As budget season kicked off in Palo Alto this week, there was no talk of service reductions, staffing cuts or painful choices.

Rather, with tax revenues growing steadily and the budget reserves filled to healthy levels, the City Council's Finance Committee Tuesday evening began working its way through a balanced fiscal year 2018 budget that includes a hefty investment in infrastructure, funds for all existing services and devotes more resources to addressing the city's parking problems.

There is one colossal wild card spoiling the otherwise glowing outlook: pension obligations that today total more than $300 million and continue to rise every year.

"This is the most massive problem that we should be dealing with," Councilman Greg Tanaka said during the committee's discussion. "It should be Priority One, given the magnitude of the issue. It dwarfs everything else by a lot."

The pension problem is far from new and the council has already taken some steps to address it. In recent years, it has reached new agreements with all of its major labor groups, requiring them to make greater contributions toward pensions (in return, they get higher salaries). The council also established last year an irrevocable trust -- known as a Section 115 trust -- toward which it plans to make regular pension contributions. The budget proposes adding $1.4 million to the account in fiscal year 2018, which begins on July 1, supplementing the $2.1 million that was allocated in the current year.

City Manager James Keene's proposed budget estimates that the city's unfunded pension liability amounts to $338.4 million, with the General Fund portion totaling $222.3 million. That number, however, hinges on the rate of return anticipated by CalPERS, the state agency that manages city's pensions. Last year, the agency agreed to lower its expected rate from 7.5 percent to 7 percent, an adjustment that will take effect in fiscal year 2019 and will be spread out over a three-year period, according to Administrative Services Department staff.

This year, pension costs are expected to increase by $2.43 million, or 11 percent, from the 2017 level of $21.2 million.

Given the projections and uncertainties, the Finance Committee agreed Tuesday that the pension problem will demand much more attention and discussion in the coming months. Committee Chair Eric Filseth shared Tanaka's concern about the magnitude of the problem. Filseth said that depending on what kind of assumptions one makes about the CalPERS rate of return, the city's pension obligations can balloon to $500 million to $800 million.

"We entered into contractual commitments to spend a lot more money than we were able to make through CalPERS," Filseth said.

Aside from its pension concerns, the committee was generally pleased with Keene's proposed budget, which the full City Council is expected to approve on June 19. On Tuesday night, the committee kicked off its month-long process of vetting the document by approving the budgets for the offices of the City Attorney, City Auditor and City Clerk, as well as for the Human Resources and Administrative Services departments.

It stopped short, however, of approving the budget for the Office of the City Manager, which is set to undergo several changes in the next year. With Assistant City Manager Ed Shikada now serving as general manager of the Utilities Department and former Assistant City Manager Suzanne Mason departing last year to work for the City of San Francisco, Keene is proposing hiring two deputy city managers and two assistants to the city manager.

While the committee didn't oppose the new positions (the council had already approved the new deputy city manager positions last fall and Keene is in the midst of recruiting for these openings), Councilwoman Karen Holman suggested that Keene's office consider hiring someone who would focus on economic development and who could help bring coveted retailers and other amenities to town.

"This is one place where some expenditure will be well worth it," Holman said. "We are a built out community but at the same time we do have vacancies."

Keene was reluctant to devote a full position to economic development, saying that one of the new deputy city managers can partly fill that role.

"If there was an interest in really looking at how we support retail, I'd want us to do research about what really works there," Keene said. "I'm concerned that that feels good, but it is a marketplace issue more than anything else. .... The idea that property owners will even tell us what their numbers are to help us figure out how to go out and get someone to come in -- that can be a real challenge."

While the committee is expected to ultimately approve Keene's request, members agreed on Tuesday night to temporarily table the budget for his office and to revisit it later this month, when it wraps up the entire budget. The committee is scheduled to review the Public Works budget on Thursday night before moving on to Police, Fire, Planning department budgets on Tuesday, May 9.

On the whole, the budget includes only modest increases to staffing. Keene has proposed adding 3.9 full-time positions to a workforce, raising the staffing level to 1,058 positions (last year, the city added 10 positions). These include a communication manager in the Police Department -- a duty that heretofore has been performed by Capt. Zach Perron, who now heads the detective division.

The city also plans to add a senior technologist to the Information Technology department, a customer service representative to the Utilities Department and 1.5 positions for facility technicians to help maintain Palo Alto Airport.

Budget Director Kiely Nose said the budget team "really looked and challenged departments to look within (and) reprioritize what they already have."

"Instead of adding new bodies, let's look at better restructuring our existing staffing and our existing workforce," Nose said.