Retirement debt to be paid off

City officials voted Tuesday to borrow from several Peters to pay Paul, tapping six internal funds to eliminate the $10-million debt to the Public Employee Retirement System.

The City Council approved City Manager Ken Frank’s recommendation to pay off the debt that stems from a state mandate giving retirees full credit for all the years they worked, even before higher benefits were approved. The payoff eliminates the 7.75% interest PERS is charging to spread the debt payment out over about 14 years, which would have added an estimated $6.4 million to the total cost.

“This may be one of the most important things we do all year,” said Mayor Elizabeth Pearson, who later voted against the recommendation because it included the Parking Authority Fund. “This is a throwaway vote “” a symbolic protest of taking money out of the parking fund.”

As approved by the council: $1.3 million will be appropriated from the parking fund; $2 million each from the General Fund and the Insurance Fund; $2.5 million from a second Insurance Fund (compensated absences); $700,000 from the Vehicle Replacement Fund and $1.5 million from the Street Lighting Fund.

Using the temporary surplus funds means the city can start saving $40,000 in interest payments on Feb. 1, Frank said.

“There would be a net savings of $209,000 in the current fiscal year,” Frank said.

Other savings include loan origination, legal and financial advisor fees and virtually no staff time.

Loans will be paid back at a rate of $858,000 a year with 2.75% interest tacked on, as recommended by Frank to compensate for the loss of interest on the $10 million that will be siphoned out of the city’s portfolio.

Frank also presented options to float bonds or borrow from a bank to pay off the debt, but raised objections to both.

The bond market is not exactly vibrant these days and banks would charge considerably more than 2.75% to make a 14-year loan. A shorter term would mean less interest, but higher annual payments, which defeats the purpose of reducing the city’s outlay.

Using city funds also allows for more flexibility.

If money is needed in one of the tapped funds, the loan could be shifted to another source, Frank said.

Frank first proposed the loans as a means to save the city money about a month ago. The proposal presented Tuesday took into consideration Pearson’s refusal to consider borrowing from the Disaster Fund on the original list and Mayor Pro Tem Toni Iseman’s objection to taking money out of the Capital Improvement Fund at a time she believes projects should be accelerated to take advantage of low bids due to the economy.

Before presenting the proposal to the council, Frank notified 10 civic groups of his intent, including the League of Women Voters and the Laguna Beach Taxpayers Assn.

Both supported the concept, Frank said.

There was no public opposition at the meeting.