Pension Obligation Bond Financing

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.


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 more than 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 as bond or underwriters’ counsel on roughly 70 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, as well as the State of California.

New York

A greater number of pension obligation bonds have been issued by state and local governments in New York than from any other state. In 1989 and again in 2003, new legislation was adopted for the purpose of structural reform to the New York State retirement systems. Each legislation also authorized pension obligation bonds.

The 2003 legislation authorizes (1) local governments to issue pension obligation bonds for any outstanding obligations to the State for any existing incentive programs (this part was drafted by Orrick) and (2) a local government (or the State with respect to its own employees) to issue pension obligation bonds to pay its normal annual contribution due on December 15, 2004 to certain components of the NYS retirement systems. These pension obligation bonds are to be issued as general obligation bonds in the same manner, under the same procedural requirements and subject to the same debt limits and other constraints as for any capital project. The 2003 legislation also authorized the State of New York to issue pension obligation bonds to pay a portion of its contribution bill for the year ending March 31, 2005.


The State of Oregon and its local governments, with Orrick’s assistance, have also been among the most active issuers of pension obligation bonds. Pension obligation bonds are issued in Oregon either as limited tax bonds under the Pension Bond Act or as revenue bonds under The Uniform Revenue Bond Act. Several large pooled pension obligation bond issues have been done by Oregon school districts, community college districts and other local governments. In 2003, Oregon voters authorized the general obligation bonds to pay the State’s UAAL.

Other States

In addition, Orrick has worked or is working on a number of pension obligation bond financings for state or local governments in other states.

Other Post-Employment Benefits (OPEB)

OPEB refers to other post –employment benefits, meaning other than pension benefits. OPEB consist primarily of healthcare benefits and may include other benefits such as life insurance, long term care and similar benefits. Until now, these benefits have generally been administered on a pay-as-you-go basis and have not been reported as a liability on municipal financial statements.