Abattle that pits the Pacific Grove Police Officers Association against the City Council’s pension reforms is being closely watched around the state.

In July, the P.G. City Council voted unanimously to limit its contributions to CalPERS, the state’s public employee retirement system, to 10 percent of workers’ salaries, shifting the burden for spiking pension costs from the city to its employees in 2012, when union contracts expire.

“PERS is raising our rates again next year,” says P.G. City Manager Thomas Frutchey. “If we don’t have a solution, we don’t have many choices next year. We would have to reduce services and lay off employees.”

Still, the move promises to plunge the tiny city of 15,000 headlong into a protracted and costly legal battle.

The city’s police union has filed a grievance and a charge with the state’s Public Employee Relations Board, alleging the city broke state law by failing to meet and confer with the union before taking action.

“We feel that it’s an illegal action,” says POA activist Maureen Roddick, a civilian police department employee.

When the council took its July vote, Frutchey admitted the didn’t formally meet with the union. But, he says, they did talk.

The idea for P.G.’s pension reform plan came to the City Council via a residents’ group, which collected enough signatures to put the idea to a public vote. But the council decided to enact it before placing it before voters. They also put Measure R on the Nov. 2 ballot, a companion measure designed to clarify the intent of the ordinance and change the city charter to make implementation easier.

Sacramento attorney Christopher Miller, who represents the POA, says he will likely also file a lawsuit against the city arguing that its action is unconstitutional and a breach of the city’s contract with CalPERS.

“For the PGPOA, this is an opportunity to defend other police officers against this threat of reducing or eliminating retirement benefits,” he says.

Each year, CalPERS bills the city based on the demographics of its workforce and the state of the retirement system’s investments.

This year, PERS charged the city 19 percent of its public safety payroll for police officers’ retirement.

Under the city’s contract with the POA, officers’ contributions are limited to 9 percent, while the city picks up the rest.

CalPERS actuary Barbara Ware has told the City Council that her agency doesn’t care whether pension contributions come from employees or the city, but CalPERS is determined to collect them in full. If the city comes up short because employees can’t or won’t pay the higher costs, the city, not the employees, would be on the hook, and CalPERS would sue to recover what is owed, according to Ware.

Other Peninsula cities are keeping an eye on P.G. as they grapple with their own budgets.

In Carmel, the City Council has created a citizens’ advisory committee to deal with the issue.

“I think everything should be on the table,” councilman Jason Burnett says, “from a two-tiered system [in which new employees receive less generous pension packages than existing workers] to buying our way out of CalPERS.”

Monterey City Manager Fred Meurer is also concerned about rising pension costs. “I certainly understand where the P.G. City Council wants to go,” he says. “But I’m not sure the process will withstand [legal] scrutiny.”