Fullerton City Council members announced they are looking at bonds in a new strategy to pay off the city’s pension debt as their budget struggles to make ends meet.
Currently, the city’s unfunded pension liabilities sit at just under $283 million, according to the city staff’s presentation.
By comparison, the city’s entire annual budget for the 2021-22 fiscal year sits at $106 million.
To help bridge that gap, the city is looking at issuing pension obligation bonds, a special type of debt that sees the city take in enough cash to pay part or all of its pension debt and then pay back investors at a lower interest rate.
By issuing these bonds over a 22 year period, the city thinks they could save around $3.7 million every year for the first 15 years of the bond, though there was no statement in the report on what happens after those 15 years.
It’s not a risk-free plan though.
The staff report points out that these types of bonds can sometimes earn less money than the interest rate, meaning the city ends up in more debt than they originally started with.
The bonds also should not be built in a way that lets the city defer payments according to the staff report, which cities and other government agencies routinely do with other bonds.
This means the city has to have the money when the bill comes due.
The city also doesn’t have to issue a bond that covers the entirety of the debt if they move forward, and can choose to tackle it in smaller pieces.
While Councilman Nick Dunlap was absent, the rest of the council all said they were in favor of looking into the bonds, including Councilman Bruce Whitaker who historically opposed similar measures.
“As someone who for many many years was highly opposed to pension obligation bonds, the historically low interest rates have made it somewhat attractive,” Whitaker said.
Mayor Fred Jung also endorsed the move, saying the city currently pays its pensions out of the same $3.1 million budget it uses to repair its roads and infrastructure.
“An additional $3.1 million would potentially double our project output, and I don’t see any other relief in sight,” Jung said.
The council unanimously agreed to retain Urban Features Inc. at a cost of $15,000 to do a further analysis of what those bonds might look like for the city.
The announcement of bonds comes as the city has been struggling to balance its budget for years, cutting services and staff in an effort to stem the bleeding.
Fullerton voters shot down a proposed sales tax increase in November 2020, the city is still looking for ways to stabilize its budget.
[Read: City of Fullerton Faces Tough Financial Future Even With Potential New Taxes]
There’s also a vacuum in the city’s upper management as it wrestles with a budget deficit, with the council on its third city manager in less than a year since they fired Ken Domer last April.
[Read: Fullerton City Council Members Sack City Manager Ken Domer Without Saying Exactly Why]
At Tuesday night’s meeting, the council also hired Cindy Collins to take over as Deputy City Manager as well as the director of the Parks and Recreation department, which hasn’t had someone in the top job for a year according to the city’s report.
City council members are also currently looking to possibly dismantle the city’s fire department and reincorporate it as part of the Orange County Fire Authority, a regional fire department that services 23 of the county’s cities.
[Read: Fullerton to Explore Ditching its Fire Department to Join Regional Authority]
If the council chooses to follow through, they’ll still be responsible for the past pension debts of the fire department and will have to pay service fees to the OCFA every year, but they won’t be on the hook for future pension payments or upkeep beyond the service fee.
Noah Biesiada is a Voice of OC Reporting Fellow. Contact him at nbiesiada@voiceofoc.org or on Twitter @NBiesiada.
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