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Synagro is staying, and a budget battle is brewing — again.

Despite repeated threats from Honolulu City Council members and even an offer from another company to build new sewage treatment technology at no immediate cost to taxpayers, Mayor Peter Carlisle will not terminate the city’s contract with the controversial fertilizer pellet producer.

Environmental Services Director Tim Steinberger made the administration’s decision plain Tuesday, the last day before a deadline to give Synagro the six months notice required for contract termination. The $2 million opt-out comes only once every five years, and now it’s passed.

“Given that we are satisfied with their performance, we see no valid reason to cancel this contract,” Steinberger said in a meeting of the Executive Matters and Legal Affairs Committee.

Carlisle had previously said he was , and a to stay the course.

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But while the critical council members — Floor Leader Romy Cachola and Budget Chair Ann Kobayashi — could only watch and ask questions, their role will grow in coming weeks.

The administration has asked for $24.5 million in the Fiscal Year 2013 capital improvement program budget for construction of a second Synagro egg-shaped digester at Sand Island and another $4 million to operate the existing digester, Steinberger said. In an interview after the meeting, he laughed nervously when asked about the chances of getting the funding.

Last year, the council removed $26 million in funding for the second digester, and Carlisle’s team responded in two ways: First, it began trucking untreated sewage sludge from what it said was an over-capacity facility at Sand Island to others around the island. Second, it executed a $1.5 million contract with Synagro to start planning and design work on the second digester despite the council’s concerns.

Kobayashi said Tuesday the administration should have started the ball rolling on new options back in 2008 so it wouldn’t be stuck in this spot now. She also said Synagro was misleading years ago about its ability to sell fertilizer pellets and that the administration of former mayor Mufi Hannemann said a second digester wouldn’t be needed.

“I wish people would just tell us the truth,” she said. “I hate to be lied to. I like the truth. Whether I like it or not, I like to be told the truth.”

Cachola said Synagro got a “sweetheart deal” because it was given the contract for the second digester work without having to competitively bid the project.

Steinberger said the original contract gave the city the option to expand operations to include a second digester, and that that original contract was competitively bid.

Another funding cut by the council this year could lead to a default on the contract and could leave the city in a sticky situation with how to deal with its sewage. The administration has been quick to point out one potential solution to growing volume is to put a moratorium on all new development in and around downtown Honolulu.

“It gives me an extremely uncomfortable feeling,” Steinberger told the council about the prospects of a funding cut.

HRP 56

Immediately following the discussion of the Synagro contract, a would-be replacement was invited to share their proposal.

HRP 56 would install an egg-shaped digester identical in size and shape to Syangro’s, but instead of producing fertilizer pellets, the company would heat the sludge up and generate biogas, which it would then burn for electricity. It would make money by selling that electricity back to the city at a profit.

The company paid for Cachola, Kobayashi and Ikaika Anderson to to tour a similar facility there. The Honolulu politicians wrote upon their return.

Executives said they could operate the facility for $500,000 less each year than Synagro does, and that the city’s currently wasting $300,000 to $400,000 every month on unused biogas.

The HRP 56 executives also said Caterpillar would provide 80 percent of the financing, and local investors would supply the rest, meaning there would be no upfront cost to the city for construction of the $28 million facility. But that doesn’t make it free — the city would end up paying for the construction, as well as the interest rates for financing and any profits, through electricity fees.

In a somewhat unorthodox turn of events, Steinberger testified and asked the executives questions about their project, even though they might one day be bidding to work with the city. The tone of the dialogue could accurately be described as hostile, and a letter from Carlisle to the council earlier in the day showed what the administration thought of the HRP 56 proposal.

“Frankly, there is no way it would be to the benefit of the city to enter into a ‘no capital cost’ contract unless the city had no way to pay for the digester itself. That is not the case here,” the mayor wrote in a letter received by the council about three hours before the meeting started. His office provided a copy to Civil Beat afterward.

Steinberger said the city is already moving forward with its own sewage-to-electricity technology for facilities in Kailua and Honouliuli, and intends to explore it as a possibility for Sand Island — Hawaii’s largest sewage treatment plant — after things shake out with Synagro.