Copyright© 2007 by School Services of California, Inc.

                                      Volume 20                   For Publication Date: July 20, 2007             No. 16

Pension Bond Proposal Dies in Court

An appeals court has once again affirmed the basic premise that, under California law, all public debt must be voter approved unless it meets one of a very limited number of exceptions. In affirming a lower court ruling in Pension Obligation Bond Committee v. All Persons Interested in the Matter of the Validity of the State of California’s Pension Obligation Bonds, the California Court of Appeal, Third Appellate District, ruled that, because the proposed $525 million issuance exceeded the Legislature’s $300,000 borrowing limit, it needed voter approval. The state has indicated it will not appeal the ruling. The lack of an appeal would allow the ruling to stand, and the issue would be dead. 

The bonds, proposed by the Governor and the Legislature in 2004, have never been issued. The lawsuit in question is a “validation suit” used to provide an opportunity for objectors to voice their opposition or forever hold their peace. The objector in this case was the Fullerton Association of Concerned Taxpayers, an Orange County group. 

A validation suit in a matter such as this is a good thing. Imagine the concern an investor might have if the bonds had already been issued and were subsequently determined to be illegal. The liability, time, energy and cost involved in unscrambling that omelet would have been tremendous. 

As it is, while the Governor’s January Budget Proposal included issuing these bonds, his May Revision did not. The decision of the court will therefore make it no harder—but also no easier—to balance the Budget. And in the future, the state may well believe that it needs pension obligation bonds; it just needs to remember to ask the voters first. 

—Ron Bennett