Showdown on City Manager’s Debt Expected in City Council : Loans: Two San Juan Capistrano councilmen vow to seek an explanation for the generous terms behind $398,235 borrowed from the city by Stephen B. Julian.

The elaborate financial transactions of this city’s top executive--including his receipt of municipal loans totaling thousands of dollars--are prompting angry reactions from residents and demands for explanation from two council members.

“I do not support that type of financial arrangement at all,” said Councilman Jeff Vasquez, who was elected in November and had no role in approving the transactions with City Manager Stephen B. Julian.

“I think it’s wrong,” Vasquez said. “I want an official response. . . . Regardless of whether the city manager is employed, I want him to pay the money back.”

Vasquez said that he has written to Julian, requesting a “prompt response” to his concerns, and that he expects the issue to be raised at Tuesday night’s City Council meeting.

“This issue is going to be addressed,” said Councilman Gil Jones, who was also elected in November. “Of course I have concerns about it. . . . Quite frankly, the council has been discredited, and it concerns me.”

But Jones said he is withholding judgment regarding the transactions until he has an opportunity to “meet face to face” with Julian.

The reactions followed a report in last Sunday’s Times Orange County Edition that Julian has incurred loan debts with the city totaling $398,235, based on terms not typically available to the public.

The story also disclosed that Julian did not repay three of his five loans within the time promised, that he still owes the city $85,736.75--at no interest--and that he has a clause in his latest employment contract that may ultimately free him from any financial obligations with San Juan Capistrano.

The first loan, in 1981, was to help Julian buy a house in the city. The most recent occurred in May, when Julian obtained a $38,500 loan, at no interest.

With some residents vowing a recall campaign against two councilmen who helped approve the transactions over the last decade, both Vasquez and Jones said they expect Julian’s financial dealings to be discussed at Tuesday’s meeting.

Carlos F. Negrete, a local lawyer who has pledged to lead the recall against veteran council members Gary L. Hausdorfer and Kenneth E. Friess, said he will press his criticisms of Julian’s arrangements at that meeting.

Friess, now mayor, and longtime Councilman Lawrence F. Buchheim said last week that they have no qualms about the transactions with Julian.

Hausdorfer, a member of the council since 1978 and mayor last year when Julian’s employment contract was revised, did not return several telephone calls seeking his comment.

For his part, Julian last week again defended his transactions as proper and said he has “every intention” of repaying $46,063 of his debt to the city that is unsecured.

In a prepared statement, Julian again blamed turmoil in his marriage for his failure to comply with the loan repayment terms.

“I am grateful and most appreciative of a City Council that has had the decency to allow me to work through a difficult personal and financial situation, without losing sight of their public responsibility,” Julian wrote.

In the statement, faxed to city managers throughout Orange County, Julian also addressed the provision in his contract that may terminate financial obligations to the city if he leaves San Juan Capistrano.

Julian’s contract specifies that unless he dies, loses his “legal capacity,” breaches his duty in a “habitual or willful” manner or commits “any act of misconduct or misfeasance,” he would be entitled to a lump-sum severance payment equal to his annual salary.

“In addition,” the contract states, “any obligations of EMPLOYEE, financial or otherwise, to EMPLOYER are likewise terminated.”

Julian, in his prepared statement, offered this interpretation:

“The termination provision of my contract does not excuse me from financial obligations nor the debt owed the city if I leave the city to take another position or if I (am) terminated for cause. It does release me from further repayment of the outstanding balance of the (1981) housing loan only in the event the City Council decides they want to terminate my agreement without just cause.”

Efforts to reach Julian for further comment were unsuccessful.

City Atty. John R. Shaw said Friday that he is not aware of a similar provision in any other public employee’s contract that would forgive financial obligations.

But Shaw said he believes that the provision in Julian’s contract, while “unique,” is legally enforceable.

Shaw offered this interpretation of the contract: “If he is terminated for anything other than (for doing) something very seriously wrong--in other words, if they (council members) don’t feel he fits in--it’s under that (event) that the forgiveness provision triggers.”

Vasquez, one of the newly elected council members, said he wants to learn what role Shaw had in drafting that provision in Julian’s contract.

“I’m really shocked regarding the forgiveness of the loans. . . . I didn’t know that,” he said.

Vasquez, who said he has received many contacts from concerned residents, added: “There’s a big question whether or not the city attorney was acting in the best interest of the city.”

Shaw said his role at the time the contract was drawn up had been to determine only whether the forgiveness clause was legally enforceable.

“I’m not going to engage in debate with you or anybody else over whether this policy is wise,” Shaw said, adding that he considered the potential forgiveness of the loans part of Julian’s overall severance package.

Buchheim, one of the councilmen who served throughout the 1980s, said he has no regrets about approving any of Julian’s transactions.

“We had approval of the city attorney,” Buchheim said. “And we did nothing wrong, in my estimation.”

Mayor Friess offered a similar assessment. “It may be different,” Friess said of the city’s financial relationship with Julian. “But it’s not bad.”

Friess also has said that, instead of extending loans, he would have preferred to have provided commensurate cash payments to Julian--with no obligation to repay.

Friess’ statement drew disagreement from Vasquez, who said: “I do not feel the same way the mayor does. I think if the previous council (members) wanted to pay (Julian) a bonus, they should have paid him a bonus. And there should have been public discussion of that.”

Phillip R. Schwartze, one of the veteran council members who did not seek reelection in November and approved of Julian’s transactions throughout the 1980s, said he too has no regrets.

“I run the city like a business and suggest things to do in a businesslike manner,” said Schwartze, a real-estate consultant who no longer holds public office. “Frankly, if I had it all to do over again, I would probably do the same thing.”