Despite a booming economy and stable revenue streams, Palo Alto is looking to cut $4 million from the city's budget this year as part of its effort to prepare for snowballing pension liabilities.

The direction came from the City Council's Finance Committee, which on Tuesday and Wednesday reviewed each department's budget for Fiscal Year 2019, which begins July 1. The council is scheduled to approve the budget on June 18.

City Manager James Keene proposed a $704.5 million budget in April that eliminates 16 full-time-equivalent positions, including 11 from the Fire Department. The slimmed down department would operate under a new service model, unveiled in January, that relies more on "cross-staffing," in which a three-person crew staffs multiple vehicles.

Keene's proposed budget includes a $214 million General Fund (which pays for most city services, not including utilities), an increase of 1.7 percent from the prior year. This week, however, the committee gave Keene a daunting assignment — by May 23, when the committee is scheduled to wrap up its 2019 budget discussion, identify $5 million in potential savings.

The committee identified its own proposed cut early on Tuesday: the Office of the City Auditor, which would see five out of its six positions eliminated.

Under the recommendation, City Auditor Harriet Richardson would be only person left in the office; most of the performance audits would be outsourced to private companies, using 80 percent of the current auditors' salaries. The restructuring would save approximately $108,000.

The significant shift was prompted by Chair Greg Scharff, who said he was concerned about the office's recent level of productivity. According to the budget document, the department completed 1.2 "work products" per audit staff in the current fiscal year, compared to 1.67 in the prior year.

"I think we're not getting the amount of audits we should get," Scharff said.

His three committee colleagues — Vice Chair Eric Filseth, Greg Tanaka and Lydia Kou — agreed that looking to the private sector is a good way to go. Richardson, meanwhile, didn't offer any objections to Scharff's proposal, noting that it's not uncommon for government organizations to rely on outside firms.

"I will be picky in selecting those firms to ensure we get firms that have actual performance audit experience," Richardson said.

• Update: On Wednesday, May 23, the Palo Alto City Council's Finance Committee reversed its recommendation to eliminate five of six positions in the Office of the City Auditor. Read the story here.

Another budget change likely to be implemented is the elimination of the Chief Sustainability Officer position in Keene's office, which debuted in 2013. Gil Friend has held that position and spearheaded the city's adoption of the Sustainability and Climate Action Plan.

Keene and his staff determined that the position is no longer needed because the sustainability plan has been adopted.

"The work that's going to be happening is largely implementation work," Deputy City Manager Rob de Geus said during Tuesday's review. "It's implementing the SIP (Sustainability Implementation Plan), and the work is mostly being done in the departments — Utilities, Public Works, Community Services."

While unanimously endorsing the proposed restructurings, the committee also agreed that the city budget needs to be further trimmed to address an expected rise in pension liabilities. Last year, the Finance Committee commissioned an actuarial study to assess the city's liability should the California Public Employees' Retirement System (CalPERS) reduce its expected rate of return (known as the "discount rate") from its existing projection of 7 percent to 6.2 percent, a rate its own consultant deemed more realistic. The change would add roughly $8 million to the city's short-term costs, the analysis found.

Given this expected rise, Filseth argued that it would be prudent to cut the budget by at least half of that amount and to account for the remaining half in future budgets. To give itself wiggle room in determining what to cut, the committee requested that Keene bring forward $5 million in potential cuts, with the expectation that the committee will ultimately reduce the budget by $4 million.

Keene described the assignment as "not an easy task" and one that will require many difficult conversations with city staff in the next week. But the committee agreed that trimming the budget now, before CalPERS readjusts its discount rate, is the responsible thing to do.

"We do not ask it lightly," Filseth said. "The reality is — we're spending this money, so it's going to be painful and we know that. But it will be more painful the longer we defer doing this kind of thing."

Despite its desire to see more cuts, the Finance Committee voted either unanimously or 3-1, with Greg Tanaka dissenting, to move Keene's budget recommendations along. The only departments whose budgets were not approved this week were the Library Department (the committee had some unanswered questions about the costs of extending library hours and other details) and the Public Works Department, which was asked to provide more information about its vehicle-replacement program and its plans for the Urban Forest Master Plan, which would largely go unfunded under Keene's proposed budget.

Tanaka was the sole committee member who voted against the Information Technology budget, largely because he took issue with the city's plan to upgrade the broadcasting system in the Council Chambers (the project is already subject to a separate review later this year). Tanaka also voted against the Planning and Community Environment budget after expressing concerns about an 8 percent increase in salaries in the department.

As part of its budget review, the committee also recommended approving increases to the city's electric and gas rates. Under the proposal, electric rates would go up by 6 percent on July 1 while gas rates would increase by 4.2 percent.