"I want to do my best to try to get this monkey off the city's back," Donoghue said.
Maryland State Retirement Agency officials didn't give city officials "very reasonable alternatives" for paying the $9.96 million, he said.
The City of Hagerstown and 22 other local government bodies owe the retirement agency a combined $69.7 million because past contributions don't cover expected pension payouts to their workers, the state agency said Wednesday.
On Tuesday, retirement agency Executive Director Peter Vaughn told Sager and City Council members that the city could pay back the $9.96 million over 40 years with escalating payments, a move that would cost the city $49.2 million at a 7.5 percent interest rate.
Sager said he wants the state to reduce the debt's principle or waive or cut the interest rate.
The city probably would get a better interest rate if it issued a pension obligation bond for the full amount owed, according to Sager. Such a bond could be paid back in 15 to 25 years, he said.
Unless the state forgives the debt or the interest, city taxpayers could face years of property tax rate increases, city service reductions and electrical, water and sewer bill increases, Sager said.
The city might not have to increase the property tax or make noticeable reductions in services if the state were to waive the interest on the debt and allow the city to pay the $9.96 million over 40 years, Sager said.
That would enable the city to pay back the debt in roughly $250,000 annual installments, he said. The debt payments would be made in addition to the city's regular payments to the pension fund.
If the city accepted the state's offer to pay off the debt over 40 years at a 7.5 percent interest rate, the annual payment due in December - including the city's regular contribution and debt payment - would be about $161,125 more than the usual payment of about $1.1 million, Sager said.
Because the general fund finances about 65 percent of the city's contribution to the pension plan, that initial payment could be financed through a property tax hike of about 2 cents per $100 of assessed value, Sager said. The other 35 percent could come from rate increases for city utility customers, he said.
Sager said the first payment probably could be offset by reducing city services instead of raising property taxes.
For the average city property owner, with property assessed at $40,000, a 2-cent hike would equal about $8 a year, said City Finance Director Al Martin.
The problem Hagerstown and other governmental bodies face reflects a change in the way the retirement agency accounts for money flowing in and out of a $1 billion pension pool. The pool is maintained by the state agency for 101 local government bodies that voluntarily participate by contributing funds toward employee retirement benefits.
Sager said he thinks the seeds were sown for the city's current pension debt in 1984 and the preceding years.
In 1984, after years of pay-as-you-go, the legislature attempted to reduce the pool's unfunded liabilities - projected pension payments not covered by current contributions - through a funding formula based on the demographic characteristics of workers covered by the pool.
That created a problem for Hagerstown and other municipalities that have workers who tend to remain in their jobs longer than average, Vaughn said. With its low employee turnover rate and stable, older work force, Hagerstown's unfunded liabilities continued to mount.
"Hagerstown paid what we billed them and they are good customers," he said. "But because Hagerstown's demographics are not the same as the total pool, there was an inconsistency in funding for Hagerstown."
A bill passed by the General Assembly last year will result in higher payments for 10 percent of the pool's participants, including Hagerstown, he said.
Sager said he found out about the debt last April, after the General Assembly's session ended.
He said his first opportunity to vent his frustration came on Tuesday, when Vaughn attempted to explain how the debt occurred to city officials.
"We knew about the problem. We didn't know about the circumstances surrounding the problem," Sager said.
This is the second time the state has told the city it owed the state pension system millions of dollars.
Back in the early 1980s, the state said the city owed $7 million, and the city has been making payments on that debt since then, city officials said.
The city has 430 active employees and 220 retirees who are covered by state-run pension plans.
The Associated Press contributed to this story.