CA Group Challenges Pension Bond Sale

December 10, 2004 ( - An Orange County, California anti-tax group has filed a lawsuit in an attempt to block the state's plan to sell $929 million in pension bonds, arguing that the state's constitution requires voters to approve all big loans.

The state plan comes despite the fact that a state judge declared a similar effort last year as unconstitutional, according to the Associated Press. The governor and the Legislature included the bonds in this year’s budget as one of several loans the state took out to help close a funding gap that was once estimated at $17 billion.

Attorney Harold Johnson of the Pacific Legal Foundation  who filed the challenge Thursday said the legal issues this year are the same as last year. “The state constitution requires that all major borrowing be approved by the voters,” Johnson told reporters. “There are no exceptions.” The constitutional provision in question is  Article 16 , which prevents the state from borrowing more than $300,000 without voter approval.

For its part, the state has argued that the constitutional ban isn’t in play, claiming that the bond sale is tied to reforms of the pension system that will save nearly $3 billion over 20 years. Savings from the reforms will more than pay off the bonds so there is no debt to the state’s general fund, officials have argued.

If the judge rules against the administration, the loss of the bonds will complicate an already difficult budget picture. The nonpartisan Legislative Analyst’s office reported last month that the state is facing a $6.7 billion shortfall in the 2005-2006 fiscal year.

Key to resolving the issue is whether the judge agrees that real savings will be achieved through the pension reforms, said Jon Coupal, executive director of the Howard Jarvis Taxpayers Association, according to the AP.

In an agreement reached with the state’s largest employee union last summer, the state would create a two-tiered pension system where new employees wouldn’t become eligible to join the retirement plan for two years, saving the state billions in benefit payments, according to the AP report. The agreement with the union, however, also protects employees from losing any of their benefits. New workers would pay a portion of their salaries into a separate tax-free account and after two years would be eligible to roll that money over into the state retirement system. They would also have the option of cashing out and starting over in the state system.

The lawsuit is  here.