With work habits shifting and employee benefits under fire, Palo Alto is bracing for an exodus of workers from City Hall over the next five years and scrambling to find new ways to attract and retain young employees.

The city expects to lose most of its workforce over the next decade as more Baby Boomers retire and as snowballing employee benefits are reined in by the City Council. The council discussed the trend Monday night, Oct. 15, the first meeting in a series aimed at finding ways to reduce costs while leaving employee morale intact.

Kathryn Shen, director of the city's Human Resources Department, told the council Monday that about half of the city's workforce will be eligible for retirement within five years. And while she said she doesn't expect all these workers to leave at once, the number is significant enough to warrant preparation by the city.

"Even if half of those (employees) retire, we'll still be in a world of hurt if we don't plan for that," Shen said.

The average age of the current workforce is 45, she said. In 10 years, she noted, the city will "have a turnover of almost the entire workforce."

To deal with the looming changes, Human Resources has just established a task force that over the next few months will be meeting with labor leaders and rank-and-file staff and considering the best ways to recruit and retain talent despite the benefit reductions.

Palo Alto has been experiencing a brain drain since 2009, when the city began to renegotiate the benefit packages for city workers. Recent reforms include a second pension tier for new employees, elimination of a bonus program for managers, elimination of the minimum-staffing provision from the firefighters' contract and a requirement that workers in each of the city's major labor unions contribute up to 10 percent for their medical costs (the city had previously footed the entire bill). These reductions prompted a wave of retirements over the past two years and turnover in senior managers and department heads at just about every level of City Hall.

According to a report from Human Resources, between 2007 and today, half of the city's employees have retired and been replaced.

Even with the recent reforms, the city's financial outlook is far from rosy. Its pension obligations have been rising at an astronomical clip, going from $6.9 million in 2004 to $25.9 million in the current fiscal year. They are projected to reach $35.9 million in 2017, an increase of more than 500 percent in 13 years.

Health care costs have also been climbing at a brisk pace. While the city spent $10 million on medical costs in 2002 and $15.4 million in 2006, the number is projected to climb to $27.3 million in the current fiscal year.

With pension and medical costs spiking, the city's benefit expenditures are now taking a greater share of overall employee costs. In 2002, benefits comprised about 23 percent of salaries. Today, they make up 63 percent, and by 2022 they are projected to equal salaries, a prospect that Shen called "pretty frightening."

Faced with these grim projections, the council is trying to balance the need for reducing expenses while stemming the City Hall exodus, which isn't expected to abate any time soon. In addition to demographics and economics, the wave of employees heading toward the exit is also a reflection of changing work habits, Shen told the council. Before, employees often stayed with one company their entire careers. That is no longer the case, she said.

"My generation and my children's generation really look at moving around between private, public and nonprofit (employers) and contributing where they can contribute and growing their skills," Shen said.

To cope with the changes, the city is trying to inject more flexibility to its employee policies and to create more opportunities for employees to advance their careers. Shen pointed to a recent study by the International Public Management Association for Human Resources, which polled more than 2,200 public-sector workers. When employees were asked to name one thing that would improve their job satisfactions, the top responses were: more opportunities to do what they do best; more career-development opportunities and more flexlbility and control over how work is done.

According to the new report, staff plans to use these studies to "develop a recruitment and retention strategy that focuses on a high-performing workforce and combines appropriate levels of training, education, job flexibility, and at-will employment to build a 21st century employment program in Palo Alto during a time of changes to traditional benefits.

"Staff intends to continue open dialogue with employees about the factors that promote engagement and retention, including surveys, focus groups and interviews," the Human Resources report states.

At Monday's meeting, the council voiced support for Shen's proposal to engage city workers. Mayor Yiaway Yeh said that "given the potential loss of the institutional knowledge in such a concentrated amount of time," it's essential for everyone at City Hall to start thinking about the changing workplace culture.

Council members also had plenty of questions about the city's power to further cut pension and health care costs. The former, in particular, is a thorny subject given the many restrictions faced by local jurisdictions, whose pension plans are administered by CalPERS (California Public Employees Retirement System). The process was made even more complicated last month, when Gov. Jerry Brown and the state Legislature agreed on a plan that includes new pension tiers and other pension reforms.

Staff plans to conduct more research about the changes in California's pension laws in preparation for the council's next discussion on employee benefits, which is scheduled for next month and which will focus exclusively on pensions. Future meetings will center on medical costs and other benefits.

City Manager James Keene said the city's trend of rising employee costs began long before the Great Recession. But the economic collapse added a sense of urgency to the Palo Alto's reform efforts.

"Our City Council really moved swiftly and strategically to begin focusing on the structural issues that surfaced right away when suddenly some of the supports were removed," Keene said. "That being said, even despite the actions that have been taken, when you look at the trend lines in pension costs and the way CalPERS actually allocates the costs to the cities we will still see rising trajectories in the future."