(News)

Like a homeowner who uses an unexpected windfall to pay off high-interest credit cards, McKeesport officials plan to take an early payment from the city's sewerage authority and use it to cut the city's debt.

At a special meeting last night, council by 4-2 vote approved a plan to pay off more than $19 million in bonds issued in 2005. The money will come from the Municipal Authority of the City of McKeesport, which intends to pay off $24 million it owes to the city.

Mayor Regis McLaughlin and City Administrator Dennis Pittman said paying off the bonds early will drastically reduce the amount of money the city pays each year in debt service, and will allow the city to stop paying for insurance on those bonds.

. . .

"It's a good thing for the city, because it's going to keep the city moving forward without struggling or raising taxes," said McLaughlin, who chairs the sewerage authority board. "And it helps the authority because we're paying down our debts early."

If completed, the plan also should improve the city's creditworthiness and enable it to borrow money in the future at a lower rate, said John McShane of Philadelphia-based Boenning and Scattergood Inc., a brokerage and bond counsel for the sewerage authority, and one-time bond counsel for the city itself.

"One of the problems that you've had is that you don't have an investment-grade (credit) rating because your debt is so high," McShane told council. "All of a sudden, you're going to be in a position to start moving forward, and do projects you may not now be able to do."

The city has about $31 million in debt outstanding, Pittman said.

"If we were to use this $24 million to do anything but reduce our bonded debt, we would have literally mortgaged this city's future," he said. "This gives us the opportunity to meet our bonded debt and manage our cash flow."

. . .

But the decision was not without controversy, with Councilmen Darryl Segina and A.J. Tedesco Jr. arguing that the city was moving too quickly and without allowing council to study the proposal more carefully. Both voted against the plan. Councilman Richard Dellapenna Jr. was absent.

"What is the rush?" Segina said.

"There is a rush," McShane said. "The authority is in a great position right now. They have a great cash flow. They have the equivalent of an A-plus rating at Moody's, and they have access to the lowest interest rates we've seen in the capital markets in the past 40 years."

The sewerage authority, which also serves residents in several neighboring boroughs, recently acquired the Duquesne and Dravosburg sewerage systems as well.

Whether or not the city decides to pay off its debts early, McShane said, the authority intends to move forward in paying off its own.

. . .

The meeting also was not without theatrics. City Controller Raymond Malinchak was ejected from council chambers when he ignored Council President Michael Cherepko's repeated requests to stop interrupting McShane with questions.

"Mr. Malinchak, you're out of order," Cherepko said. "This is a council meeting. (You're) not a voting member of council."

As a city police officer removed Malinchak from the room, Malinchak --- who is running for mayor against Cherepko --- protested that his "rights as a citizen" were being violated.

. . .

The sewerage authority in 1997 borrowed $3.5 million from the city. It owes $2.4 million on that loan. In addition, the authority in 2008 agreed to purchase the city's sewer lines and other connections at a cost of $30 million; it owes $21.9 million.

But the authority --- which is in the middle of a major expansion program --- has recently received state loans and grants totalling nearly $37 million, McShane said.

As a result, he said, the authority wants to pay off its debts to the city early, to lower its debt load and improve its own cash flow. "From the authority's standpoint, it's a no-brainer," McShane said.

. . .

Under the plan presented by McShane and endorsed by McLaughlin, the city would use the authority's payment to redeem $19 million in bonds issued in 2005 as part of former Mayor Jim Brewster's McKeesport Renaissance program.

The remaining money --- about $5 million --- would be put into an escrow account for the city.

The authority is paying the city 4 percent interest on its debts to the city, while the city is paying more than 5 percent interest on its own debt, McShane said.

"You'd be reducing debt that has a higher (interest) rate than what you let the authority borrow at," he said.

. . .

Because the authority would pay off its debts early, the city would no longer receive regular payments on the debts. Instead, regular payments from the escrow account would replace the cash flow from the authority's debt payments.

But Segina said the plan is full of "jargon" and "too hard to understand for a layman," and protested that revisions were circulated to council only a few hours before the meeting.

"For us to sit here now and try to make a judgment regarding $24 million is beyond comprehension, as far as I'm concerned," he said. "This is insane for this to be presented to us at this time, without proper representation."

But McLaughlin said that council has known of the sewerage authority's plans to pay off its debts early for "at least five or six months."

Cherepko said last night's meeting --- which included McShane and two other attorneys specializing in municipal bonds --- was designed to answer council's questions.

. . .

Segina expressed concern that the plan was crafted by the sewerage authority and presented to the city as a "done deal."

"It seems like MACM (the sewerage authority) is the tail, and they're wagging the city's dog," he said. "We're an elected body. They're just an appointed body over there ... I resent the fact that we're being dictated to by MACM."

Segina and Malinchak also have complained that several city officials --- including McLaughlin, Councilman Dale McCall and Public Works Director Nick Shermenti --- have conflicts of interest because they sit on the sewerage authority's board of directors.

City Solicitor Bruce Dice has not yet issued a public ruling on whether or not the board positions --- which are uncompensated --- represent a conflict of interest.