Hagerstown would have to pay 7.5 percent interest to the state on the reduced debt. Specific terms, such as the length of the loan and the annual payments, would have to be worked out. State officials said it will take about a week to put together specific cost figures on the plan.
Payments at the reduced rate would be "significantly less" than those the city would have had to pay if required to reimburse the pension fund for the full $9.96 million plus interest.
Payments on the full amount would have cost $49.2 million over 40 years, said city Finance Director Alfred E. Martin.
"This seems like a pretty reasonable approach to the problem," said Sen. Donald F. Munson, R-Washington.
Without state help, city officials had warned that the debt crisis might result in tax increases or cuts in services. If the current plan goes through, it would remove the risks of a tax hike or electric rate hikes, while preserving the quality of city services, Sager said.
The debt resulted from the Maryland State Retirement Agency under-billing the city for its contribution to the state pension plan over several years.
The problem goes back to 1984, when the General Assembly attempted to reduce the state pension pool's unfunded liabilities - projected pension payments not covered by current contributions - with a funding formula based on worker demographics.
But Hagerstown, which has a lower worker turnover than the state average, didn't fit the demographics. The result was less money going into the state's $1 billion pension pool than was needed to cover the city's pension payments.
A bill passed last year by the General Assembly to reconcile the differences between those areas paying too much into the fund and those paying too little resulted in Hagerstown owing more money per capita than any of the 101 local governments participating in the state plan.
All local members of the county delegation in the General Assembly voted in favor of the new pension law except for Del. D. Bruce Poole, D-Washington, who did not vote.
Sager became animated at times during the meeting. At one point, Del. John P. Donoghue, D-Washington, asked him to calm down. Sager repeatedly pointed out that the city had paid all of its pension bills and on time.
"It's not fair," Sager said at one point.
"Life's not fair," Dixon replied.
"I'll grant you that. But we should strive for fairness, in a relative sense," Sager said.