last year, and Gilroy officials considered putting the issue on the ballot last year but decided not to after they reached an agreement with their firefighters.

A Santa Clara County Civil Grand Jury released a report last year arguing that cities must do more to rein in employee costs and recommending that San Jose place its binding-arbitration ordinance on the ballot.

"Binding arbitration is not open to the public and results in an adversarial process between the city and employee groups," the Grand Jury report stated. "Binding arbitration limits the ability of city leaders to craft solutions that work for the city's budget. The process has resulted in wage and benefit decisions that have been greater than the growth in basic revenue sources."

The issue of binding-arbitration is re-emerging in Palo Alto at a time when city officials are pushing for more pension reforms, particularly in the public-safety groups. The city's contributions to California Public Employees' Retirement System (CalPERS) went from comprising about 2 percent of the city's General Fund to more than 10 percent over the past decade, Keene told the council. The retirement fund suffered major losses in the stock market in 2008, Keene wrote, and required additional contributions to fulfill its commitment to retirees.

Other labor groups have already made concessions to solve the looming pension crisis. Workers represented by the Service Employees International Union, Local 521, and the non-unionized group of managers and professionals have agreed to two-tired pension systems and a plan to share medical costs with the city. Keene has repeatedly said he wants to see similar concessions from the public-safety groups, whose workers account for 56 percent of the General Fund's salary and benefits expenditures.

Even though the police and fire department budgets are each set to rise by about $1 million in the proposed budget for fiscal year 2012, Keene told the council Monday night that these budgets also presuppose concessions form the two labor groups.

"The budget we do present to you is really balanced by counting on achieving significant and timely concessions from our public-safety unions, which have yet to make any structural cost-savings contributions in pay or benefits to the city's ongoing fiscal challenges over the past few years," Keene told the council.

Concessions from public-safety unions comprise the biggest wildcard in what otherwise promises to be a calm budget season. The city's budget deficit in fiscal year 2012 is estimated at about $3 million, far smaller than the $7.3 million deficit the City Council wrestled with last year and the $16.2 million budget hole it closed the year before that. This means the city won't have to weight cutting popular programs such as school-crossing guards or shifting the costs of sidewalk repair to residents -- proposals that were on the table last year. Most of the cuts this year will come from department budgets and, presumably, concessions from labor groups.

The city's fiscal future looks fairly bleak, however, with rising pension and health care costs threatening to push budget deficits to about $7 million in fiscal years 2013, 2014 and 2015, barring permanent changes.

Keene indicated on Monday that he wants to use this brief period of relative calm to work on the city's long-term fiscal challenges.

"While we have a lull of sorts this year and we're aided by some good signs on the revenue front locally, the succeeding years will see an increasing gap that, if we don't get these structural concessions, will continue to put our city at risk," Keene said.