"As we have discovered, there is no policy," Councilman Craig Gartman said Monday night during the body's regular public meeting. "As a council, is this something we wish to get into?"

'Yes' was the unanimous answer from his colleagues, who last month directed City Administrator Tom Haglund to halt all merit-based raises until June 2010 after they learned that 31 employees had received more than $130,000 in merit-based pay hikes since layoff talks began in September. Union representatives soon challenged the unilateral action by threatening lawsuits because, they said, the decision involved a change in wages, which normally requires negotiations.

Pay grades and annual cost of living raises are hammered out during regular city-union negotiations, and after consulting with the unions two years ago, the previous city council approved Gilroy's Human Resources and Regulations - a 73-page document that specifically addresses merit raises - according to a copy of the July 2007 resolution. As written now, the "Performance Pay Increase" policy states the city administrator "may authorize" the first merit raise for an employee who also received a recommendation from a superior. There is no specific mention of the administrator's authority when it comes to subsequent raises - which officials calculate using a ratings matrix - and that's what council members want to clarify.

Merit raises are in addition to regular cost of living adjustments - or COLAs - that most employees receive based on union-negotiated contracts. Merit raises are also known as a "step increases" because the discretionary pay bump raises an employee's salary by one "step" out of five assigned to that position's pay grade - which comes out to 5 percent per step. Once an employee reaches their pay ceiling, they can no longer receive merit raises but can still receive COLAs.

"Every year after (the first review), you get to go up to the next step," Gartman said of the seemingly automatic process. "When times were good, it wasn't an issue, but it was something I was completely unaware of until I started doing digging earlier this year."

It is this apparent awakening that has shrouded such a long-standing policy in confusion. After the economy tanked and the raises became controversial, council members said they wanted Gilroy's policy to more explicitly identify Haglund's authority to deny merit bumps. But denying such raises has never happened because the practice is long-standing here and at public agencies throughout the Bay Area, according to former City Administrator Jay Baksa as well as union members and city officials both here and at other nearby cities.

Despite history, Gartman said Tuesday the council needed to "make a clear policy to replace a practice" because "we cannot keep throwing out money."

"If I was in a union, I'd argue the same thing, but this is a new day," Gartman added.

Along the same lines, Haglund has said he was merely perpetuating Gilroy's policy despite hard economic times, but council members, who had repeatedly directed Haglund to cut costs across the board, said afterward they wished he had consulted them before issuing the raises.

When council members broached the idea of rewording the policy during a recent closed session scheduled to discuss possible budget-relieving cuts to union wages and benefits, the city's attorney shied them away from the topic because the item had not been posted on the meeting's public agenda - a legal requirement. Monday night's public direction to hold a closed-door meeting was essentially a notice to place the raise topic on upcoming closed meetings with relevant agendas. State and local law allows a closed session for personnel, legal and property matters, and the council held one after Monday night's regular meeting to discuss possible changes to unions' wages, hours, benefits and working conditions, during which council members directed Haglund to conduct further research and return to the next closed session April 27, Haglund said.

Councilman Perry Woodward said he was "reluctant" to discuss the raise issue in public because the three unions representing Gilroy's firefighters, police officers and other City Hall workers have talked about potential lawsuits. Beyond this, if union representatives see a split council publicly struggling to create new payroll practices, then that could detract from the body's later negotiating powers, council members have said.

As a sort of compromise, Councilman Peter Arellano suggested the council deal with the merit raise issue individually with each union, otherwise any changes would be "premature," he said.

Councilman Dion Bracco agreed and added that giving employees steady merit increases and then suddenly taking them away without any talks set a bad precedent.

"I think we need to do it with the bargaining units so everybody's cards are on the table," Bracco said. "We hired an employee and tell them that if they reach certain benchmarks in their career, they'll get a raise, and then we change our mind, and say, 'No,' ... If we continue down this road - give something and then take it away - we're not going to be able to find any employees."

Pending any union negotiations, Haglund said wage freezes will continue. For now, though, 24 city employees who would have been eligible to receive merit-based raises by the end of this fiscal year will go without, according to Director of Human Resources LeeAnn McPhillips. The more than 60 merit-based raises that have been issued in the last year will not be rescinded, though McPhillips returned her $8,000 raise in January soon before the council ordered the freeze.