Campbell council rejects paying off loan early, fearing penalties

By jeanne starmack

starmack@vindy.com

campbell

City council has rejected a proposal to pay off a loan early.

Council voted 3-2 at its meeting this week against legislation to allow the payoff.

Finance Director Sherman Miles originally had proposed the idea to offset a loss of between $60,000 and $90,000 in state funding for local governments next year.

He wanted to dip into the city’s $817,000 cash reserve to pay what’s left of $760,000 the city borrowed when it went into fiscal emergency in 2004. That amounted to $120,000. The city gets $10,000 a month from the state in local government funds to pay off the loan. Miles had argued an early payoff would free up that money for other uses.

Council argued about it for several months, with member Bryan Tedesco saying the city should save the reserve money for emergencies.

Miles insisted the city has much more money in reserve than it needs.

The measure to allow the payoff couldn’t be put to a vote in June because not enough council members agreed to sponsor it.

It finally got to the floor and was advanced to a second of three readings last month. It was up for final passage Wednesday.

Council had asked city Law Director Mark Kolmacic last month for an opinion on whether the city would be violating state law by paying off the loan early.

Kolmacic told council Wednesday it would not be in violation of state law, but language in the loan agreement prohibits paying the loan off early.

He said he spoke to First Place Bank and was told the bank would not penalize the city.

The bank pointed out the city could run into trouble with the county, however, he said, because the county holds the state money in escrow for the city and pays on the loan every six months.

“The county administers the payment. Why?” he asked, adding that it isn’t just for altruistic reasons.

“There has to be an economic incentive to them. The county’s got to be making money, and might come back and say, ‘Hey, you weren’t allowed to pay early and you owe us some money,’” Kolmacic said.

Kolmacic said he did not have time to investigate further before Wednesday’s meeting.

Council President Juanita Rich and Councilman Mike Tsikouris both said they did not believe the county would penalize the city for paying early. Councilmen Joe Mazzocca and Lew Jackson indicated they had concerns with leaving the question unanswered.

“I think we should hold off and let Mark check a little further,” Tedesco said.

But the legislation stayed on the floor and was rejected, with only Rich and Tsikouris voting in favor of it.