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City of San Jose v. Howard Jarvis Taxpayers Assn. (CA6 H050889 4/29/24) Public Pensions and Municipal Debt Limitation

By April 29, 2024June 30th, 2024Uncategorized

In this appeal, we consider the application of the constitutional debt limitation to a municipality’s constitutional obligation to its employees to make promised pension payments and its duty to ensure pension plans have sufficient assets to be actuarially sound.

Article XVI, section 18, subdivision (a) of the California Constitution sets forth the constitutional debt limitation applicable to cities.  It states in relevant part:  “No . . . city . . . shall incur any indebtedness or liability in any manner or for any purpose exceeding in any year the income and revenue provided for such year, without the assent of two-thirds of the voters of the public entity voting at an election to be held for that purpose.”  (Cal. Const., art. XVI, § 18, subd. (a).)  

This provision, which “mandat[es] balanced budgets” (Rider v. City of San Diego (1998) 18 Cal.4th 1035, 1045 (Rider)), has been part of the California Constitution since 1879.  It was enacted in response to “municipal extravagance” (San Francisco Gas Co. v. Brickwedel (1882) 62 Cal. 641, 642 (San Francisco Gas)) by local governments making large capital investments and thereby “creating huge long term debts.”  (Compton Community College etc. Teachers v. Compton Community College Dist. (1985) 165 Cal.App.3d 82, 88 (Compton Community College).)  

Courts have identified exceptions to the constitutional debt limitation, including the “special fund doctrine” (City of Oxnard v. Dale (1955) 45 Cal.2d 729, 733 [debt limitation not violated by obligations payable solely from a special fund]), obligations imposed by law (City of Long Beach v. Lisenby (1919) 180 Cal. 52, 57 (Lisenby) [debt limitation has “no application to cases of indebtedness or liability imposed by law or arising out of tort”]), and contingent obligations (Rider, supra, 18 Cal.4th at p. 1047 [debt limitation inapplicable to “multiyear contracts in which the local government agrees to pay in each successive year for land, goods, or services provided during that year” because each payment is a contemporaneous payment for the property, goods, or services rather than an installment payment on a long-term debt]; see also Taxpayers for Improving Public Safety v. Schwarzenegger (2009) 172 Cal.App.4th 749, 763).

Howard Jarvis Taxpayers Association, Citizens for Fiscal Responsibility, and Pat Waite (collectively, HJTA) argue that the City of San José (city) violated the constitutional debt limitation when its city council adopted a resolution authorizing the issuance and sale of bonds, on the condition they result in a savings to the city, to address a shortfall in the city’s pension plans.  In validation proceedings, the trial court upheld the city’s actions against a challenge by HJTA, deciding that the bond issuance falls under the obligation imposed by law exception to the debt limitation.  HJTA appeals the judgment, contending the city’s actions violate the constitutional debt limitation and lack statutory authority.

We affirm the judgment, but our reasoning differs from that of the trial court.  We decide that under the terms of the challenged resolution, the city has not “incur[red] any indebtedness or liability in any manner or for any purpose exceeding in any year the income and revenue provided for such year.”  (Cal. Const., art. XVI, § 18, subd. (a).)  Because the city’s actions do not trigger the constitutional debt limitation, we need not consider the applicability of its exceptions.  We furthermore conclude the city has the authority under state law to issue the bonds.