Pension Obligation Bonds and the “Obligation Imposed by Law” Exception:
Commentary on City of San José v. Howard Jarvis Taxpayers Association

I. Introduction

The California Supreme Court’s opinion in City of San José v. Howard Jarvis Taxpayers Association (S285426, Dec. 18, 2025) addresses a question at the intersection of municipal finance, constitutional debt limits, and public pensions:

Can a city issue pension obligation bonds (“POBs”) to refinance its unfunded actuarial pension liability without first obtaining two-thirds voter approval under the local debt limitation in article XVI, section 18, subdivision (a) of the California Constitution?

The Court answers yes. It holds that San José’s POBs fall within the long‑recognized exception for “obligations imposed by law,” even if the bonds are treated as creating “new” indebtedness. Because the City’s duty to fund its pension systems on a sound actuarial basis is imposed by state law and by its voter‑adopted charter, the constitutional debt limit does not restrict the City’s choice of how to finance that obligation.

This decision has significant ramifications:

It confirms that local governments may use POBs to address unfunded pension liabilities without a popular vote, where those liabilities arise from legally mandated, actuarially sound pension obligations.
It clarifies and strengthens the “obligation imposed by law” exception to the local debt limitation and distinguishes it from the analogous limitation on state debt.
It delineates the boundary between the fiduciary authority of pension boards and the fiscal discretion of city councils regarding how to meet funding obligations.

II. Background and Procedural History

A. The City’s Charter and Pension Obligations

San José became a charter city in 1965. Its charter obligates the City Council to:

“provide, by ordinance or ordinances, for the creation, establishment and maintenance of a retirement plan or plans for all officers and employees of the City” and
fund such plans in an “actuarially sound” manner.

(See San José City Charter, art. XV, § 1500; see also §§ 1504, subd. (c), 1508‑A, subd. (a).)

By ordinance, both the City and its employees contribute to the “normal cost” of retirement benefits—the present value of the benefits earned by current employees in a given year. Retirement board actuaries set contribution rates using assumptions about:

mortality, service and retirement patterns,
investment returns (the “discount rate”), and
other demographic and economic factors.

B. Unfunded Actuarial Liability (UAL)

When experience diverges from assumptions—e.g., lower investment returns, higher longevity, or demographic changes—the value of pension assets can fall below the present value of already‑earned benefits. The resulting shortfall is the unfunded actuarial liability (UAL).

San José’s retirement boards calculate the UAL annually. The City has been paying this UAL through an amortization schedule—making annual lump‑sum payments at the start of each fiscal year, subject to a discount compared to monthly payments. Nevertheless, by 2021 City staff projected that rising UAL amortization payments through 2029 would significantly “erod[e] capacity for other City programs and services.”

C. The Pension Obligation Bond Proposal

To address this pressure, in October 2021 the City Council approved a resolution authorizing the issuance of POBs in a maximum principal amount equal to the lesser of:

$3,483,001,000 — the retirement boards’ calculation of the UAL as of June 30, 2020; or
“the sum of the City’s Unfunded Liability and Current Obligation as calculated by the actuary.”

Key conditions in the resolution included:

The bonds must produce “savings to the City” consistent with the City’s then‑current Debt Management Policy; and
The bonds’ maturity date must not extend beyond the final amortization dates previously set by the retirement boards for the UAL.

The City’s basic strategy:

Borrow at what it hoped would be a lower interest rate than the pension system’s 6.625% discount rate; and
Use bond proceeds to eliminate or reduce the UAL, lowering long‑term pension costs and relieving pressure on future operating budgets.

D. Validation Action and Lower Court Decisions

San José filed a validation action under Code of Civil Procedure section 860 et seq., seeking judicial confirmation that the POBs were valid and did not violate article XVI, section 18(a)’s local debt limitation. The Howard Jarvis Taxpayers Association, Citizens for Fiscal Responsibility, and Pat Waite (collectively, “HJTA”) answered, arguing:

The POBs would create a multi‑year municipal debt exceeding the current year’s income and revenues; and
Under article XVI, section 18(a), such debt cannot be incurred without two‑thirds voter approval.

The Santa Clara County Superior Court ruled for the City. It found that:

The City is required under its Charter to create and maintain actuarially sound retirement plans; and
To maintain actuarial soundness, the City is required to pay the UAL.

The trial court concluded that the UAL is an “obligation imposed by law,” and that the debt‑limit provision therefore did not apply.

The Court of Appeal (Sixth Appellate District) affirmed in City of San José v. Howard Jarvis Taxpayers Assn. (2024) 101 Cal.App.5th 777. But it used a different rationale: it held that the POBs did not create any new indebtedness, because “the debt the [C]ity seeks to refund already exists, in the form of the unfunded liability” (id. at p. 806). On that view, the debt limitation was never triggered, and no exception needed to be reached.

HJTA sought and obtained Supreme Court review.

III. Summary of the Supreme Court’s Decision

The Supreme Court unanimously affirmed, but on narrower and more principled grounds than the Court of Appeal.

Reaffirmation of the “obligation imposed by law” exception.
Article XVI, section 18(a) bars local entities from incurring indebtedness or liability exceeding current‑year revenues without two‑thirds voter approval. But longstanding case law recognizes an exception for obligations “imposed by law” rather than voluntarily assumed by local officials.
San José’s UAL is an obligation imposed by law.
The Court held that the City’s duty to fund its retirement plans on an actuarially sound basis arises from:
- State law requiring any municipal pension system to be on a “sound actuarial basis” and to be funded so that promised benefits can be paid “without further contributions from any source” (Gov. Code, §§ 45342, 45343); and
- The City’s voter‑adopted charter mandating creation and maintenance of retirement plans for all officers and employees, funded on an actuarially sound basis.
These provisions together impose a legal obligation to address the shortfall between existing assets and the present value of already‑earned pension benefits—i.e., the UAL.
The debt limit does not regulate the City’s method of addressing an involuntary obligation.
Even assuming the POBs create “new” debt, the key question is whether the underlying obligation (the UAL) is imposed by law, not whether the specific financing technique (bonds vs. amortized payments) is mandated by law. Once an obligation is imposed by law, the City has discretion to decide how to fulfill it, including through bond financing, without triggering the two‑thirds vote requirement.
Distinguishing the state debt limit and Pension Obligation Bond.
The Court distinguished State ex rel. Pension Obligation Bond Com. v. All Persons Interested (2007) 152 Cal.App.4th 1386, which invalidated state‑level POBs under article XVI, section 1. There, the duty to fund CalPERS at the amount calculated by its board was created by statute—effectively a self‑imposed obligation by the Legislature that the Legislature could also amend. By contrast, San José’s obligation arises from state statutes and a voter‑adopted charter that the City Council cannot simply revoke or amend on its own.
Retirement board fiduciary authority not infringed.
HJTA argued that article XVI, section 17 gives the retirement board “sole and exclusive” fiduciary responsibility over pension assets and actuarial decisions, so the City Council could not decide to inject additional assets via a bond. The Court rejected this argument, emphasizing that the City merely relied on actuarial work and UAL calculations performed by the retirement boards; it did not supplant or override them.
No need to overrule or fully distinguish County of Orange.
The Court noted that County of Orange v. Assn. of Orange County Deputy Sheriffs (2011) 192 Cal.App.4th 21 treated UAL arising from benefit increases as not “indebtedness or liability” within article XVI, section 18(a) because it was not immediately payable. But County of Orange did not address the obligation‑imposed‑by‑law exception at all. The Court therefore declined to rely on or dissect it in detail, resolving San José solely on the exception.

The holding is succinctly stated:

We hold that the proposed pension obligation bonds, even if deemed to create a new debt, fall within the exception to the local debt limitation for obligations imposed by law.

IV. Detailed Legal Analysis

A. The Constitutional Local Debt Limitation

Article XVI, section 18(a) provides:

“No county, city, town, township, board of education, or school district, 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 . . . .”

From its earliest cases, the Court has described this provision as a directive for local governments “to live within [their] means” (Gassman v. Governing Board (1976) 18 Cal.3d 137, 148). In San Francisco Gas Co. v. Brickwedel (1882) 62 Cal. 641, 642, the Court held that:

Each year’s income and revenue must pay each year’s indebtedness and liability.
No indebtedness or liability incurred in one year may be paid out of the income or revenue of a future year.

This became known as the “pay as you go” principle of municipal finance, “a cardinal rule” later summarized in Westbrook v. Mihaly (1970) 2 Cal.3d 765, 776 (vacated on other grounds).

Yet, “almost as old” as the debt limitation itself are certain judicially recognized exceptions (Rider v. City of San Diego (1998) 18 Cal.4th 1035, 1046). The most important for this case is the exception for obligations “imposed by law.”

B. The “Obligation Imposed by Law” Exception – Historical Development

The core idea, expressed early in Long Beach v. Lisenby (1919) 180 Cal. 52, 57, is that article XVI, section 18(a) “clearly is intended to confine its operation to those forms of indebtedness and liability which may have been created by the voluntary action of the officials in charge of the affairs of such city.” Debts that flow from legally imposed duties, as opposed to discretionary contracts or policy choices by local officials, fall outside the constitutional limit.

1. Lewis v. Widber (1893) 99 Cal. 412

In Lewis v. Widber, the Chief Clerk of San Francisco claimed unpaid salary from a prior fiscal year, to be paid out of current‑year revenues. The city argued that this would violate the debt limitation. The Court disagreed:

The limitation applies only to indebtedness “which the municipality has discretion to incur or not to incur.” (Id. at p. 413.)
The clerk’s office and salary were established by state law, so the city had no discretion about whether to incur the salary obligation. It was therefore an obligation “imposed by law” outside the debt limit. (Id. at p. 415.)

This case planted the seed for a general principle: salaries fixed by law, judgments mandated by law, and similar compulsory payments are not the kind of “debts” targeted by the constitutional limitation.

2. County of Los Angeles v. Byram (1951) 36 Cal.2d 694

In Byram, Los Angeles County needed a new courthouse. State law required county boards of supervisors to provide “suitable quarters” for superior and municipal courts. The county proposed financing courthouse construction, and the question was whether the capital expenditure violated the debt limit.

The Court held it did not, because:

The obligation to provide “suitable quarters” was imposed by law; and
The existing facilities were inadequate, so some new or improved courthouse was legally required.

The fact that the county had extensive discretion over “what kind of courthouse to supply and how much to invest in it” did not change the analysis (Compton Community College Teachers v. Compton Community College Dist. (1985) 165 Cal.App.3d 82, 91, discussing Byram). The specific form and cost of compliance were discretionary, but the duty to act was compulsory.

3. Compton Community College Teachers v. Compton Community College Dist. (1985) 165 Cal.App.3d 82

In Compton Community College, a community college district unlawfully reduced teachers’ salaries during a contract year. The teachers sued for backpay. The district invoked the debt limit, arguing it had no specific legal obligation to agree to any particular salary during bargaining and thus the obligation was voluntary.

The Court of Appeal rejected that argument:

State law required the district to employ needed instructors,
to set salary schedules after good‑faith bargaining over wages and working conditions, and
not to reduce salaries within a contract year.

Thus, the obligation to restore the illegally withheld pay was “not an obligation voluntarily assumed by local government; it is a duty imposed by law. As such, the repayments are not subject to the constitutional debt limitation.” (Id. at p. 96.)

Critically, the court noted that the law need not set the exact amount of the expenditure; it is enough that the duty to make the type of payment (e.g., lawful salaries) is legally mandated (id. at pp. 93–96).

4. Contingent Obligations (Not Directly at Issue Here)

The Supreme Court has also recognized a related but distinct exception: “contingent obligations” are not “debt” until the contingency occurs. A “sum payable upon a contingency is not a debt, nor does it become a debt until the contingency happens.” (Doland v. Clark (1904) 143 Cal. 176, 181, citing People v. Arguello (1869) 37 Cal. 524, 525; see American Co. v. City of Lakeport (1934) 220 Cal. 548, 557.) The Court in San José notes this doctrine but expressly declines to rely on it, staying focused on the “obligation imposed by law” strand.

C. Applying the Exception to San José’s Pension Obligation Bonds

1. Source of the City’s Pension Funding Obligation

San José’s obligation to maintain actuarially sound retirement plans stems from two sources:

State law. Government Code sections 45342 and 45343 require that:
- Any municipal pension or retirement system be “on a sound actuarial basis,” and
- Contributions be computed to accumulate, by retirement, a fund sufficient to pay promised benefits “without further contributions from any source.”
Case law confirms that municipal retirement plans “must be on a sound actuarial basis” (Costa Mesa v. McKenzie (1973) 30 Cal.App.3d 763, 773).
The City Charter. San José’s charter, adopted and amendable only by the voters (Cal. Const., art. XI, § 3, subd. (a)), requires the City to “create, establish and maintain” retirement plans for all officers and employees, and to fund them in an actuarially sound manner (San José City Charter, art. XV, §§ 1500, 1504, subd. (c), 1508‑A, subd. (a)).

Under the California Constitution, “[t]he provisions of a charter are the law of the State and have the force and effect of legislative enactments.” (Cal. Const., art. XI, § 3, subd. (a).) San José thus operates under a legal mandate—combining state statutes and charter provisions—to maintain actuarially sound pension systems.

The UAL is the actuarially measured shortfall between existing plan assets and the present value of already‑earned benefits. Because the City cannot lawfully maintain its pension systems indefinitely in that underfunded state, the UAL reflects a legal obligation to make up the deficiency over time.

2. Is the Obligation “Voluntarily” Assumed?

HJTA conceded that the City must “make up any deficiencies that have developed in the [retirement] funds (i.e., unfunded liabilities).” But it claimed that this obligation is effectively voluntary because the City originally chose to offer pensions. In other words, the City’s foundational choice to create pension systems and embed them in its charter was a voluntary act; therefore, all resulting funding obligations should be considered “voluntarily assumed” for purposes of the debt limit.

The Supreme Court rejects this framing as inconsistent with its prior cases. The key inquiry is not whether the City once had a historical choice to adopt a benefit program, but whether, at the time of the disputed transaction:

The obligation is currently imposed by external law; and
The officials in question have discretion to avoid that obligation.

Here:

The obligation to fund pensions on an actuarially sound basis comes from state statute and a charter enacted by the voters, not from a mere ordinance or contract that the Council could repeal on its own.
The Council cannot unilaterally escape its duty to fund already‑earned benefits in accordance with board‑determined actuarial principles.

Accordingly, “the council’s efforts to grapple with that obligation do not qualify as voluntary for purposes of the local debt limitation.”

3. Must the Specific Financing Method Be Mandated by Law?

HJTA next argued that, even if the duty to maintain actuarial soundness is involuntary, the POBs themselves fall outside the exception because:

No statute or charter provision specifically requires the City to issue bonds, and
The City could instead continue paying the amortized UAL from current revenues each year.

The Court calls this a “misconce[ption]” of the local debt limit inquiry. Relying on Byram and Compton Community College, it explains:

The question is whether the underlying obligation is imposed by law, not whether the particular method of meeting that obligation is legally mandated.
In Byram, the county’s duty was to provide “suitable quarters,” not to build that specific courthouse with that specific design and cost.
In Compton Community College, the law did not fix any particular salary schedule, but it did prohibit mid‑year reductions, making backpay to correct unlawful cuts an obligation imposed by law.

By the same logic:

San José’s duty is to maintain actuarially sound pension systems and to fund the UAL—an obligation imposed by law.
Whether the City:
- amortizes the UAL over time at the pension system’s discount rate,
- pays it in full with a lump sum funded by POBs, or
- uses some hybrid approach
is a matter of fiscal judgment entrusted to the City Council.

Thus, “the City’s burden is to demonstrate that the unfunded actuarial liability is an obligation imposed by law—not that the particular method it has chosen to fulfill its obligation is mandated by law.”

This is a crucial doctrinal clarification: once a local entity faces an involuntary, legally mandated obligation, it is generally free to choose a financing mechanism, including bond issuance, without implicating article XVI, section 18(a).

4. Interaction with the Pension Board’s Exclusive Fiduciary Role

Article XVI, section 17(a) gives public pension boards “the sole and exclusive fiduciary responsibility over the assets of the public pension or retirement system” and “the sole and exclusive responsibility to administer the system in a manner that will assure prompt delivery of benefits and related services.”

HJTA contended that:

Only the retirement boards, not the City Council, may determine whether additional assets are necessary in a given year; and
The Council’s decision to issue POBs effectively usurps actuarial or fiduciary judgments reserved to the boards.

The Court sidestepped the broadest aspects of this contention, instead focusing on the facts:

The POBs’ maximum principal amount—$3,483,001,000—was taken directly from the retirement boards’ own actuarial calculation of the UAL as of June 30, 2020.
The City did not perform independent actuarial services or decide, contrary to board determinations, that the pension funds needed more assets.

As amici (League of California Cities and California State Association of Counties) pointed out:

“Actuaries conducted the relevant evaluations; the retirement board managed the assets of the fund; and both informed the City that the fund was woefully underfunded. The City then carried out its obligation to maintain . . . actuarially sound pension plans.”

The Court accepted this framing and held that the City’s issuance of POBs, relying on board‑provided actuarial data, did not infringe the board’s exclusive constitutional role.

D. Treatment of Prior Decisions

1. State ex rel. Pension Obligation Bond Com. v. All Persons Interested (2007) 152 Cal.App.4th 1386

HJTA leaned heavily on Pension Obligation Bond, where the Court of Appeal invalidated state POBs under the state debt limitation (Cal. Const., art. XVI, § 1). There, the Legislature had passed a statute authorizing bonds to pay part of the state’s employer contributions to CalPERS. The question was whether this violated the $300,000 limit on state debt absent statewide voter approval.

The Court of Appeal held:

The state’s obligation to fund PERS at the amount determined by the retirement board was created by statute (Gov. Code, § 20790 et seq.);
That obligation was therefore “an obligation imposed by the Legislature on itself”; and
Self‑imposed statutory duties are not “obligations imposed by law” for purposes of bypassing the state debt limit, precisely because the Legislature can amend or repeal them unilaterally.

HJTA argued that San José likewise “voluntarily” created its pension obligations and could not invoke the obligation‑imposed‑by‑law exception.

The Supreme Court disagreed, emphasizing several distinctions:

The obligation in Pension Obligation Bond derived solely from statute enacted by the same body (the Legislature) that sought to issue the bonds.
By contrast, San José’s duty derives from:
- state statutes over which the City Council has no control; and
- a voter‑adopted charter, which the Council cannot unilaterally change.
Thus, the City’s obligation is not “essentially an obligation imposed [by itself] on itself,” as in the state case.

In short, Pension Obligation Bond constrains the Legislature’s ability to circumvent the state debt limit by legislating its own “mandatory” obligations; it does not bar local governments from treating externally imposed or voter‑mandated requirements as “obligations imposed by law.”

2. Arthur v. City of Petaluma (1917) 175 Cal. 216

In Arthur, Petaluma’s trustees contracted with a newspaper to print the text of a proposed charter as required by law, but the city lacked current‑year funds to pay the printer. The Court held that this printing contract created “indebtedness” subject to the debt limitation, because it was “the immediate result” of a voluntary contract entered into by the municipality as part of the charter‑adoption process.

HJTA argued that by analogy, San José voluntarily chose to offer pensions and so the resulting funding obligations should be treated as voluntary.

The Court distinguished Arthur:

The Petaluma obligation arose from a discrete contract that local officials chose to make.
Here, San José’s obligation stems from ongoing statutory and charter requirements to maintain actuarially sound pensions, which local officials cannot avoid or repeal.

In other words, Arthur illustrates the kind of voluntary, contract‑based debt that the constitutional limitation was designed to check; San José deals with a structural, legal obligation to fund public pensions.

3. Crowley v. Board of Supervisors (1948) 88 Cal.App.2d 988

Crowley involved a county retirement system facing an actuarial deficit. The Court of Appeal observed that “ultimately the [actuarial] deficit must be borne by the county, and whether it chooses to do so now or at some future time is a matter within the discretion of the board of supervisors with which the court may not interfere, since in either event the purpose of the retirement law would be carried out” (id. at pp. 999–1000).

The Supreme Court in San José cites Crowley to reinforce the notion that:

Local entities must ultimately bear the cost of pension deficits; but
They have discretion in the timing and method of addressing those deficits—precisely the discretion San José exercised in choosing to issue POBs rather than only making amortized payments.

4. County of Orange v. Assn. of Orange County Deputy Sheriffs (2011) 192 Cal.App.4th 21

In County of Orange, the county had granted retroactive pension benefit increases that created a significant UAL. The county sued, claiming the resulting UAL violated the debt limit. The Court of Appeal held that the UAL was not “indebtedness or liability” under article XVI, section 18(a) because it did not represent a sum for which the county was “immediately liable.”

The San José Court notes two points:

County of Orange never considered the obligation‑imposed‑by‑law exception.
Accounting standards have since changed, and UAL must now appear as a deficit on governmental balance sheets, weakening some of the reasoning in County of Orange.

Nevertheless, the Supreme Court expressly avoids deciding whether County of Orange is distinguishable or correct, explaining that San José can be resolved entirely under the obligation‑imposed‑by‑law framework.

V. Simplifying the Key Legal and Financial Concepts

A. Local Debt Limitation (Art. XVI, § 18(a))

In plain terms, the local debt limit means:

A city generally cannot promise to pay money in future years that exceeds the revenues it has in the current year, unless two‑thirds of its voters approve.
The goal is to prevent local officials from binding future taxpayers to large, long‑term debts without strong democratic consent.

B. “Obligation Imposed by Law” vs. Voluntary Debt

An “obligation imposed by law” is something the city is legally required to do or pay—because of the Constitution, statutes, or a voter‑enacted charter.
- Examples: Statutorily fixed salaries; court‑ordered judgments; mandated services (like providing court facilities) when state law leaves no real choice about performing them.
A “voluntary” debt is one that results from a discretionary decision by local officials—like entering into a new contract for construction or services when they were not legally compelled to do so.

The debt limitation only restricts voluntary debts. If the obligation is imposed by law, the city may incur debt to fulfill it without a two‑thirds vote.

C. Unfunded Actuarial Liability (UAL)

UAL is a technical but critical concept in pension finance:

Actuaries estimate the present value of all future benefits already earned by current employees and retirees.
They compare that to the current market or actuarial value of assets in the pension fund.
If assets are less than the present value of promised benefits, the difference is the UAL.

The UAL is not a bill that must be paid tomorrow. It is more like a funding gap that must be eliminated over time to ensure the plan can pay benefits as they come due. But as accounting and legal rules increasingly emphasize, the UAL reflects a real economic obligation that cannot be ignored.

D. Discount Rate

The discount rate is the assumed long‑term rate of return on pension investments used by actuaries to:

Convert future benefit payments into a present value; and
Determine contribution levels necessary to fund those future obligations.

If a city can borrow via POBs at an interest rate lower than the pension system’s discount rate, it may see apparent savings: it replaces an implicit “cost” of funding the UAL at the higher discount rate with a lower bond interest rate. But this involves risk: if actual investment returns on POB proceeds underperform the discount rate, the strategy can backfire.

E. Pension Obligation Bonds (POBs)

POBs are taxable bonds issued by a government to:

Raise funds and deposit them into a pension plan, or
Directly pay down the UAL.

Instead of making UAL payments only through operating revenues, the government:

borrows a lump sum;
reduces or eliminates the UAL; and
repays bondholders over time with interest.

The bet is that long‑term investment returns on the bond proceeds will equal or exceed the bond interest rate, netting savings. If not, the government can wind up worse off. The San José opinion is not a policy endorsement of POBs; it simply holds that where a city has a legal obligation to fund pensions, issuing POBs to address the UAL is constitutionally permissible without voter approval.

VI. Likely Impact and Future Implications

A. Practical Effect on Pension Obligation Bonds in California

The most immediate impact is on the ability of charter cities—and likely many other local governments—to issue POBs without a two‑thirds vote under conditions similar to San José’s:

The entity is legally required (by statute, charter, or both) to maintain an actuarially sound pension system.
The UAL reflects the gap between current assets and the present value of already‑earned benefits, as calculated by the system’s actuary.
The proposed bonds are designed to refinance that existing UAL (rather than to fund new or expanded benefits).

Under San José, such POBs fall squarely within the obligation‑imposed‑by‑law exception, so article XVI, section 18(a) does not require voter approval. Cities and counties that previously hesitated to pursue POBs for fear of violating the debt limit now have clear Supreme Court authority supporting their legality, provided their obligations are comparable.

B. Broader Reading of the “Obligation Imposed by Law” Exception

Doctrinally, the opinion reinforces and slightly extends prior case law in several ways:

It confirms that the exception applies even where the legal obligation arises from a combination of:
- State statutes; and
- Voter‑adopted local charters that local officials cannot unilaterally change.
It clarifies that the law need not specify the precise amount, timing, or financing method of the expenditure—only the underlying duty must be legally mandated.
It emphasizes that once an obligation is imposed by law, the local government has constitutional latitude to decide how to manage and finance it, including through long‑term borrowing.

This could be relevant beyond pensions—for example, in contexts involving:

Statutory or court‑ordered mandates to provide services (e.g., mandated health, safety, or education measures).
Judicial judgments against a city (damages, backpay, etc.) that must be satisfied over time.

In each of these areas, local entities may argue that bonding or other long‑term financing instruments to cover such mandated obligations are exempt from the debt limit under the San José reasoning.

C. Distinction Between State and Local Debt Limits

The Court’s treatment of Pension Obligation Bond draws a sharp line between:

State obligations the Legislature has imposed on itself by statute—where the state debt limit in article XVI, section 1 is strictly enforced; and
Local obligations imposed by state law or local charters—where the local debt limit in section 18(a) is relaxed through the obligation‑imposed‑by‑law exception.

This suggests that:

The Legislature cannot easily create “mandatory” statutory obligations for itself and then invoke those as a justification for bypassing the state debt limit.
Local governments, conversely, may treat obligations embedded in higher‑level law (or in their voter‑adopted charters) as sufficient to invoke the exception, even if those obligations originated in local political choices years or decades earlier.

D. Potential Limits and Open Questions

While the decision is expansive, certain limits and unresolved issues remain:

Scope of “imposed by law.” The Court does not fully define the outer boundary of this phrase. At a minimum, it clearly includes:
- Constitutional mandates,
- State statutes applicable to local entities, and
- Voter‑adopted charters.
Whether all contractual obligations traceable to statutory frameworks (e.g., collective bargaining agreements) automatically fall within the exception in all contexts is not explicitly decided here, though Compton Community College points strongly in that direction.
New benefits vs. existing obligations. This case involved a UAL for already‑earned benefits. It does not decide how the exception might apply to indebtedness incurred to create new pension benefits or to grant retroactive enhancements. County of Orange involved such benefit increases and is left untouched.
Interaction with other constitutional provisions. The opinion focuses on article XVI, section 18(a). It does not address Proposition 13, Proposition 218, or other voter‑approval requirements that might independently apply to certain taxes or revenue streams used to repay POBs.

E. Policy Considerations (Beyond the Court’s Holding)

Although the Court is careful not to weigh in on the policy merits of POBs, its decision necessarily lowers one legal barrier to their use. This will likely intensify policy debates at the local level:

Supporters may view POBs as rational financial tools that:
- Refinance expensive pension debt at lower rates,
- Smooth budget impacts of pension costs, and
- Potentially accelerate full funding if properly structured.
Critics may argue that POBs:
- Shift investment risk onto taxpayers,
- Invite speculative behavior (borrowing to invest), and
- Can worsen fiscal stress if markets underperform or interest rates move adversely.

The Court leaves these policy judgments to local elected officials and their constituents, focusing solely on constitutional permissibility.

VII. Conclusion

City of San José v. Howard Jarvis Taxpayers Association is a significant and clarifying decision in California municipal finance law. Its key contributions can be distilled as follows:

Reaffirmed and strengthened “obligation imposed by law” exception.
The Court confirms that article XVI, section 18(a) is aimed at voluntary debts, not liabilities that local governments are compelled to incur by law. When an obligation arises from statutes and voter‑adopted charters—such as the duty to maintain actuarially sound pension systems—the local debt limit does not restrict how that obligation is financed.
Clear holding on pension obligation bonds.
Pension obligation bonds issued to refinance existing unfunded actuarial liabilities of legally mandated pension systems fall within the exception, even if the bonds are treated as “new debt.” Two‑thirds voter approval is not required by the local debt limitation for such bonds.
Separation of mandatory obligations from discretionary methods.
The Court draws a sharp line between:
- The existence of a mandatory obligation (imposed by law), and
- The discretionary choice of how and when to pay it (including via bonds).
Only the former matters for triggering the exception; the latter remains within local fiscal discretion.
Distinction between state and local debt limitations.
The decision harmonizes but distinguishes the state‑level Pension Obligation Bond case: while the Legislature cannot evade the state debt limit by legislating its own “mandatory” obligations, local governments may treat obligations imposed by state law and voter‑adopted charters as truly “imposed by law.”
Guidance for future cases.
The opinion provides a framework for analyzing when other mandated expenditures—such as judgments, statutory programs, or court‑ordered remedies—may be financed without a two‑thirds vote under the obligation‑imposed‑by‑law exception.

In the broader legal context, San José underscores that California’s constitutional debt limits, though rooted in a 19th‑century distrust of public borrowing, coexist with modern realities of mandated public obligations and complex fiscal management. The decision gives local governments more legal flexibility to manage the costs of legally required public pensions, while leaving to politics, not litigation, the debate over whether and how they should exercise that flexibility.

Pension Obligation Bonds and the “Obligation Imposed by Law” Exception: Commentary on City of San José v. Howard Jarvis Taxpayers Association