The City of San Jose’s City Charter requires the City to maintain an actuarially sound retirement plan. The City chose to refinance a budget shortfall by issuing pension obligation bonds. The bonds were intended to reduce long-term costs by paying down the liability at a lower interest rate. The Howard Jarvis Taxpayers Association challenged the plan, arguing that the bonds would create new municipal debt exceeding annual revenues, and therefore, the California Constitution required the plan be approved by two-thirds of the voters.
The superior court ruled for the City, finding that the unfunded pension liability was a legally imposed obligation exempt from the constitutional debt limit. The California Court of Appeal affirmed, concluding that the bonds did not create new debt because the obligation already existed.
The California Supreme Court affirmed the judgment, holding that even if the bonds constituted a new debt, the City’s duty to fund its pension system is an obligation imposed by law rather than a voluntary one. As a result, the constitutional exception to the local debt limitation applied, and voter approval was not required. The Court emphasized that the debt limitation does not constrain the City’s choice of methods for meeting its legally mandated pension obligations.
City of San Jose v. Howard Jarvis Taxpayers, 18 Cal. 5th 1106 (2025).