As the issuance and sale of Pension Obligation Bonds (POBs) surged in California due to near-zero interest rates in 2021, the Howard Jarvis Taxpayers Association began filing lawsuits against cities seeking rapid POB validation without a vote. The Association argued that the cities issuing POBs invoked California’s constitutional debt limit provision, which requires voter consent for new debts exceeding certain limits. Most cities backed away from these challenges and abandoned validation of the issuance of their POBs as interest rates have surged since 2021.

Kutak Rock partner Cyrus Torabi recently told The Bond Buyer that historically, cities will tend to avoid legal challenges to the validation of bonds.

“Most of the time I have been practicing law, if Howard Jarvis or a gadfly responded to a validation, the city would stop, because they don’t want a contested validation,” said Torabi.

Two cities decided to accept the Association’s challenges, and earlier this year San Jose won rulings in the Superior Court and the California Sixth District Court of Appeal. Likewise, the city of Escondido’s validation was affirmed by the Superior Court and the California Fourth District Court of Appeal.

Torabi wrote in a recent Client Alert that both cities won these initial rulings when the appeals courts agreed with the cities’ argument that because the issuance of POBs does not create a new indebtedness for the purposes of the California constitutional debt limit, POBs can be validated without a vote. The court ruled that the cities, rather than creating new indebtedness, were merely changing the form of an existing debt, making the obligation payable to bondholders, where previously they were payable to the California Public Employee Retirement System.

Though the San Jose and Escondido won the initial rulings, further appeals have been made to the California Supreme Court. These cases are still pending and await the higher court’s review.

Click here (subscription required) to read the full article in The Bond Buyer for an analysis of the effect of these cases and interest rates on POBs.