The Healdsburg City Council this week authorized the refinancing of some of the city's employee pension debt, in a move estimated to save $900,000 over a decade.

The City Council on a 3-0 vote approved the issuance of up to $9 million in bonds to pay off a "side-fund debt" that the city owes CalPERS, the public employee retirement system.

"This is an opportunity to repay (the debt) at a lower rate and obtain savings for the city," said Councilman Jim Wood, who voted to authorize the bonds along with council members Susan Jones and Tom Chambers.

The action won't reduce an additional $26 million estimated gap in funding employee pensions. But Healdsburg officials said it will enable the city to pay off at a lower rate of interest approximately $9 million it owes CalPERS.

Vernon Simmons, a City Council candidate in the November election, questioned why the city isn't using money it already has in other funds to pay off what it owes the state retirement system.

He noted that a treasurer's report for July shows the city has an investment portfolio of $65 million and the average rate of return is less than 1 percent.

"If you have that kind of money, why not invest it in yourself?" he asked.

He said he was puzzled why the city is authorizing the issuance of bonds — basically borrowing more money at a rate of interest of around 4 percent. "I look at the numbers and this thing doesn't make a lot of sense," he said.

According to the treasurer's report, the city funds are invested in government pools, trust funds and federal agency securities.

City Manager Marjie Pettus said the investment funds have restrictions and could not be used to pay pension obligations. The funds are intended as a cushion for things such as the city's utility departments, including wastewater and electricity, and also include redevelopment money.

They might be used in an emergency if an expensive transformer explodes, Wood said, or if the city needs to buy electricity on the spot market.

The investments produce a low rate of return because they are considered safe and conservative. "We have to have certain capital reserves to meet debt ratios (set) by the bond covenants," Wood said.

"We're about trying to preserve capital as best we can," he said. "CalPERS is chasing big returns."

The side-fund debt the city is refinancing stems from when Healdsburg's pension plans were pooled with other small cities and agencies about 10 years ago. CalPERS reviewed the city's contributions to that plan and determined there was a gap between the assets and liabilities.

That gap, currently at just under $9 million, is amortized and annual payments are applied in a similar manner as a mortgage loan, with an interest rate of 7.5 percent charged by CalPERS.

The council's action Monday authorizes the issuance of bonds that will be purchased by Umpqua Bank. The proceeds from the bond sale will allow the city to pay off CalPERS by Sept. 30.

The interest rate the city will pay on the bonds ranges between 3.95 and 4.25 percent annually with a final maturity in 2023.

"The savings are quite substantial," Vice Mayor Jones said.