Montebello Borrows $16.5 Million to Avert Crunch From O.C. Crisis : Finances: Funds will allow payment of $11.4-million debt and provide cash to avoid immediate budget cuts.

Montebello has arranged to borrow about $16.5 million from a division of Sumitomo Bank to avert a financial crunch stemming from the city’s involvement in Orange County’s ill-fated investment pool.

The funds will allow the city to pay an $11.4-million debt due in June and provide cash to avert immediate budget cuts, officials said. Currently, more than $30 million of city funds is frozen in the Orange County pool.

The financing arrangement with Sumitomo Trust and Banking Co. “will give us the ability to pay off our bondholders, downsize our budget in an orderly manner over five years, and recover our credit rating,” city Administrator Richard Torres said.

Anticipating a drop in income from the Orange County investments, the city plans to reduce its $32-million budget by $1 million a year during the next five years. Officials said they are not certain what form the cuts will take, but would most likely come through tighter spending and not filling vacant positions.

Montebello’s budget includes about $3 million in income from the Orange County pool, but city officials said they are uncertain how much they will receive this year.

Under the financing agreement, which the City Council approved last week, the bank will give the city “certificates of participation”--similar to a loan--to be paid back over 30 years, officials said.

Montebello, in turn, will put up $4.6 million in annual revenues as collateral, including $2.6 million from the city golf course. If the city defaults, Sumitomo could also take over golf course operations until the debt is paid, said finance director Ted Nix.

With the Sumitomo deal, officials will be able to pay the debt in June, retire an existing $1.7-million debt on the golf course, and have some cash reserves to avoid drastic budget cuts, Torres said.

The council agreed to pay a flexible interest rate that doesn’t have a ceiling, prompting criticism from some residents.

The rate is tied into the London Inter-Bank Offer Rate (LIBOR), an international index of the cost of lending between banks. At the current rate of about 7.1%, the city will pay about $1.3 million a year in interest.

“The variable interest rate bothers me a great deal,” resident Irene Lopez told council members. “Today it’s 7% . . . but what about four or five months from now?”

City finance officials said the London rate is traditionally fairly stable. Torres said that under the terms of the deal, Montebello has the option of paying back the money at any time, and will do so if Orange County returns a portion of the city’s investments. Officials said they hope to recover $20 million from the $30 million currently in the county pool.

Montebello’s investment in the Orange County pool totaled $47 million when the county filed for protection under federal bankruptcy laws in December. The city had borrowed $31 million at lower interest rates and invested it in the Orange County pool in hopes of earning a higher return.

The city faced a Dec. 30 deadline for paying back $25 million of the $31 million that it borrowed. A federal judge released about $14 million from the Orange County pool, and lenders agreed to extend the remainder until June.

The city owes an additional $6 million by Sept. 30, but Torres said the city has set aside funds to meet that deadline.

In addition, Sumitomo has offered to lend the city up to $30 million if the city needs more funds in coming months, Torres said.