The California Supreme Court ruled unanimously that San Jose can issue pension obligation bonds to address its unfunded pension liability without seeking prior voter approval.
The
"Now, moving forward this will provide public agencies with tremendous flexibility to deal with budget issues," said Brian Forbath, a partner with Stradling, Yocca, Carlson & Rauth, the firm representing San Jose in the case. "If they want to issue pension obligation bonds, they won't have to go through the lengthy expense of getting a validation. They can just go to market and sell bonds."
Prior to the ruling, Forbath said, "there was no case law in California that bond lawyers could rely on to say if it was outside the constitutional debt limit. Now, there is case law that will allow public agencies to proceed without filing affirmative validation actions."
The case hinged on whether the city could issue $3.5 billion in POBs to pay toward its unfunded pension liabilities without going to voters for approval.
Issuers sell taxable POBs to reduce pension liabilities, putting the money into their pension funds with the rationale that interest payments on the bonds will be lower than the assumed return pension funds get on their investments.
The Jarvis association, an anti-tax watchdog group, had argued that the local debt limitation enshrined in the state's constitution prohibits cities and counties from incurring any indebtedness or liability that exceeds their income and revenue for that year, unless the indebtedness or liability has first been approved by two-thirds of voters.
"The debt limitation, however, does not apply to indebtedness or liability a local government may incur to fulfill an obligation imposed by law," Associate Justice Kelli Evans wrote in the 17-page ruling.
"HJTA is disappointed with the Court's ruling because our state constitution provides, in plain English, that local governments cannot incur any bond debt for any reason without voter approval," said Timothy Bittle, HJTA's director of legal affairs.
Prior to issuing POBs, San Jose filed a validation case to confirm the legality and validity of issuing the bonds.
That validation was challenged by the Howard Jarvis association, but the city prevailed in Santa Clara County Superior Court. The case was then appealed, and the city won again in appeals court, and the tax association asked the state Supreme Court to hear the case.
The high court justices agreed with the points made by Alison Burns, the Stradling partner who
The ruling won't have an immediate market impact; in the four years it took for the case to be resolved, interest rates have risen, erasing the
Burns' central argument was that the city isn't required to go to voters because pension obligation bonds don't create new debt. The debt already exists, the argument went, in the form of the unfunded pension liabilities the bonds pre-pay.
She also argued the proposed bonds fall within the "obligation-imposed-by law" exception, because the city's charter requires it to run a fiscally sound pension system.
In the ruling, the high court agreed with the basis for both the Superior Court ruling, which found the bonds fall within the obligation-imposed-by-law exception and the appeals court, which determined issuing POBs does not create new debt but refunds existing debt, so the debt limit exclusion does not apply.
The court further found that because the city is required by law to provide a fiscally sound pension system for city employees that even if issuing the bonds "would incur new debt, the city has an obligation imposed by law" to address the existing shortfall.
"Although HJTA is correct that no law requires the city to address this shortfall by issuing bonds for the entire sum, the local debt limitation does not constrain how local governments choose to manage obligations that are imposed by law," Evans wrote.
"Courts also exist to be a "check and balance" against government self-interest, not to invent contorted exceptions to the constitution's voter approval rules," Bittle said. "Under today's ruling, the taxpayers of San Jose, their children and grandchildren, will be on the hook to repay bonds for lavish public employee pensions, when most of those taxpayers have no pension of their own and were never given a chance to vote on the bonds."
In 2021, the HJTA
The Supreme Court had put on hold a request by HJTA to review similar cases involving the cities of Escondido and Oxnard.
Burns said she expects the justices will take a month to 60 days, before they opine on those cases, which she believes will also come down in those cities' favor.
"I think they will either be resolved based on San Jose or sent back to the Court of Appeals to dispose of the cases based on the San Jose ruling," she said.
San Jose's case was argued, partly based on the fact, that ensuring a sound pension program was enshrined in the city's charter. The judges didn't narrowly decide the case based on it being a charter city, but made a broader ruling that applies to all public agencies in California, Forbath said.
"The scope of the language makes it clear it applies to all agencies," Burns said.
