City’s Authorization To Issue Bonds To Address Unfunded Pension Liability Was Lawful

CATEGORY: Client Update for Public Agencies, Fire Watch, Law Enforcement Briefing Room
CLIENT TYPE: Public Employers, Public Safety
DATE: Jun 05, 2024

The City Council of the City of San Jose authorized the sale of bonds to address an unfunded liability in the City’s pension plans.  The Howard Jarvis Taxpayers Association and others (collectively, HJTA) claimed the City had no authority to issue bonds because the City had not obtained approval of two-thirds of the voters as required by the California Constitution’s debt limitation clause.  The constitutional debt limitation prohibits cities from incurring any indebtedness or liability exceeding the income and revenue provided for a given year without the assent of two-thirds of the voters.

The trial court upheld the City’s actions, ruling that the bond issuance fell under the “obligation imposed by law” exception to the debt limitation clause.  The HJTA appealed.

The California Court of Appeal affirmed the judgment on different grounds.  First, the Court determined that the City did not violate the debt limitation clause.  The City did not seek to increase pension benefits but instead to issue bonds to provide an income stream for a pension liability it had already incurred.  Thus, the City’s actions to sell bonds did not trigger the constitutional debt limitation.

Second, the City has the authority to issue the bonds.  Government Code section 53583 permits a city to issue bonds for the purpose of refunding any revenue bonds. Bonds are defined in Government Code section 53570 as “warrants, notes, or other evidence of indebtedness.”  The Court concluded that “evidence of indebtedness,” includes unfunded liability.  Thus, the Court found the City had authority to issue the bonds as well.

City of San Jose v. Howard Jarvis Taxpayers Association, et al, 101 Cal.App.5th 777 (2024).

Key Takeaway: This case provides a helpful summary of a public entity’s pension-related obligations.

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