Soaring tax revenues from new hotels and other sources have improved Palo Alto's economic climate, allowing city officials to finally move forward with a new police headquarters, accelerate street repairs and construct a new bike boulevard.

The prosperity has also lifted the hopes of the city's major labor unions, which are now in negotiations over new contracts. After taking pay cuts five years ago and agreeing to make greater contributions toward their pensions and health care over the past two years, the city's employees say they are hoping to see a pay bump soon.

City officials, for their part, acknowledge that some salary increases will be forthcoming. A new financial forecast states the city's desire "to retain and attract a talented workforce," an endeavor that has become more challenging as the costs of living in Palo Alto have skyrocketed. The city's forecast also acknowledges that, in comparison to other similar agencies, "The salaries of our employees, primarily safety employees, have fallen behind."

"Therefore," the report states, "this forecast includes salary and benefits increases to adjust employees' salaries to the average of the market over the next few years."

How big should these adjustments be? That's the question the two sides are now trying to hash out.

On Jan. 6, members of the city's largest labor group, the Service Employees International Union (SEIU), Local 521, signaled that the gap between their request and the city's offer remains too wide. While labor negotiators and management's representatives were meeting behind closed doors, about 30 employees gathered outside King Plaza with signs that read "FAIR CONTRACT," "PALO ALTO, REINVEST IN YOUR WORKFORCE" and "PALO ALTO PRESERVE OUR QUALITY SERVICES."

After receiving an update from union organizers, employees marched around the "Rondo" sculpture and recited a familiar chant.

"What do we want?"

"Contracts!"

"When do we want them?

"Now!"

Lacey Lutes, a utility account representative, said that employees' salaries are not keeping up with the costs of living. In the last contract, she noted, the city's contributions for health care switched from a percentage to a flat rate -- a move meant to reduce fiscal risk for the city. As health care costs have risen, employees have had to spend more.

To be sure, employee salaries have also increased. In March 2014, the city approved a salary hike over two years of 4 1/2 percent for every employee. In addition, 320 employees represented by the SEIU received one-time raises ranging from 2 percent to 10 percent. These were based on the salaries that neighboring cities offer to workers in similar positions. The 2014 salary hike was the first the union had seen since 2008.

That contract expired in December, and the two sides have been negotiating a new agreement since mid-September.

Lutes said the city continues to lose employees to other cities and companies that offer higher pay.

"If we can't offer a comparative package in comparison to other cities in the area and other utilities in the area, we aren't able to retain our workers, let alone attract new workers to our area," Lutes said.

Others shared her concerns. During recent City Council meetings, workers from the Utilities and Public Works departments testified about the challenge of retaining employees. Joseph Duran, a facilities mechanic who has been in the Public Works Department for the past five years, said he has seen many experienced employees leave the city for other opportunities, making it "increasingly difficult for operations to meet residents' expectation."

"In order to recruit and retain quality employees who meet the city's high standards, compensation needs to reflect the competition and the living reality," Duran said. "Living in the Bay Area has become increasingly more difficult. Rent alone takes nearly half of my monthly income. Mixing in food for five and all the other necessities in daily living brings new meaning to 'living on a shoestring.'"

Neither the SEIU nor the city would discuss the specific issues they're debating behind closed doors, though Lutes said they include across-the-board salary increases and additional compensation for positions for which retention and recruitment have been most difficult.

Assistant City Manager Suzanne Mason said the city has already held 12 bargaining sessions with union representatives (the 13th was scheduled for Jan. 13). While SEIU employees expressed some frustration with the city's latest offer, Mason said, she expressed optimism about reaching agreement soon.

"There are a number of economic issues that are still outstanding, but there have been a lot of productive tentative agreements," Mason said. "I do think we're making progress. We earnestly would like to reach an agreement as quickly as possible."

The SEIU's roughly 600 employees aren't the only labor group currently negotiating a new contract. The city is also in talks with its largest police union, the Palo Alto Police Officers Association; its largest firefighters union, the International Fire Fighters Association; and the Utilities Management and Professionals Association of Palo Alto, which represents managers within the Utilities Department. It has also been working on new deals for the small unions representing top brass within the police and fire departments: the Police Management Association and the Fire Chiefs Association, respectively.