California Supreme Court docket
The California Supreme Court docket
The case, San Jose v. Howard Jarvis Taxpayers Affiliation, hinges on whether or not town can challenge $3.5 billion in pension obligation bonds to pay towards its unfunded pension liabilities with out going to voters for approval.
Allison Burns, a Stradling associate representing town, reiterated the long-standing argument California governments have used to challenge POBs: she mentioned town doesn’t need to go to voters as a result of pension obligation bonds will not be creating new debt. The debt already exists within the type of the unfunded pension liabilities the bonds pre-pay.
The appellate court docket had agreed with that argument, ruling in favor of San Jose.
Issuers promote taxable POBs to cut back pension liabilities, placing the cash into their pension funds with the rationale that curiosity funds on the bonds can be decrease than the assumed return pension funds get on their investments.
However Amy Sparrow, the Howard Jarvis Taxpayers Affiliation’s lawyer, countered by saying: “This case shouldn’t be about changing present bonds with new bonds of the identical particular quantity. It’s about voluntarily borrowing a big infusion of money to make new investments.”
In 2021, the HJTA, an anti-tax group,
Dealing with that problem, many of the cities walked away from plans to challenge POBs, which had
However San Jose, Escondido and Oxnard fought again. All three received on the superior and appeals court docket ranges, however the HJTA appealed the instances to the state Supreme Court docket.
The excessive court docket
The excessive court docket restricted overview of the case as to if the issuance of POBs to repay unfunded pension liabilities is topic to the voter approval requirement of article XVI, part 18, subdivision (a) of the California Structure.
Within the San Jose case, the Sixth District Appeals Court docket affirmed a superior court docket’s April 2024 determination, ruling that the state’s structure didn’t require San Jose to ask voters to approve its plans to challenge POBs.
“The transaction doesn’t create debt inside the which means of the debt restrict provision, however is a cost association to permit town to repay that quite massive unfunded legal responsibility,” Burns mentioned in her oral argument.
She additionally argued that since sustaining the pension fund in an actuarially sound method is encoded within the San Jose constitution, town is required to take action, and it is not discretionary.
Justice Joshua Groban questioned whether or not POBs can, in actual fact, be thought-about issuing new debt, as a result of there’s a price related to issuing bonds, along with the curiosity and principal funds required to pay them off.
Burns responded that the construction of the Metropolis Council’s decision on the proposed debt issuance required that no bonds be issued except financial savings could be realized by issuing the debt. The rates of interest paid on the bonds need to be decrease than the assumed charge of return that’s used to find out what town pays to the pension fund, she mentioned.
“The financial savings would not make sure till the ultimate maturity of the bonds, which may very well be a long time later,” Sparrow mentioned. “The bonds need to be issued at rates of interest lower than the 6.625% assumption charge. If the idea of financial savings on the funding of bond proceeds had been ironclad, I’d agree, however market returns will not be assured.”
It is at the moment considerably of a moot level for cities, as a result of the economics do not permit for the arbitrage essential to make POBs viable.
The case, at this juncture, is extra about preserving the flexibility to challenge the debt sooner or later with out going to voters.
San Jose has additionally argued that town is required by metropolis constitution to take care of its pension fund in an actuarially sound method; and it’s inside the metropolis’s discretion to challenge POBs if wanted to fulfill that requirement. The trial court docket had agreed with that argument, Justice Goodwin Liu mentioned.
The HJTA’s Sparrow argued that if town has the “discretion” to challenge or not challenge the debt, it is not a requirement, and town should go to voters.
Earlier instances “have erased from the structure a proper which, on its face, appears to permit no exceptions in any respect,” Sparrow mentioned quoting the part of the state structure that reads, “No native authorities shall incur any indebtedness or legal responsibility in any method or for any goal exceeding in any yr the earnings and income supplied for such yr, with out the assent of two-thirds of the voters.”
She additionally argued an Orange County pension case held that unfunded pension legal responsibility is simply an actuarial projection based mostly on a number of assumptions, and due to this fact not an indebtedness topic to the voter approval requirement.
The Supreme Court docket has 90 days from the date of oral arguments to file its written opinion. After the opinion is filed, the choice turns into ultimate 30 days later, though the events can petition for a rehearing throughout that 30-day window.
