The California state constitution doesn't require cities, like San Jose, to ask voters' permission before issuing bonds to cover city worker pensions, a state appeals panel has ruled, even if those bonds could obligate taxpayers to billions more in payment for decades to come.
In the decision, a three-justice panel of the California Sixth District Appellate Court said future pension costs should legally be considered existing debts already owed to workers.
So, they said the city of San Jose did not incur new debt when issuing $3.5 billion in bonds to fund those costs, without first sending the question to city voters for approval, as would otherwise be required when taking on new debt owed by taxpayers.
California Sixth District Appellate Justice Allison Danner
| Courts.ca.gov/
The Sixth District Appellate panel issued the decision April 29. The decision marked the latest step in a legal battle over the bonds, pending since late 2021, between the city of San Jose and taxpayer advocates, led by the Sacramento-based Howard Jarvis Taxpayers Association.
In October 2021, the San Jose City Council voted to move ahead with issuing in at least $3.5 billion in so-called pension obligation bonds. According to court documents, the city believed the bonds were needed to cover a funding shortfall in its worker pension funds. That shortfall was estimated by the city's actuaries to be worth about $1.4 billion for its police and firefighters pensions and $2.1 billion for its so-called federated plan, covering other city workers, as of June 30, 2020.
According to court documents, those pension obligations grew, not because of greater than expected pension benefits for workers, but because of decreased earnings from city investments, "as well as changes to certain assumptions about demographic factors, including mortality and retirement rates."
The city cited provisions in the state constitution which require chartered cities, such as San Jose, to fully fund its public worker pension plans in keeping with actuaries' estimates.
In response to the city's bond issue, the HJTA and others filed petitions in court, challenging the validity of those bonds. Specifically, the taxpayers advocates argued the city lacked the legal authority to issue those bonds without first seeking voter approval.
They pointed to a provision in the state constitution which forbids cities from taking on "any indebtedness or liability in any manner or for any purpose exceeding in any year the income and revenue provided for such year," without winning approval from two thirds of voters in an election referendum.
The HJTA argued the new bond issue violated that provision, because the city council never sought voter approval.
Santa Clara County Superior Court Judge Sunil Kulkarni sided with the city, saying the city's obligations to fund pensions makes such bonds exempt from the constitution's limits on the city's ability to take on debt without securing voter approval.
HJTA appealed that ruling. In their appeal, they argued the city can't sidestep the state constitution by citing what they said are demands for funding imposed by "merely 'an actuarial projection.'"
The taxpayers' advocates said the bonds amount to "prepayment of future pension benefits."
Appellate justices, however, sided with the city. In their ruling, they said the state constitution's bar on taking on city debt without voter approval applies to "new debt."
But when addressing pension costs, the justices said the city's obligation to fund its pensions can never be considered new debt, but is rather always considered current debt owed to public workers, no matter how far in the future the benefits may ultimately be paid.
Seen from that perspective, they said the city was within its constitutional authority to issue bonds to pay for that current debt. In essence, they said, the city would be required to pay the pensions cost, whether or not the bonds are issued. The bonds themselves in this case are not debt, but rather only a means of paying a debt owed to public worker retirees now and in the future.
And voters get no say in the matter, they said, because the bonds do not trigger the requirement to seek voter approval.
"... Under the terms of the city charter, the city has an obligation to provide pensions to city employees and maintain them in an actuarily sound manner," the justices wrote. "The unfunded liability in this case consists of pension obligations the city has already incurred, the payment of which is constitutionally protected by the contract clause.
"The city has elected to fulfill its contractual commitment to its employees to fund those payments in an actuarially sound manner through the issuance of bonds on the condition that they result in a savings to the city. Under these circumstances, we decide that, by passing the challenged resolution, the city has not 'incurred any indebtedness or liability in any manner or for any purpose exceeding in any year the income and revenue provided for such year.'
"Therefore, the city is not required to seek voter approval before issuing the bonds."
HJTA did not reply to a request for comment from The Record, including a question concerning if they will seek to appeal the decision to the California State Supreme Court.
The decision was authored by Justice Allison M. Danner; Justices Mary J. Greenwood and Daniel H. Bromberg concurred.
HJTA was represented by attorneys Jonathan M. Coupal, Timothy A. Bittle and Laura E. Dougherty, of the HJTA.
San Jose was represented by attorneys Allison E. Burns, Brian P. Forbath and Gregory J. Maestri, of the firm of Stradling Yocca Carlson & Rauth, of Newport Beach.