SAN FRANCISCO - Half Moon Bay, Calif., may sell judgment obligation bonds to pay off a debt to a developer that has caused speculation that the city could be forced to declare bankruptcy.

City manager Michael Dolder Friday said the city of 12,300 has no need for such drastic measures. Instead, he's pursuing two options simultaneously - a loan through the California Infrastructure and Economic Development Bank and the sale of judgment obligation bonds.

"The city is not upside down in its ongoing costs," he said. "It has a one-time judgment."

Half Moon Bay just needs to amortize the cost over a number of years, he said. The city has approval to sell $18 million of judgment obligation bonds, but it plans to use reserves to pay part of the settlement.

As of June 30, 2008, the city had an unreserved general fund balance of $7.3 million. Dolder said it has cut its $11.6 million general fund budget to free up $1 million a year for debt service.

Local lawmakers are seeking $10 million of loans through the state infrastructure bank because they may provide lower interest rates than the judgment bonds. The city has until the end of August to pay a developer $18 million for blocking development on a piece of land in the beach community 30 miles south of San Francisco.

Half Moon Bay was ordered to pay $41.1 million in 2007, but it negotiated the debt down to $18 million last year. The city said the $41.1 million judgment "could have bankrupted" it in an April 2008 news release, and the city's mayor told the local newspaper that the city had considered bankruptcy.

But Dolder and the city's lawyers are eager to assure investors that they are not entertaining such options.

"The City Council has never put forward a desire to declare bankruptcy," Dolder said.

Half Moon Bay wouldn't be eligible for bankruptcy protection because it isn't insolvent, said John Knox, a lawyer at Orrick, Herrington & Sutcliffe, the city's bond counsel.

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