The Watsonville City Council gave staff the green light to begin the process of issuing taxable bonds in hopes of paying off steep unfunded pension obligations over the next three decades.
According to a 2020 California Public Employees’ Retirement System (CalPERS) report, the City of Watsonville is facing roughly $98 million in unfunded pension obligations that it hopes it can pay off over the next 23 years. Issuing $40 million of the so-called “refunding” bonds is one tool the City will use to try to slowly dig itself out of debt, and free up general fund dollars for other day-to-day uses.
Refunding bonds are generally considered a low-risk option for municipalities to refinance existing debt at a lower interest rate.
Consultant Urban Futures, Inc. projects that, thanks to current low interest rates, the City will pay roughly $59 million in total on the bonds that it hopes to issue sometime this spring. But projections also show the City could save anywhere between $1.1 million and $1.76 million annually over the next four fiscal years if they do issue the bonds.
The taxable bonds differ from traditional pension obligation bonds—which many cities in California have reluctantly turned to in addressing debilitating retirement costs—in that the latter is typically repaid with general fund dollars and is more volatile. A taxable bond, meanwhile, is repaid by funds generated by a local tax. In Watsonville’s case, the City will use the funds generated annually by a property tax measure approved by voters several years ago that addressed pension costs, also known as the Pension Tax Override.
There will be no new tax associated with this series of bonds, staff said.
Staff will return to the city council for final approval on this year’s bonds and any other bonds it might issue in the future.