Howard Jarvis Taxpayer Association
The California Supreme Court agreed to an extension for filing briefs in San Jose v. Howard Jarvis Taxpayer Association, the primary case challenging cities’ use of pension obligation bonds.
Laura Doughtery, HJTA’s staff attorney, asked for and received an extension to file briefs in the case by Jan. 31.
Once those are filed, parties filing amicus briefs will have a month to file.
“We expect oral arguments to occur near summertime,” said Allison Burns, a partner with Stradling Yocca Carlson & Rauth, the firm representing San Jose in the lawsuit.
The Howard Jarvis Taxpayer Association, an anti-tax organization, had filed challenges against nearly a dozen cities’ validation lawsuits in which the cities seek a court seal of approval on plans to issue POBs.
HJTA argues that POBs invoke the constitutional debt limit provision, which requires voter approval. Lower courts have argued that POBs are not creating new debt, so the limit does not apply.
In the 38-page brief filed by Stradling, the attorneys noted San Jose’s unfunded pension liability now exceeds $3.2 billion.
“The City Council had exercised its legislative discretion and determined that the issuance of the bonds is a viable option to reduce costs associated with this growing obligation to its retirement funds,” according to the brief.
San Jose had asked the court to validate the issuance of $3.5 billion in POBs, Rick Bruneau, San Jose’s director of finance told The Bond Buyer in August.
Stradling argues in the brief that unlike what has been posited by the taxpayer’s association, the prospective POB issuance doesn’t require voter approval, because it would not create new indebtedness for the city, since POBs merely refund existing unfunded pension liabilities.
“The City Council authorized the issuance of bonds to reduce its annual payments and effectuate savings to the city and its taxpayer,” reads the Stradling brief. “Indeed, by the express language of the resolution, the city cannot issue the bonds unless that issuance will result in savings for the city.”
Moreover, “in evaluating the city’s financial strength and liabilities, credit rating agencies consider debt and pension liabilities, such as unfunded liability, as effectively equivalent obligations,” according to Stradling’s brief.
In 2021, the anti-tax organization began challenging lawsuits that local governments had filed seeking expedited judgment to validate proposed POB issuance.
Most cities abandoned the lawsuits when the taxpayer’s association filed challenges, but San Jose, Escondido and Oxnard responded and won in lower court and appeals court.
San Jose decided to respond to the taxpayer association’s challenge of its validation suit and prevailed in Superior Court, and on April 29, the California Sixth Circuit Court of Appeal affirmed the lower court’s decision.
Dougherty appealed the rulings to the state Supreme Court, and the high court agreed to hear the three cases. But it put a pause on hearing the Escondido and Oxnard cases pending a ruling in the San Jose case.
It’s currently somewhat of a moot point for cities, because the economics — given the rise in interest rates — don’t allow for the arbitrage necessary to make POBs viable. POBs were popular when interest rates were low, because the debt could be sold at a low rate and the money could be invested to reap a higher return and allow cities to prepay pension fund liabilities to reduce the burden.
Bruneau told The Bond Buyer in August the city isn’t likely to issue POBs in the current market environment, because the conditions don’t favor such debt.
POBs are taxable bonds issued by a state or local government to pay down obligations to the public agency’s retirement system.
California was the biggest source of POB issuance when sales of the taxable debt instrument spiraled upward, peaking in 2021 as interest rates remained low.
In 2022, the volume of pension obligation bonds fell to $1.07 billion from a high of $6 billion the prior year, according to data provided to The Bond Buyer by the California Debt and Investment Advisory Commission for a prior article.