Buoyed by a successful insurance case, the Half Moon Bay City Council — and two challengers seeking seats on the board — have all endorsed ways to use an expected $10 million judgment to pay off the city’s bond debts early.

But figuring out the best way to accomplish that was complicated, warned City Manager Laura Snideman. She suggested the city’s financial team would need months to study the options before it could recommend a course of action.

Half Moon Bay is on track to pay more than $32 million through the year 2040 as part of a series of bonds issued in 2009 to fulfill a legal settlement in the Beachwood land-use lawsuit. However, city officials also have the option during certain pre-scheduled years to pay off the bonds early without a penalty. Doing so would dramatically reduce the interest and lower the city’s total debt.

Throwing out a disclaimer that the city was working with “big estimates,” Snideman suggested the city could save as much as $25.4 million if it could make the most out of the early opportunity windows to pay off the bonds. City officials later said that amount was a typo, and the real number was $15.4 million.

“That’s the biggest bang for your buck, but it requires more than the $10 million we’ve been promised to receive,” she said. “That’s the maximum opportunity we have as of now.”

But even with that goal in mind, city staff warned council members they would still face legal and financial uncertainties going forward. The city issued two separate bond packages in 2009, including $5.7 million in judgment obligation bonds, and $10.9 million in federally subsidized “Build America Bonds.” Each bond program has its unique payment structure, interest and payback windows.

Other factors could also throw a curveball at the future bond picture, Snideman said. Federal lawmakers were signaling they could pull back the government subsidy on the Build America Bonds program, possibly leaving the city on the hook for as much as $6.6 million more in debts.

Half Moon Bay has already encountered problems with the Build America Bonds, a 2008 stimulus initiative intended to build infrastructure and create jobs at the height of the recession. Earlier this year, IRS investigators accused the city of inappropriately using the subsidized bonds to pay off their debt and essentially buy the Beachwood property for private uses. The city settled the matter in May by agreeing to lower the federal subsidy by 6 percentage points, meaning the city would pay about $1.38 million more over the full bond schedule.

Discussions about paying off the Beachwood debt early were reinvigorated last month after an arbiter ordered the Insurance Company of the West to pay Half Moon Bay $10 million. The money was due because of policies the city had in the 1990s. City attorneys say they intend to press the case further to seek more damages, but they have no clear timeline for when the city would receive any of the money.

Two candidates running for the City Council last week both urged the sitting members to make paying off the Beachwood debt the top priority for the insurance money.

“The only intelligent use of this, I think windfall, is to pay off the bond as soon as possible in any way that makes sense,” council candidate Harvey Rarback said. “I don’t think we should take this money and use it for anything else but reducing our debt.”

Fellow candidate John Ullom agreed, suggesting the city may be able to pay back the principal early by using an “extraordinary event” clause added in the bond language. Snideman responded that the city’s attorneys had investigated that concept, but they did not think they could make a viable case for it.

Council members encouraged staff to continue studying the bond structure and come back with recommendations. Half Moon Bay needed to take a long-term financial perspective, said Mayor Allan Alifano. He argued the insurance money did not change the city’s need for the Measure J sales tax increase.

“We have significant capital needs over the next few years,” he said. “I don’t think this should change our capital needs and why we put Measure J on the ballot.”

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