San Juan Council Calls for Audit in Loan Controversy

City Council members unanimously called for an independent audit and legal review Tuesday of $398,235 in municipal loans granted over the past decade to City Manager Stephen B. Julian.

With more than 100 citizens packed into the council chambers, council members were cheered by some and jeered by others for their roles in helping to approve a $250,000 housing loan to Julian in 1981 and $148,235 in other loans since.

Mayor Kenneth E. Friess offered a lengthy explanation of the loan transactions, which began as part of a benefits package given to Julian when he was hired as city manager.

“We did those things with full knowledge of what we were doing,” said the mayor, who has maintained unqualified support for Julian in the face of criticism. “Nobody was playing games with us, nobody was pulling the wool over our eyes. We felt it was the best deal at the time.”

Councilman Gil Jones, who proposed the outside review, also recommended that he and Councilman Jeff Vasquez oversee the hiring of a consultant to complete a review of the loans within one month. Both councilmen were elected in November and were unaware of the transactions, disclosed by The Times on Jan. 6.

Vasquez wanted to pose questions to the city manager during Tuesday night’s meeting, but that was not allowed by Friess. Julian sat silent throughout the discussion.

“I think it’s incumbent upon us to clear the air,” said Councilman Gary L. Hausdorfer, who took part in approving the loans to Julian. “All of you and all of us need to understand that there has been no misuse of public funds.”

Local attorney Carlos F. Negrete has threatened to circulate petitions to recall Friess and Hausdorfer. In addition to the loan transactions with Julian, Negrete said he is dissatisfied with Friess’ and Hausdorfer’s support of the proposed San Joaquin Hills tollway. Earlier Tuesday, Negrete filed papers with the city clerk to establish a political action committee that could guide a recall petition drive.

“City Hall is not a bank,” Negrete said, “nor is it Mr. Julian’s personal ATM.”

However, several citizens charged that the publicity surrounding the loans had been generated by special interests who want to embarrass the city.

“The only thing they (City Council members) are guilty of is being compassionate and understanding (in helping Julian settle in the city),” local merchant Mike Darnold said.

“Our Chamber of Commerce is behind you 100%,” said Dorothy Williams, president of the business group.

The Times reported that Julian did not repay three of his five city loans within the time promised; that he still owes the city $85,736.75, at no interest; and that a clause in his latest employment contract may ultimately free him from “any” financial obligations to San Juan Capistrano.

In a statement released last week, Julian defended his transactions as proper and promised to repay $46,063 of his debt to the city that is unsecured.

Negrete said that at a private, three-hour meeting on Monday that was called by Friess, the mayor told him that he would vigorously fight a recall.

Once a recall petition is certified by the city clerk, recall supporters would have 120 days to obtain signatures of 20% of the city’s 13,260 registered voters, according to Oliver Cox, a staff attorney for the California secretary of state’s office.

Times staff writer David Willman contributed to this report.