West Covina City Council members voted Tuesday, July 7 to take on $205 million in debt to pay for its employees’ retirements.
The city has nearly $200 million in unfunded pension liabilities. The lease revenue bonds issued would cover that, according to Brian Whitworth, director of Hilltop Securities, the bond’s underwriter. They would also provide the city with $1 million in working capital that would be paid back in four years.
“This is the fastest form which the city would be able to use and issue bonds,” Whitworth said. “This is helpful because the city is paying over $1 million a month to CalPERS if they don’t issue bonds.” CalPERS handles the retirements of many public employees in the state.
The city essentially would pledge its streets to a finance authority and then make lease payments on its own streets. The lease payments pay off the bonds with total repayment due within 25 years, according to the staff report.
Whitworth assured council members there is no writing in the bond that would allow bondholders to take over the streets or turn them into toll roads.
“If the city issues bonds this year, it gets a lot of payment relief. This is probably the year to take it because of the COVID-19 losses primarily in sales tax and TOT (transient occupancy tax),” Whitworth said.
Indeed, the city’s revenue losses caused by the new coronavirus outbreak have been mentioned often at City Council meetings. Citing an economy strained by the pandemic, City Manager Dave Carmany announced a fiscal emergency in May.
And when the city passed its budget in June, council members agreed to keep the budget fluid and tentative, saying the coronavirus has made their financial situation unpredictable.
Council members voted 4-1, with Councilwoman Jessica Shewmaker voting against the lease revenue bonds. While she was the only council member opposed, all council members voiced some concern.
Mayor Tony Wu said the bonds’ interest rates were too high. He wanted the interest rates to be as low as possible, saying anything over 3.8% is too high.
“It has to make sense,” Wu said at the meeting. “It has to make savings.”
Across the board, council members agreed but they acknowledged the need to pay the city’s unfunded pensions. Carmany said that liability needs to addressed with or without the bonds.
“It’s been the custom of the city to make the payment in July,” Carmany said. “This year, because cash flow is so precious, we’re looking to make monthly payments, of $1.2 million per month. Every month we delay, we still have to make that payment.”
Eventually, council members agreed to approve the bond at a 4.1% interest rate, which didn’t thrill Wu who voted in favor regardless.
“We’re not here nitpicking,” he said. “We’re here because we’re dealing with $200 million of unfunded liability, and that’s a lot of burden for our residents.”