Nor a Lender Be: Lessons for a City : * San Juan Capistrano Now Reckons With Its Loans

San Juan Capistrano now must get beyond a painful chapter in its recent history, the controversy over generous city loans made to the city manager. The City Council voted last week to let City Manager Stephen B. Julian go, saying that a lawsuit challenging the approval of the loans had undermined his ability to do his job.

The matter may have been concluded mostly. What remains unknown is how much has the city learned for the long term from its recent exercise in poor judgment.

Over a decade, the council made five loans to Julian, resulting in about $400,000 in debt. First there was a $250,000 house loan; other loans were made whereby Julian was allowed to use his accrued sick, holiday and vacation leave as collateral. In effect, the city became a personal lending institution for this employee.

Some generosity was inspired by a willingness to be helpful. The city wanted to assist its city manager to be able to afford housing in an expensive area. But some resulted from naivete. One official explained the city’s lending this way: “Every city has to make the best deal it can with its administrator.”

It was in that context that the city agreed to a provision in the city manager’s most recent contract that could excuse financial obligations. And the same could be said of an oral agreement with the then-city treasurer to extend the repayment deadline for two loans after Julian did not repay within the period required originally. Ditto to a deal to convert those same accrued-leave benefits to cash upon demand--amounting to $26,701 a year in extra pay. Moreover, with the exception of the $250,000 house loan, approved by the council in 1981, most agreements flew through the council without public debate.

That kind of deal-making should never be allowed to happen again.

Now the city has to reckon with the consequences of the council’s previously agreed-to generous terms. Under the provisions of Julian’s 1990 contract, he could be excused from any unpaid debts that remain if terminated for anything other than misconduct. And there wasn’t a hint in last week’s dismissal of any allegation of misconduct on Julian’s part. At the end, there was only the expression from city leaders that his departure was necessary because it was difficult for Julian to be effective or exercise authority.

So now the city is basically stuck with what it has signed off on. Yes, the city officials and the lawyers will now negotiate the details. “There are about 20 items that need to be discussed,” says City Atty. Richard K. Denhalter. But nobody should kid himself, either. Julian has said he hopes the council members will honor the debt-forgiveness clause in his contract. The city’s finance director says Julian owes $27,965.25 on a house loan and $26,306.07 on loans taken from his benefit package. The latter is secured, but the house loan is not. So on some of the money, better luck next time, San Juan Capistrano.

There is at least one thing the city can do on the way to resolving to do better the next time. It can complete and make public an independent accounting firm’s audit, paid for by the city’s taxpayers and undertaken to review the loans made to Julian. Last spring, the City Council suspended that review because of the city attorney’s concern about a pending lawsuit that challenged the propriety of the loan transactions. A Superior Court judge dismissed that lawsuit, finding no evidence of illegal expenditures, waste, misuse of public funds or fraud. And now Julian has been let go. So it would be good if future councils can learn from the auditors’ findings, and be kept on their toes by them.