CAPITOLA - The City of Capitola has reached agreement on a three-year contract with bargaining groups representing midmanagement and confidential employees that provides $300 to $600 a year toward health care expenses but no cost of living increase for the first two years.

The third year, the cost of living increase will be based on the San Francisco-Oakland-San Jose consumer price index, which was 2.6 percent in 2011.

New employees in those bargaining groups will pay 5 percent more than current employees toward pension costs for their first five years.

After five years, they will pay the same rate as current employees, which is what the California Public Employee Retirement System requires, said Lisa Murphy, the city's administrative services director.

Murphy noted Capitola had the foresight in 2007 to institute a cap on what it would pay toward employee pensions to limit exposure to rising costs.

For miscellaneous employees, the cap is 16.488 percent of payroll. CalPERS set the pension contribution rate at 23.999 percent, so employees pay 7.511 percent.

On July 1, when CalPERS raises the rate to 24.755 percent, employees will pay 8.267 percent, and a new employee would pay 13.267 percent.

Requiring new employees won't save much initially because the city is unlikely to hire a large number of new employees.

In time, according to Murphy, the change could save $50,000 to $70,000 a year, about 1 percent of payroll, if all bargaining groups agree to it.

The city has been making the pension contribution for City Manager Jamie Goldstein since he took that post two years ago. He has agreed to pay 8.267 percent, the same as miscellaneous employees, with the city contributing the same amount to a deferred compensation account for him. If and when CalPERS raises the contribution rate, the city manager will pay the higher rate.

The rates are different for police officers, who are still negotiating with the city.

Under the "me too" clause, if police are granted an increase in salary or health care benefits, the same increase would be given to midmanagement, confidential employees and department heads.

Department heads will be eligible for a 5 percent pay increase after 12 years. Public works chief Steve Jesberg would be eligible in October 2013 and Murphy would be eligible in January 2014.

The employee agreements go to the City Council today for final approval.

Follow Sentinel reporter Jondi Gumz on Twitter: @jondigumz