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”) authorization of the issuance of up to approximately $3.48 billion in pension obligation bonds (“POBs”) to refund the City’s unfunded actuarial pension liability (“UAL”), holding that—even if the bonds constitute “new” debt—the issuance falls within the exception to the constitutional debt limitation for an “obligation imposed by law” and therefore does not require two‑thirds voter approval under Article XVI, section 18(a) of 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.  Therefore, the Court decided, 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, filing an amicus brief urging the Court to hold that the obligation imposed by law exception encompasses local governments’ use of POBs to address legally mandated pension‑funding obligations. The Court’s opinion expressly cites amici’s point that the City relied on the Retirement Boards’ actuarial calculations and did not usurp the Retirement Boards’ fiduciary role, as the Court ultimately adopted the obligation imposed by law rationale in affirming the validity of the City’s POBs.

The Court’s Decision

In the validation action brought by the City, the Howard Jarvis Taxpayers Association filed an answer, contending that the City needed a two-thirds vote under Article XVI, section 18(a) of the California Constitution to issue bonds to refinance its UAL and that the unfunded liability is itself not an obligation imposed by law as it is not a fixed dollar amount that is currently due and payable (rendering it a preexisting debt). The trial court 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; and 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, in its discretion, choose to use to pay its obligation to the pension fund under a statutory and/or charter‑based requirement to maintain actuarial soundness. Although the Court’s analysis relied on statutes specifically applicable to municipal pension systems and the City’s charter, the statutory frameworks governing other local systems—including for counties and cities participating in CalPERS—contain materially similar requirements supporting the broader applicability of the Court’s reasoning.

Implications for POB Validation Actions

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 a degree of uncertainty about whether pension obligations and the bonds issued to refund them were obligations imposed by law entitled to exemption from the constitutional limitation on a city or county’s ability to incur a debt or liability without a vote. With the Supreme Court’s decision in the City of San Jose, Orrick is now in a position to proceed with most POB issuances without a validation action.

Orrick 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 a number 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 POB Group: