City Loans Its Manager $398,235 Over 10 Years : Debt: Stephen B. Julian still owes San Juan Capistrano $85,736.75. His contract may free him from repaying.

The city manager of this centuries-old mission town has an extraordinary financial relationship with the government he administers.

Records show that City Manager Stephen B. Julian over the last nine years has tapped the city’s treasury much like a personal bank--incurring five loan debts totaling $398,235--based on terms not typically available to the general public:

* He got a $250,000 city loan to buy a house in 1981, but did not repay the money within the time promised.

* He has not complied with the original repayment terms in three of his loan transactions--twice obtaining extensions based on agreements that do not appear in writing. He still has not entirely paid off the 1981 loan.

* Except for the house loan, Julian’s borrowing arrangements have not been discussed or debated by the San Juan Capistrano City Council in public. And Julian acknowledges that he has not accurately reported the loans on his required annual financial statements, saying he does not believe the law compelled him to disclose any of the transactions.

* As of December, Julian still owed the city $85,736.75--all of it at no interest. Julian got his most recent loan in May--an interest-free check for $38,500.

Both Julian and San Juan Capistrano Mayor Kenneth E. Friess said they believe that all of Julian’s financial dealings with the city have been proper.

“Every city has to make the best deal it can with its administrator,” Friess, who has been on the City Council since 1976, said last week. “The man has been absolutely straightforward and honest in all of these transactions.”

Julian, 49, said his failure to repay at least one of the loans within the time he promised was because of difficulties in his marriage.

Julian also said he is proud of his achievements in San Juan Capistrano, noting that he has guided the city through difficult development decisions and has helped attract business investment that has bolstered its commercial tax base.

“I think the records would show that any of the monies that I have used are ones that I have been legally entitled to,” said Julian, whose annual salary is valued at $125,644 to $152,345, according to city records. “I’m not in violation of personnel rules or agreements or any other such thing.”

Indeed, Julian’s latest employment contract may allow him to walk away from all of his debts with this city of 25,000 residents:

In what local-government experts describe as an unprecedented arrangement, Julian’s latest employment contract, approved by the council in February, stipulates that if he leaves city service without being fired for misconduct, he will be freed from “any obligations, . . . financial or otherwise, to” San Juan Capistrano.

“That’s extraordinary,” said Robert M. Christofferson, ethics committee chairman of the International City Management Assn. and a veteran city manager in California. “It sounds like that might forgive the loans. It’s incredible.”

“That’s a hell of a benefit,” said James Hendrickson, another longtime city manager whose recent study of municipal executives’ salary packages statewide was published on behalf of the California City Management Foundation.

Hendrickson, formerly San Clemente’s city manager, said he is not aware of a similar provision in the contract of any other city manager in the United States.

In recent interviews, Julian gave inconsistent explanations of whether he intends to pay all of the money back:

At one point he said he would do so. Later, he said the “city is at no risk,” because what’s at stake is “my money.”

All of his loan transactions with the city, Julian said, are part of his salary-related “compensations.”

Julian at first told The Times that the clause in his contract terminating all financial obligations would affect only one of the loans he has yet to repay. But later in the same interview, he said “all of those obligations are concluded” if he resigned as city manager.

Mayor Friess, asked whether he is familiar with the clause in Julian’s contract, said:

“I’m pretty comfortable with that. . . . I think if you trust your employee, and you feel he’s going to fulfill the terms of his contract, then it’s not a problem.”

Referring to the unsecured amount of debt that Julian still owes the city, about $45,000, Friess said: “There is obviously a risk that that could be lost if he decided to bail on the city, and walk. We would have to go to court to recover that money.”

Yet Friess also said: “From a personal standpoint, I would have granted all of those (loans) as cash awards . . . as salary. . . . The man has done an excellent job.”

Julian has refused The Times’ request for access to some city records that could provide a more complete accounting of the loans and other payouts he has received from city coffers. Granting access to all of those records, he said, would violate his “privacy.”

“Those are private documents,” Julian said. “They relate to compensation that I’ve already earned from the city. And how I choose to use my income is not your business. . . . How I use benefits that were afforded to me as a public employee are my business.”

Julian’s most recent employment contract allows him to lump together his vacation, sick and holiday leave and to convert all of those benefits to cash upon demand. That amounts to $26,701 a year of extra pay available to Julian, according to San Juan Capistrano Finance Director David P. Bentz.

Hendrickson, the author of the 1990 study of city managers’ salary packages, called the option of being able to convert all accrued leave to cash at any time “novel.”

Before the fall of 1989, such cash conversions of accrued sick and vacation leave were not permitted for San Juan Capistrano employees or executives unless they were leaving city service. Even then, only those on the job for 10 or more years were eligible to convert all of their leave to cash.

And such direct cash-income payments--as distinguished from loans--would be subject to federal and state taxes.

Records show that most of the loan payouts to Julian were not discussed publicly. Instead, the loans were approved after the checks were issued, as routine matters on the council’s weekly consent calendar, usually reserved for routine, non-controversial matters.

Friess said the transactions were discussed at executive sessions, in which personnel decisions can be kept private.

Nor have Julian’s terms for repayment always been put in writing:

In 1987--after Julian did not repay two related loans of $21,600 within the time he had promised--he struck what he says was an “oral” agreement with the city’s former finance director to extend the repayment period.

Most recently, Julian signed a promissory note in May for the no-interest loan of $38,500. That payment was approved by the City Council, without public discussion, as a consent calendar item on June 19--one month after the check was issued. Records show that Julian had not repaid any of that money as of late December.

THE HOUSE

City Makes $250,000 Loan

When members of the San Juan Capistrano City Council prepared to hire a new city manager in 1981, they decided to provide some form of assistance to help that executive cope with the city’s rising housing prices. Julian, who had been city manager in the Riverside County town of Banning, was allowed to borrow $250,000 from San Juan Capistrano so that he could buy a home upon taking the job here.

Such arrangements are common in the private sector, particularly in Orange County, where housing prices throughout the 1980s rose to among the highest in the nation.

Land records show that in spring, 1981, Julian bought a house at 28121 Calle San Remo in San Juan Capistrano for $207,500 and, on July 30, 1981, pledged in writing to repay the $250,000 loan to the city by July 8, 1986.

Julian, who said he spent thousands more to improve the residence, was to pay off the loan at an annual interest rate equal to the average rate of return earned by the city’s deposited investments. That rate fluctuated from 8.55% one year up to 14.75% another year.

“Should default be made,” said the promissory note signed by Julian, “. . . the whole sum of such principal and interest shall become immediately due.”

But instead of repaying the entire loan balance or obtaining conventional financing, city records and interviews show that Julian won an oral extension for the loan in 1985.

Two years later, in November, 1987, Julian and the city renegotiated the repayment terms. Based on that agreement, Julian sold the house to San Juan Capistrano in April, 1988, for $280,000--$72,500 more than he paid for the house. However, because Julian had been making only minimum, $800-a-month repayments, he still owed the city $86,095.

And, when Julian sold the house to the city, he signed a promissory note pledging to repay all of the money he still owed, over five years, at no interest and with no collateral required.

“The amount due shall be paid at no interest in the sum of $1,434.95 monthly,” said the promissory note, signed by Julian on Feb. 2, 1988.

But records show that after falling $2,628 behind in repaying that note, Julian again renegotiated: The due date was extended to June, 1995, and his monthly payments were cut nearly in half, to $822.50. The total still owed the city in interest is $45,236.

Julian, asked why he has had such apparent difficulty repaying the original $250,000 loan, cited turmoil in his personal life.

“My wife and I went through some marital difficulties and subsequently ended up getting a divorce,” he said. “And within that lies some of the difficulty that we had.”

Mayor Friess also said Julian “got a divorce, and his whole financial thing changed.”

However, in an interview one day after his first comments, Julian acknowledged that he and his wife have never filed divorce papers.

Julian said that, although property records show that they bought a house together in June in San Juan Capistrano for $265,000, they continue to live separately.

Julian and his wife earlier bought a condominium for $117,500 in the city in December, 1985--the same year that he won an extension for repaying the original $250,000 loan.

Julian, however, said he does not think that he has gotten financial terms from San Juan Capistrano that are more favorable than he could have gotten from a private, institutional lender.

“Put it this way: If I defaulted on a loan with a private lending institution, they’d come back, they’d get the house,” Julian said, referring to the residence that he owned for seven years before selling it to the city for $72,500 more than he bought it.

“They’d sell the house,” Julian said. “They wouldn’t be going after you for all the lost interest forever and ever. In this instance, I’m paying that back, because there were public funds involved. . . . I’m simply paying off the outstanding interest that was due, and I’m paying back every penny.”

But Julian also acknowledged that his employment contract says that if he leaves San Juan Capistrano for reasons other than “misconduct” or “malfeasance,” he will not have to repay “any” financial obligation.

“That’s right,” Julian said. “In other words, you’re not going to can me and then require me to pay $86,000 on a house that I no longer live in, own or anything else.”

Friess termed the contract provision that would erase any financial obligations “a fairness clause” aimed chiefly at excusing him from any debt from the first $250,000 house loan that might remain.

“Should we just dump him out,” Friess said, then “it’s reasonable for him to have some release from that.”

Julian’s annual financial disclosure statements noted the existence of the original house loan but describe it in ways that are at odds with the actual dates the city manager owned the property and sold it to the city. Julian’s income disclosure statement encompassing 1988 reported that he had the loan, but Julian did not check either of two boxes that would have revealed whether the “entire loan” had been repaid.

In his disclosure statement for 1987, Julian noted the existence of the loan but stated that he had repaid the entire amount.

Julian, in his interviews with The Times, acknowledged that and other mistakes in his disclosure statements but said he does not believe that state law required him to disclose the transactions.

OTHER LOANS

Unique Repayment Terms

Julian obtained two other loans from the city on Dec. 23, 1986, when he drew separate checks for $16,639 and $5,000. Again, he did not repay the money within the time he promised.

Julian refused The Times’ request for photocopies of all documents pertaining to the transactions. But he did allow a reporter to review a promissory note, in which he pledged to repay the $21,639, at an interest rate of 9.2%, “not later than June 1, 1987.”

Asked why none of the money had been repaid by that date, Julian said: “Because it was extended.”

Julian said that he orally negotiated the revised terms with San Juan Capistrano’s then-finance director, Robert Boone.

“I don’t have any recollection of why it was extended,” said Boone, who left San Juan Capistrano in fall, 1989, to accept a position with the city of Lake Elsinore in Riverside County.

Records show that Julian repaid the $21,639, with interest, on Dec. 31, 1987. He did not report the existence of the loans on his state financial disclosure statements for 1986 or 1987.

Mayor Friess termed the December, 1987, loans a specially tailored transaction in which Julian borrowed the money by using his accrued or yet-to-be-earned sick leave as collateral.

On Dec. 21, 1987, Julian obtained another check, for $2,000, that was described in a computer printout of city warrants as “Additional CM Loan.”

Julian disputed whether the $2,000 check was actually for a loan.

“It’s probably just a straight piece of monies that are available to me,” Julian said. “No, I don’t think that’s a loan at all. . . . It was a payout.”

Julian did not report the transaction as a loan on his financial disclosure statement that encompassed 1987.

In the most recent of his loans from the city, Julian received a check on May 16 for $38,500. Julian on that date signed a promissory note pledging to repay the money before “my leaving employment with the city.”

According to the promissory note, the city manager has placed a chunk of his annual vacation and sick leave to be collateral for the loan. Julian gave conflicting answers when asked whether he would repay the $38,500 to the city.

Julian at one point said the $38,500 was part of the “compensations” to which his contract entitles him--not a loan from the city.

“Are you asking me that if I decided to leave this job tomorrow, would the city be on the hook for that amount of money (the $38,500)? The answer to that question is no. And the reason that the answer to that question is no is that the monies that I have borrowed are my monies.”

Later, Julian said that he used the $38,500 as part of a down payment on the $265,000 house he bought in June and that he intended to reimburse the city.

“I have not repaid on that yet,” Julian said. “But it will be repaid. It will be repaid.”

However, when asked at another point whether the provision in his contract terminating any financial obligations he owes the city if he resigns would preclude his having to repay the $38,500, Julian said:

“Listen, upon termination of my employment with the city, all of those obligations are concluded.”

City Government Loans to Its Top Executive

THE HOUSE

San Juan Capistrano has made five separate loans to city manager Stephen B. Julian. In July, 1981, the city loaned him $250,000, to but and improve his house, at 28121 Calle San Remo. In April, 1988, city officials decided to buy the house from Julian “for future municipal housing purposes.” The city paid him $280,000 in the transaction, but Julian still owes $45,236 in accrued interest. The house, meanwhile, has been rented to tenants who do not work for the city.

THE LOANS

* July 30, 1981; $250,000 at variable interest rate; $45,236.75 still owed, at no interest.

* Dec. 23, 1986; $5,000 at 9.2% interest; repaid as of Dec. 31, 1987, at 9.2% interest.

* Dec. 23, 1986; $16,639 at 9.2% interest; repaid as of Dec. 31, 1987, at 9.2% interest.

* Dec. 21, 1987; $2,000 at 0% interest; $2,000 still owed, at 0% interest.

* May 16, 1990; $38,500 at 0% interest; $38,500 still owed, at 0% interest.

* Total owed city: $85.736.75 at 0% interest.

THE CONRACT

City manager Stephen B. Julian won a provision in his latest employment contract that may terminate all of his loan debts to the city if he leaves office for reasons other than “misconduct.”

Source: Interviews, city of San Juan Capistrano