Sen. Jake Garn's office confirmed Tuesday that Salt Lake City can keep $2.5 million in settlement money for the Select Telephone Technology scandal, once a black mark but now a hallmark on the city's record.

"We've taken a black mark on the city and turned it into a positive thing," said Mike Zuhl, chief of staff to Mayor Palmer DePaulis, who was out of town Tuesday.City officials have been negotiating with U.S. Department of Housing and Urban Development officials to reach an agreement on keeping millions in HUD grant money the city, in a 1986 law suit, alleges was fraudulently obtained by STT developers.

Laurie Snow, spokeswoman for Sen. Garn's office, told the Deseret News her office was notified last week HUD will permit the city to keep the $2.5 million windfall.

"We've heard the same thing from Sen. Garn's office," Zuhl said."However, we are waiting for confirmation from all of the parties involved in the litigation to sign on to the agreement."

The U.S. Justice Department is negotiating with several defendants - most notably the Dallas law firm of Aikin, Gump, Strauss, Hauer & Feld - to reach an out-of-court settlement linked to a fraud suit filed by Salt Lake City.

The suit alleges the law firm set up STT as a shell corporation to fraudulently obtain a $4.5 million Urban Development Action Grant administered by HUD to build the telephone refurbishing company in 1984.

A Justice Department spokesman could not be reached to comment on the negotiations, but Zuhl said settlement documents are prepared and "signatures are forthcoming."

If a settlement is reached, the $2.5 million the defendants may agree to pay would go back to Salt Lake City under the agreement reached with HUD, City Attorney Roger Cutler said. The city then would drop its suit against the defendants.

City Attorney Roger Cutler said the parties are "moving in the right direction" toward settlement. Once an agreement is reached the money will be put into an escrow account until Salt Lake City and HUD agree how it will be spent.

"But we still don't have the signature papers, we don't have the check," he cautioned, "and glitches could come up."

City Councilwoman Sydney Fonnesbeck welcomed Garn's announcement. "The money is wonderful especially with the need we have right now."

The first priority for using the $2.5 million will be to assist in the development of downtown parking structures, a tool the city is trying to use to lure developers into building into the ailing downtown area, she said. The grantmoney lost in the STT scandal was UDAG money so it is likely projects HUD permits the city to fund with the money must be economic development projects that fall within UDAG qualificaions.

"But I think there's another issue," Fonnesbeck said, "The money being returned sort of says Salt Lake City did not carry all the blame for what happened," The city has been criticized for being hoodwinked by STT developers.

City officials deny any responsibility for the loss of $4.5 million in federal grant money. But in 1986 HUD demanded the city reimburse them for the loss. Salt Lake City then sued the law firm and 12 other defendants to retrieve the money.

The city's first priority in negotiating the complicated STT scandal was to be released from the 1986 demand they repay the money, a very likely event at this point, Cutler said.

Officials credited Garn with being instrumental in convincing HUD to allow the city to keep the money. "Jake made a call to (HUD Secretary Samuel Pierce Jr.) saying Salt Lake City deserved the grant," Snow said.