California Supreme Court Approves Pension Obligation Bonds

In City of San José v. Howard Jarvis Taxpayers Association (December 18, 2025), the California Supreme Court unanimously upheld the City of San José’s (the “City”) plan to issue up to approximately $3.48 billion in pension obligation bonds (“POBs”) to refund the City’s unfunded actuarial pension liability (“UAL”). The court held that even if the bonds constitute “new” debt, they fall within the exception to the constitutional debt limitation for an “obligation imposed by law” and therefore do not require two‑thirds voter approval under the California Constitution. The Court concluded that state law and the City’s voter‑enacted charter obligate the City to maintain its retirement plans on a sound actuarial basis and that the UAL is therefore an obligation imposed by law. Thus, the Court determined the constitutional debt limit does not constrain the City’s discretion over how to address such obligation, including by choosing to issue POBs without a vote.

Orrick, Herrington & Sutcliffe LLP served as counsel for amici curiae, the League of California Cities and the California State Association of Counties, and filed an amicus brief urging the Court to confirm that the “obligation imposed by law” exception allows local governments to use POBs to meet legally mandated pension‑funding obligations.  The Court’s opinion expressly cited amici’s argument that the City relied on the Retirement Boards’ actuarial calculations and did not interfere with the Retirement Boards’ fiduciary role, ultimately adopting the legal obligation rationale in affirming the validity of the City’s POBs.

The Court’s Decision

In the City’s validation action, the Howard Jarvis Taxpayers Association argued that issuing bonds to refinance the City’s unfunded pension liability needed a two-thirds vote under the California Constitution. It further contended that the unfunded liability is itself not an “obligation imposed by law” because it is not a fixed dollar amount that is currently due and payable (rendering it a preexisting debt). The trial court rejected these arguments and validated the bonds under the “obligation imposed by law” exception.

The Court of Appeal affirmed on the ground that refunding the UAL did not create “new” debt. The California Supreme Court granted review and affirmed that, even if the refunding was considered new debt, the “obligation imposed by law” exception applies.

Practical Takeaways for California Local Governments

The Court approves POBs as a permissible tool that the City may choose, in its discretion, to pay its obligation to maintain the actuarial soundness of its pension system. Although the Court’s analysis relied on statutes specific to municipal pension systems and the City’s charter, similar statutory requirements apply to other local retirement systems—including counties and cities participating in CalPERS—and support the broader applicability of the Court’s reasoning.

What This Means for POB Validation Actions

Historically, all POBs issued by California cities or counties have been validated under California’s validation statute (Code of Civil Procedure §§860 et seq.) due to uncertainty over whether pension obligations—and the bonds issued to refund them—were “obligations imposed by law” exempt from the constitutional limitation on a city or county’s ability to incur a debt or liability without a vote. The Supreme Court’s decision in the City of San José substantially resolves that uncertainty, confirming that POBs fall within the “obligation imposed by law” exception. As a result, validation actions may no longer be necessary for many POB issuances.

Orrick’s Public Finance POB Group

Orrick innovated the concept of POBs with the first-of-its-kind issue for the City of Oakland in 1985. That financing and several that rapidly followed were tax-exempt and primarily driven by then legal arbitrage possibilities. Tax-exempt POBs largely came to an end with the introduction of tax legislation that became part of the Tax Reform Act of 1986.

A California Debt and Investment Advisory Commission report indicates 333 unique POB and Other Post-Employment Benefits transactions worth over $34 billion have been issued by public agencies in California from 1985 through April 2022.

For more information about POBs and whether a validation action is necessary, please contact one of the following members of the Orrick Public Finance Group.