City officials learned about the debt almost a year ago, and have been reviewing their options, which include withdrawing from the state pension plan and creating an independent pension plan for city employees, said Eric Marburger, city personnel manager.
Sager and City Council members learned Tuesday that the city has the option of paying off the debt over 40 years, a move that would cost $49.2 million at a 7.5 percent interest rate.
Proposed legislation in Maryland's General Assembly would allow the city to pay off the debt over 50 years, which would bring the total amount paid to $74.5 million, officials said.
Sager said he would rather pay the state by floating a pension obligation bond at a lower interest rate.
The mayor said he would ask state lawmakers representing Washington County whether the state can provide any relief from the pension debt.
Should the city accept the state's offer to pay $49.2 million over 40 years, the first payment of $261,125 would be due in December.
Because the general fund finances about 65 percent of the city's contribution to the pension plan, that initial payment would equal a 3-cent property tax hike per $100 of assessed value, Sager said. The rest of the city's share of the pension fund is paid by rate payers, such as electrical, water and sewer customers.
Sager said he didn't think a tax hike would be necessary in the coming fiscal year, but that officials probably would be forced to reduce city services.
The amount of the payments would continue to grow over time, Sager said. As that happened, more services would have to be eliminated or reduced or the property tax rate would have to be hiked, Sager said.
Sager said he would like to avoid all those scenarios by getting relief from the state.
At one point, Sager asked about suing the state, but Vaughn told him legal action would be fruitless because the state Comptroller's Office would take the debt out of the city's share of revenue from the state, such as state income tax revenue.
The city has 430 active employees who would be able to choose between state or city pension plans and 220 retirees who would have to stay with the state's pension plan, Marburger said.
"I hope to convince you to stay," Vaughn said.
"You have a hard job ahead of you sir," Sager responded, suggesting that the city should get as far away from the state pension plan as possible.
If city officials decide to leave the state pension program, the city would owe the state $10.4 million. That represents a $5.8 million fee the state would slap on the city for leaving and an estimated $4.6 million the city would owe for employees who opted to stay with the state program, Vaughn said.
City officials asked Vaughn what the state would do to ensure that Hagerstown would not face a similar financial disaster in the future.
If city officials each year were to tell state pension officials they might withdraw from the pension plan, the state, for a fee, would be obligated to conduct a study to determine whether the city was underpaying or overpaying the pension program, Vaughn said.
The city has been underpaying the pension fund because it has an older work force with little turnover, Marburger said. Almost every city employee receives or will receive some retirement benefit, he said.
As a result, the percentage contribution the state charged Hagerstown and other participants of the program hasn't been enough to cover the costs of retirement benefits for the city's employees, he said.