Setting the stage for a dramatic politic standoff the police officers union has rejected the city of Santa Barbara's final contract offer, forcing a state mediator to intervene.

The two sides are expected to sit down with the third-party this week after they reached an impasse in late-August.

Santa Barbara Police Officers Association President Sgt. Mike McGrew has accused top city manager Jim Armstrong of hiding money, while Armstrong and city officials contend that the police need to make financial sacrifices to help the overall city.

At the core of the debate is whether the police officers union should pay any money toward their own retirement.

Right now the police union does not contribute anything to its California Public Employees Retirement System plan.

The city contributes a full 9 percent of a police officer's salary and benefits toward his or her retirement program.

This year, however, the city has asked the police union to contribute 4.3 percent toward his or her retirement.

The city's Service Employees International Union employees contribute 7 percent toward their retirement; the city contributes one percent.

The retirement request of the police union appears to be the biggest point of contention with the new contract.

"It is not uncommon for us to reach impasse and go into mediation," said Kristy Schmidt, the city's employee relations manager. "It is uncommon for us to be this far apart."

The city has also asked the police union not to cash out their accrued vacation time, and instead take the days off.

The collapsed talks come at a time when the city is struggling with a severe drop in revenues, while its costs have increased. The city scrambled to close a $9 million budget deficit at the end of the last fiscal year.

City and counties all over the state are sinking deep into deficits because of enormous pension benefits approved a decade ago when the economy was at the height of the dot.com boom.

"Right now they are not contributing anything to their retirement," said councilman Dale Francisco. "Most people are aware that there is a long term problem with PERS. We will get to the point where a majority of both and the state and local revenues will go toward retirement benefits, and that obviously is not a workable model."

McGrew, however, disputes the city's description of the situation.

McGrew said Armstrong has been on a mission to decimate the police department since he was hired nearly a decade ago. He said that the city does have the money to contribute toward the police union's retirement.

To prove their point, the police union even hired a consultant to conduct a "forensic audit," of the city's books.

After reviewing data from 1999 to 2009, the consultant Peter Donohue concluded that the city had $116 million in unrestricted net assets - money that potentially could go toward police salaries and benefits.

"Armstrong is saying you can't really use the money, but actually you can," McGrew said. "There's plenty of money in there to keep the machine running."

McGrew said that Armstrong is using government accounting tricks to make it appear as though "the general fund is starved."

The city's demands, McGrew said, are unfair.

"If they were to impose that on us, we would lose 25 cops this year and about 10 in the next week," McGrew said. "We don't have enough as it is. Armstrong over the past 10 years has cut our department so thin there is no room."

McGrew took issue with the contention that the police union was not contributing to its own retirement.

He said that the police agreed to no pay raise during the last contract negotiations.

"In lieu of the raise the city would pay that portion of our retirement," McGrew said.

The police union and its consultant Donohue are still waiting for 2010 financial documents from the city. McGrew said once those numbers are received, Donohue will drop a bombshell.

"Donohue's report is going to come out and that is going to enlighten everyone," McGrew said. "It has just been a big stall game on Armstrong's part. He is real nervous."

But Francisco said the police union may be on the wrong side of history. Many public agencies are moving away from defined-benefit plans. Francisco said two-tier systems, where new hires have less generous retirement packages, is also a possibility in Santa Barbara.

"The city has been spending up to the limit for quite a while," said Francisco, who was elected in 2007. "There is no way you can make a substantial cut unless you cut salary and benefits."

Santa Barbara Mayor Helene Schneider agreed that the police union must step up.

"I am hoping that the Police Officers Association can join the rest of the bargaining units in the city in helping us meet the budget," Schneider said. "We need their help. I hope they can come to the table."

Schneider said she understands the police union's pain, but that she must consider the fiscal health of the overall city.

"This is a sacrifice," she said. "We are not taking this lightly, but I think having them pay into their retirement will help us provide the level of public safety services the community deserves."