By Mark Gutglueck
The effort by Upland municipal officials to covertly issue $121 million in bonds and impose thereafter what would ultimately become a $3,560.56 tax on every man, woman and child in Upland to cover the cost of pensions for municipal employees was thwarted this week by the Howard Jarvis Taxpayers Association.
On July 21, the City of Upland quietly sued its 77,754 residents by means of what is in legal parlance referred to as a validation complaint, challenging them to come forward within 30 days of being served with notice of the lawsuit with reasons why the city should not issue $121 million in pension obligation bonds. On September 9, the city served that summons on its residents by means of a legal notice published in the Inland Valley Daily Bulletin. Publication was repeated on September 16, again in the Inland Valley Daily Bulletin and once more yesterday, September 23, also in a legal notice in the Inland Valley Daily Bulletin. Those three appearances of the notice in three consecutive weeks met the specification in California law and under the order of the court, specifically that of Superior Court Judge Lynn Poncin, for Upland’s residents and all others with standing to be given adequate warning of the potential entry of a default judgment in the city’s favor by the court if no response was made. If it turned out that by 4 p.m. on October 9 no answer to the validation complaint was lodged with the court, the city in that event would then be at liberty to proceed with the issuance of the pension obligation bonds.
Other than the notices published in the Inland Valley Daily Bulletin, the City of Upland and its officials, led by acting City Manager Steven Parker and advised by City Attorney Steve Deitsch and its bond issuance consultant Julio Morales, gave Upland residents no heads up with regard to the lawsuit. In all of its actions relating to the contemplated bond issuance, which included the hiring, on April 28 of this year, of Morales and the firm he works for, Urban Futures, as the city’s bond issuance consultant; the retaining, on May 10 of this year, of Deitsch’s law firm, Best Best & Krieger, to serve as the validation counsel and bond counsel; the retaining, on May 10 of this year, of the law firm of Straddling Yocca, Carson & Rauth to serve as the disclosure counsel for the bond issuance; and the hiring, on August 9 of this year, of J.P. Morgan Securities LLC as the managing underwriter and Stifel, Nicolaus & Company, Incorporated as the co-managing underwriter for the proposed pension obligation bond issuance, the city council acted stealthily. Rather than listing those hirings in the open as separate action items on the April 28, May 10 and August 9 city council agendas, they were presented on the consent calendars for each of those meetings.
Normally, in Upland and all cities elsewhere, the consent calendar is reserved for routine and noncontroversial actions that merit no discussion. The practice in Upland as it is in other cities is to not consider any of the items that are placed on the consent calendar individually but to vote on them collectively. In this way, it is very easy for the pubic to take no note of the items on the consent calendar. Accordingly, the public is very likely to miss the significance of any items that appear on the consent calendar and to have no understanding whatsoever or awareness of the substance of consent calendar items.
In this way, city officials minimized the degree to which Upland’s residents’ attention could be drawn to the pending bond issuance. When the city filed the validation complaint on July 21, it did so without any fanfare. Once the filing was made, city officials made a concerted effort to lull Upland’s citizenry into a state of complacency so that no answer to the validation action would be made.
Earlier in the year, there had been a discussion of the seriousness of the pension funding dilemma the city faces. That discussion included reference to the generous commitments made by past city councils going back more than three decades, such that at present the City of Upland has an accrued pension debt that is close to three times its annual budget.
The current outstanding debt the City of Upland has to the California Public Employees Retirement System to cover the cost of the pensions being paid to already retired former Upland City employees and the anticipated cost of paying present employees their pensions in the future is referred to, in municipal parlance, as Upland’s unfunded pension liability.
More than nine years ago, as of June 30, 2012, Upland’s unfunded pension liability had reached $88,994,066. It rose modestly but steadily for the seven years thereafter, jumping almost $11 million, reaching $99,976,917 as of June 30, 2019. Over the last two years, Upland’s pension debt escalation has been historically steep. During the six months after June 30, 2019 alone, the pension debt grew by more than it had in the previous seven years, hitting $112,039,675 by the midway point of fiscal year 2019-20 on December 31, 2019. As of June 30, 2020, it stood at $120,920,721. A document issued by the city in March 2021 indicated the city’s unfunded pension liability as of that month had reached $130,186,277.
As early as August of 2020, when the city council did not include two of its current members – First District Councilwoman Shannan Maust and Third District Councilman Carlos Garcia, both of whom were elected in November 2020 – and now-Mayor Bill Velto was a councilman running, successfully it would turn out, against former Mayor Debby Stone, the city had looked at issuing pension obligation bonds as a means of meeting the financial challenge the pension debt represents to the city and its taxpayers.
Advocates of issuing pension obligation bonds argued that by doing so – essentially borrowing money from bond buyers at a lower interest rate than the anticipated 7 percent yield the California Public Employees Retirement System expects from its investments – the city could reduce significantly the cost of servicing its pension debt. Others offered counterarguments against issuing the bonds, maintaining borrowing money to pay down already existing debt is a risky proposition. They argued that before the city engages in any such strategies to lower its pension debt through refinancing, it should first reform its pension system by reducing the level of benefits being provided to the city’s future retirees and/or shifting the responsibility of paying for the retirement program from the city’s taxpayers to the employees. It was further suggested that simultaneous with any refinancing of the pension debt through the issuance of pension obligation bonds, the city should exit from the California Public Employees Retirement System going forward, and institute in its stead a municipal employee 403 (B) retirement program for those city workers which they pay for themselves, perhaps with some modest city contribution, similar to 401 (K) programs available in the private sector.
Earlier this year, some members of the public expressed concern that city employees, in particular those at the management echelon at City Hall who are on a trajectory that will qualify them for extremely lucrative pensions, in some cases in excess of $200,000 per year, were dragging their feet with regard to having the city engage in actual pension reform because doing so was not in their personal interest. Those residents observed that the city’s top administrators were seeking to stampede the city into the issuance of the pension obligation bonds because doing so would end the impetus for pension reform. Councilman Carlos Garcia offered an assurance that the city was not pre-committed to the issuance of the pension obligation bonds, and that the city would approach any such issuance if it were to occur methodically and with complete transparency, keeping the public apprised at every juncture of the action to be taken, and allowing the public to weigh in on the matter and be heard by the council before it took any such action.
That they were being sued by their city went unremarked by virtually all of Upland’s residents for nearly two weeks after the city made its unheralded filing of the validation action in San Bernardino County Superior Court on July 21. In early August, a handful of Upland residents learned of the City of Upland’s effort to issue the bonds and the launching of its validation lawsuit against them and their fellow residents. Inquiries were made at City Hall and of the city council. Upland Acting City Manager Steven Parker, Upland Councilwoman Shannan Maust and Upland Councilwoman Janice Elliot responded to those inquiries, insisting that the city was not suing its residents. That quieted the residents temporarily, but six days after all of Upland’s residents were served with notice of Upland’s validation notice, via the Inland Valley Daily Bulletin, a smattering of residents spotted the summons, which began with the language, “Notice! You have been sued.”
Instantaneously, the credibility of Parker, Garcia, Maust and Elliott came in for a shellacking, as did the believability of the mayor, city council and City Hall in general. Thereafter, residents, through the Howard Jarvis Taxpayers Association, filed an answer to the validation complaint in protest of the proposed Upland bond issuance.
In that answer, filed on Tuesday, September 21, 2021, the Howard Jarvis Taxpayer Association, which has members who reside in Upland and therefore have standing in the matter, framed its response with regard to the 34 paragraphs in the city’s validation complaint pertaining to its rationale for making the issuance. The answer admits, or acknowledges the accuracy of nine of the validation complaint’s relevant paragraphs, those being paragraphs 2, 3, 4, 5, 13, 19, 20, 21 and 22. The answer takes issue with 12 other paragraphs in the validation complaint – paragraphs 1, 6, 9, 10, 11, 12, 18, 24, 25, 27, 28 and 29 – on various grounds, denying them in part, admitting them in part or finding them to be non-applicable to the meat of the complaint.
The complaint denies in whole the assertions contained in 13 of the validation complaint’s paragraphs, those being paragraphs 7, 8, 14, 15, 16, 17, 23, 26, 30, 31, 32, 33 and 34.
Specifically in its answer, the Howard Jarvis Taxpayers Association Taxpayers denies that the “city’s contract with the California Public Employees Retirement System (PERS) is a bond that can be ‘refunded.’ Taxpayers therefore deny that city has authority under Government Code section 53589.5 to issue ‘refunding bonds.’”
The answer denies that retirement law obligates the city to make annual contributions to the system to fund pension and other retirement benefits for its members and their beneficiaries and amortize the unfunded accrued actuarial liability of the city and denies that the city is absolutely obligated to satisfy its pension debt “from any money available in any fund in the city’s treasury.”
The answer denies that the city has established or “evidenced” its obligations to the state retirement system as a consequence of its past adherence to a contract it has with PERS dated August 7, 1944.
The answer denies that California Government Code sections 53570 and 53584 authorize the city to issue pension obligation bonds to refund any pension debt it has.
The answer contests the proposed commitment that the city issue and sell the pension obligation bonds for the purpose of refunding and applying the proceeds of the bonds to refund the city’s pension debt.
The answer contests the proposed commitment that the city issue and sell $121,060,000 in pension obligation bonds to refund all or a portion of its current unfunded obligation and any future unfunded obligation.
City officials have not explained why they intend to limit the issuance to $121.06 million, even thought the unfunded pension liability the city has accrued had reached $130,186,277 as of March of this year.
The answer denies that the bond issuance the city proposes is in conformity with the applicable provisions of all laws and enactments at any time in force or controlling upon such proceedings and denies it is or will be fully in conformity with all applicable requirements of all regulatory bodies, agencies or officials if the bonds are issued.
The answer denies the validation action is properly brought under Government Code section 53511 and California’s validation statute such that the agreements envisioned in the bond issuance contemplated by the city are valid and legal, and in conformity with the applicable provisions of Article XVI, Section 18 of the California Constitution.
The answer denies retirement law imposes a statutory duty upon the city to provide funding for retirement benefits for city employees and former employees and it denies that the city has demonstrated or “evidenced” this obligation in the PERS contract and that the the PERS contract is a legal and enforceable obligation of the city. The answer denies that the pension obligation bonds constitute fulfillment of the city’s legally imposed obligation to fund the retirement benefits for city employees and former employees.
The answer denies that the proceedings related to the issuance of pension obligation bonds are are exempt from and not subject to the debt limitation set forth in Article XVI, Section 18 of the California Constitution.
The answer denies that the city can use the validation process to obtain a judicial determination establishing that the pension obligation bonds can be issued in lieu of the requirements of Article XVI, Section 18 of the California Constitution.
Article XVI, Section 18 of the California Constitution states that “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.”
City officials were in a rush to establish the city’s eligibility to issue the bonds because, those officials say, interest rates are at historic lows, in the range of 2.6 percent. According to acting City Manager Parker and City Treasurer Greg Bradley, if the city continues on the current trajectory of using the repayment schedule the California Public Employees’ Retirement System has set for paying down the $121 million in unfunded pension liability the city is targeting in its pension obligation bonds refinancing effort, the debt service and principal payments on that $121 million will come to $225 million. By issuing the pension obligation bonds, they maintain, the city can reduce that $225 million to $165 million. For that reason, the city had set a goal of making that bond issuance by November, before interest rates rise.
It now appears impossible for the city to meet that goal, as the court is faced with considering the answer the Howard Jarvis Taxpayers Association has lodged, which asks that Judge Poncin declare the proposed issuance and sale of bonds without voter approval invalid. Judge Poncin has set February 14, 2022 as the date for a trial setting conference in the matter, meaning that even if the city prevails in convincing Judge Poncin that the bonds can be issued, that is unlikely to take place any time prior to the arrival of spring.
By Mark Gutglueck