Ruling clears way for up to $9.9. billion in borrowing to deal with pandemic-related revenue losses. GOP had filed suit to block law’s implementation

New Jersey’s Supreme Court issued a ruling on Wednesday that affirmed Gov. Phil Murphy’s administration can borrow billions of dollars without voter approval to offset revenue losses during the coronavirus pandemic.

The state’s highest court concluded in a unanimous opinion that the ongoing health crisis represents the type of major emergency that allows for bonds to be sold without voter sign-off under an exception to restrictions on borrowing and spending in the state Constitution.

But the opinion also said the emergency exception is not unlimited, and that the Murphy administration will have to clearly define in formal certifications the budget hole created by the health crisis before issuing any debt as part of its response.

Last month the Democratic-controlled Legislature passed a bill that Murphy immediately signed into law, giving preliminary authorization for up to $9.9 billion in general-obligation debt to be issued without voter approval spread over two fiscal years.

The state Republican Party and several GOP lawmakers filed suit immediately after the law was enacted to prevent it from being implemented. They cited the restrictions in the state Constitution, which call for a balanced budget and generally limit the issuance of new debt without voter approval to 1% of the annual budget.

How the restriction will apply

“To avoid borrowing in excess of what the law allows, and to be faithful to the Emergency Exception, the State cannot issue bonds or borrow funds beyond the actual fiscal exigency caused by the pandemic,” the court said in its opinion, which was issued just after noon Wednesday.

“In order to satisfy those concerns, it will be necessary for the Governor or the Treasurer to certify publicly the State’s projected revenue and consequent shortfall ‘as a result of the COVID-19 pandemic’ before each tranche of borrowing,” the opinion said.

Murphy, a first-term Democrat, has argued that borrowing must be part of the state’s response to the pandemic to help offset significant revenue losses that his administration has forecast through the middle of next year. Without borrowing, he’s warned the state could see major layoffs of public workers just when they are being relied upon on the front lines of the pandemic.

Murphy responded to the ruling during an afternoon media briefing, saying he was “grateful for this decision.”

“We knew that not only were we right in our decision to take this step, but because the alternative would have been something that no one up here would have wanted to experience,” Murphy said.

“This means that when I present my new budget for the 2021 Fiscal Year in roughly two weeks, our schools can be funded, our residents and communities can be protected, and our state can move forward,” he said.

Powerful four-member commission

As well as authorizing close to $10 billion in general-obligation debt, the COVID-19 borrowing law also established a special commission of four lawmakers that must sign off before any individual bond sale can be held. But the law did not specify exactly how the bond proceeds could be used other than a general reference to responding to the pandemic and maintaining the state’s fiscal health.

Lawyers for the GOP’s legal challenge and those who were allowed to join the case as a “friend of the court” also argued that a 2004 Supreme Court opinion set a precedent that disqualifies bond proceeds from being considered as revenue for the purposes of balancing the budget. Citing language in the new law, the Republicans also warned the borrowing could expose residents to major tax hikes, including an increased sales tax and a new statewide property-tax assessment,.

But Murphy’s administration argued that  exceptions written into the state Constitution relax otherwise tight fiscal controls specifically to give the state more flexibility during times of war or when there is a major emergency. The administration also argued the scope of the pandemic is on the scale of the Great Depression and the Civil War, two events that also saw the state borrow to cover unforeseen budget woes.

Republicans responded Wednesday to the opinion by saying it would motivate them to work even harder in future elections to oust majority Democrats who supported the borrowing law.

“The only way to put an end to out of control spending is to send more Republicans to Trenton,” said state GOP Chair Doug Steinhardt.

Ciattarelli: ‘Another slap in the face’ to NJ taxpayers

“Today’s decision is another slap in the face to New Jersey taxpayers who have for too long been victimized by irresponsible Trenton politicians,” said Jack Ciattarelli, a former Republican lawmaker who has already declared his intention to challenge Murphy in next year’s gubernatorial election.

Ciattarelli was among those granted “friend of the court” standing to participate in the case.

The opinion upholding the borrowing law was written by Chief Justice Stuart Rabner, and joined by the court’s six other justices. The high court took the case on an expedited basis last month, sending it directly before the justices for oral arguments last week.

The opinion listed some examples of the items that could be funded with bond proceeds. They included “public services like education, police, fire, first aid, child welfare, and prisons, among other services” that would “secure the continued functioning of government.”

Taken together, the government services listed in the opinion cover a significant share of the state’s nearly $40 billion in annual spending, which should make it much easier for Murphy as he draws up the state’s next budget plan. But the opinion also said that “not every act of borrowing would ‘meet’ the current emergency.”

“Borrowing for programs unrelated to the emergency would not satisfy the language of the exception or the Act,” the opinion said.

Even if Murphy administration officials eventually certify that the pandemic’s fiscal toll equals the full $9.9 billion set out in the borrowing law, the governor still will need to have majority approval from the lawmakers on the four-member panel before any bond issues can go to market.

Coughlin: ‘Reasonable measures to guide borrowing’

The members of that panel are Senate President Steve Sweeney (D-Gloucester), Senate Budget and Appropriations Committee Chair Paul Sarlo (D-Bergen), Assembly Speaker Craig Coughlin (D-Middlesex), and Assembly Budget Committee Chair Eliana Pintor-Marin (D-Essex).

Coughlin said the court’s opinion provided “reasonable measures to guide borrowing.”

“We will work within those parameters and ensure proper Legislative oversight is included. With this, our economic position will be strengthened for both the present and future,” he said.

Sweeney could not be reached for comment.

Murphy and lawmakers enacted a three-month, stopgap budget that covers spending through the end of September. Despite being balanced on paper, the stopgap budget deferred more than $2 billion in planned spending. The governor is due to unveil another budget plan on Aug. 25 that will cover spending needs between Oct. 1 and June 30, 2021.

The Murphy administration earlier this year projected revenue losses could total nearly $10 billion through the middle of next year as the state wrestles with the pandemic and its economic fallout.

The borrowing law gave preliminary authorization for up to $2.7 billion in debt to be issued before Sept. 30, and up to an additional $7.2 billion by June 30, 2021. However, the administration told the justices during oral arguments last week that the revenue outlook had improved slightly in recent weeks, whittling the overall projected revenue gap to $9.2 billion.

Lance: Constitution’s framers ‘rolling over in their graves’

The court’s opinion had the potential to more broadly revise state fiscal law and precedent, but the justices noted they were not overruling the opinion issued in 2004 on what is known as the Lance v. McGreevey case. That decision came in response to a lawsuit that challenged a borrowing initiative enacted by former Gov. Jim McGreevey that did not occur during an emergency and did not involve general-obligation debt, the state’s most secure bonds.

Still, former state Sen. Leonard Lance —a lead plaintiff in the 2004 case — said he believes the framers of the 1947 state Constitution are now “rolling over in their graves.” The new court opinion leaves the door open to deficit spending by the Murphy administration to balance future budgets, said Lance, whose father participated in the drafting of the 1947 Constitution.

“For the next fiscal year, it should have gone to the people for their approval,” Lance said.

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