Pension Obligation Bond Financing

History

Pension obligation bonds had their start with the famous City of Oakland pension bond financing in 1985, which Orrick helped to invent and for which it served as bond counsel. That financing and a number of copy-cats that rapidly followed were tax-exempt and primarily driven by then legal arbitrage possibilities. Many of these transactions were structured as lease financings or as installment sales of annuities. Tax-exempt pension obligation bonds largely came to an end with the introduction of tax legislation that became part of the Tax Reform Act of 1986. However, we have continued to work on pension bonds that are tax-exempt because of special transition rules or special (non-arbitrage) situations.

A new taxable version of pension obligation bonds surfaced in 1994, particularly in California, starting with Sonoma County. Most were driven by declining taxable interest rates compared to the interest rate imputed by pension funds on the unfunded accrued actuarial liability (UAAL), the need for budget relief, and/or the risk arbitrage opportunities in the much wider range of investments made by pension funds than the city or county would be permitted to make. A number of these transactions financed the regular annual pension payment in addition to all or part of the UAAL.

California

Most of these post-1994 transactions have been structured as general obligation bonds of the state, city or county. In California, city and county pension obligation bonds are issued under the local agency refunding law (drafted in pertinent part by Orrick) and considered valid without a vote under a judicially created exception to the State Constitution Article XVI, Section 18 debt limitation referred to as “obligations imposed by law”. Because this exception to the constitutional debt limit was and is much less developed in the case law than the other two judicially created exceptions (for lease financing and revenue bonds) each POB issue in California has been validated pursuant to Code of Civil Procedure § 860 et seq. Subsequent POBs are usually covered by the original validation action without the need of any new judicial proceeding, but this must be reviewed in each case.

Orrick has handled over 100 validation actions, including a number based on the same “obligations imposed by law” theory as POBs. In each case, we attempt to structure the validation action to cover not only the proposed issue but also any future issue or refunding. After securing a default judgment for a county in 1994, someone appealed the judgment even though he had not joined in the original action. The matter was settled before the courts could decide whether he had standing to appeal, but the market reacted by insisting that the then 60 day appeal period run before any POBs were issued. As a result, Orrick attorneys drafted and helped secure passage of amendments to CCP § 870 reducing the appeal period for validation judgments from 60 to 30 days and restricting the grounds for appeal to jurisdictional issues. The market now often does not require waiting out even this much shorter appeal period.

Orrick has served or is presently serving as bond or underwriters’ counsel on roughly 30 pension obligation bond financings in California for the counties of Alameda, Contra Costa, Imperial, Los Angeles, Mendocino, Merced, Orange, Sacramento, Sonoma, and San Diego, for the cities of Fresno, Long Beach, Oakland, Pasadena, and Richmond and for the State of California.

Other States

Outside of California, Orrick has worked or is working on dozens of pension obligation bond financings for state or local governments in New York, Oregon, Louisiana and elsewhere.