The city’s cash flow grew by $2 million on Dec. 29 after the Washington State Ferry system deposited the check to end the long-standing dispute over land in the Washington Ferry System maintenance yard in Eagle Harbor.

Interim City Manager Brenda Bauer told council Wednesday that the money was placed in the general fund as part of the city’s reserves. It is not budgeted at this point nor have any decisions been made about its use. The council agreed it will be the subject of many meetings, discussion and debate in 2011.

The funding boost to the 2010 year-end balance may help the city escape its financial gridlock and pay some debts.

“It accomplished the level of reserves [council] intended to accomplish by the end of next year and is helpful for us moving forward this year financially,” said Bauer. “Potentially it could get us off the credit watch list and move forward with refunding loans to the utilities.”

The city has mounting debt and was placed on Moody’s credit rating watch. Financial shortcomings, for example, led to $3 million worth of interfund loans from the water utility during the past two years that has not been repaid. The loan was used primarily to pay bills in the general fund.

The council has said the city needs to repay the water utility and the $1.9 million bond owed to Cashmere Bank in order to re-enter the bond market because of its current negative financial standing with Moody’s.

Taking the cash settlement instead of leasing about an acre of land from WSF was a culmination of months of negotiation and years of history, but the actual decision was rushed at the end because of a deadline imposed by the Washington State Department of Transportation. The cash expired at the end of 2010, and the council waited until Dec. 15 to make its choice.

“The council put itself in a bad position,” said Mayor Bob Scales. “We knew all along we had to have a decision by the end of the year and we waited and extended the process in order to do more work. We waited until the last minute. We need to plan ahead better.”

Councilor Debbi Lester expressed her frustration over decisions that were made outside of the common council process that didn’t allow the community and even the councilors themselves to fully understand all that was signed on that day.

The contract used to negotiate for the money was not presented to the council until 1 p.m. on the same day it was voted upon by the council. Lester said she didn’t read the document until she arrived at the council meeting. The actual document still hasn’t been made public by the city.

The specific wording of that final document outraged some members of the community, including Elise Wright, who is a member of the Bainbridge Island Concerned Citizens. BICC fought for the Eagle Harbor land through several legal battles and eventually elicited a covenant from the State Shoreline Hearing Board to be placed on the land in 1974, which, according to Wright, restricted the land to be used for a community water-related purpose forever.

Subsequently WSF condemned the land, which has complicated questions over legal rights to the land.

Though it was never discussed in the public eye, the council and city management did discuss the city’s legal status in executive session. City Attorney Jack Johnson created a memo outlining his opinion on where the city stood on its legal rights to the land.

In his memo, Johnson said it was his opinion that none of the three legal documents cited as the basis for the city to “compel” WSF to place a public boatyard would have more merit in a court of law than the state’s position. The three legal documents are the 1974 Declaration of Covenants, the 1995 Memorandum of Agreement and the 1996 EPA Superfund decision.

Johnson wrote that while the city released its legal claims to the land by accepting the settlement, it does not “compromise any such private rights to pursue enforcement of the Covenant,” which read in part that a segment of the property that eventually became the maintenance facility “will be restricted to a pleasure craft marine or marinas and/or commercial boat facility along with all related activities.”

The city attorney said the financial settlement doesn’t “prevent a future voluntary agreement between the state and the city or a private party to develop a boatyard. These opportunities are not compromised in the settlement.”

Wright argued that the BICC and others “never asked the city to go to court. During this latest discussion, we only asked the city not to remove the covenants.”

Wright said she was extremely disappointed with the council, especially Scales, for giving up rights the city never had to give away. In 1975 the city of Winslow was given responsibility to enforce the covenants, which was a responsibility later inherited by the city of Bainbridge Island, according to Wright.

“What legal right does city have for shedding that responsibility? The rights were won on behalf of the community,” said Wright. “I feel the city does not have a legal right to sell [the covenants].”

Scales said the agreement the council signed agrees not to sue the ferry system to enforce the covenant, but said the city’s inability to sue doesn’t remove the covenants if they indeed are still in tact.

Scales said the agreement with the state and Johnson’s memo will be posted on the city’s website as per request of the council.

“We should post the settlement agreement and the legal analysis so the public can see what we knew in executive session at the time we entered into the agreement,” said Scales.