Now that the Chelsea City Council has approved combination funding to pay off a $3 million judgment against the city brought by a developer, the first money is being transferred into a special account to pay for the initial interest-only bond payments due in November and May 2012.

“We are acting proactively setting aside interest payments; a year’s worth of payments ahead of time,” said Kim Garland, the city’s administrative director.

The transfer was unanimously approved by the City Council Tuesday night.

Previously, the city approved $2 million in bonds for up to 10 years, with the additional $1 million to be funded by the city’s electric and general fund budgets.

With interest-only bond payments totaling $74,407 in the 2011-2012 fiscal year, Garland requested the city council approve the transfer from the six predesignated city accounts — electric, water, wastewater, stormwater and the general funds.

Each fund will be charged a percentage of its total budget to make the payments. Electric will be charged 46 percent, the general fund will pay 28 percent, the water fund 12 percent, the wastewater fund 10 percent, and the sold waste budget 3 percent.

The City Council approved a transfer of about $34,200 from the electric fund, about $21,000 from the general fund, about $9,000 from the water fund, about $7,400 from the wastewater fund and about $740 from the stormwater fund for these payments.

In addition, the city incurred about $21,000 in legal fees from Miller, Canfield, Paddock and Stone, PLC, including $300 for Michigan filing fees for the bond documents. The six funds will absorb these payments as well. The electric fund will have about $9,200 transferred to the special bond fund while the general fund will be docked about $5,600. About $2,400 will come from the water fund, about $2,000 from the wastewater fund, $600 from the solid waste budget and about $200 from the stormwater account.

Two months ago, the City Council voted to fund $1 million from the city’s electrical and general funds. It plans to use $250,000 from the general fund cash reserves and $750,000 from the electric fund cash reserves to pay the debt.

The payments stem from a lawsuit by Chelsea Investment Group, LLC . The company sued the city and former City Manager Mike Steklac in 2006 alleging breach of contract, among other things, when problems with the city’s sewer and water system halted additional phases of the Heritage Pointe subdivision along Dexter-Chelsea Road.

City Manager John Hanifan, who was hired after the lawsuit had been filed, said previously the city would not raise its millage to pay the judgment.

Lisa Allmendinger is a reporter for AnnArbor.com. She can be reached at lisaallmendinger@annarbor.com. For more Chelsea stories, visit our Chelsea page.