Supreme Court Arguments Over NJ’s New $9.9B Borrowing Law Focus On What’s A Real Emergency

Republican challenge also questions limits on what state can pay back

Arguments before the New Jersey Supreme Court Wednesday over Gov. Phil Murphy’s $9.9 billion borrowing authority focused on three key questions: Can the money be used for general spending not directly related to the COVID-19 pandemic, what constitutes an emergency for which the state can borrow money without voter approval and are there any limits on what the state can pay for.

Similar borrowing during both the Civil War and the Great Depression figured prominently in the discussions among the justices and attorneys representing the state and Republicans who challenged the law Murphy signed three weeks ago. That gave the state the ability to sell bonds to offset revenue losses due to the emergency caused by the novel coronavirus without getting approval from voters in a ballot question.

Normally, such a challenge could take years to wind its way through the courts, but Chief Justice Stuart Rabner took the case directly to expedite it given the pressing financial situation the state is in: Assistant Attorney General Jean Reilly told the court that the initial estimated revenue shortfall of $9.9 billion through June 30, 2021 has brightened only a bit with the last report of sales tax receipts and is now projected to be $9.2 billion. The state Constitution requires that New Jersey’s budgets be balanced.

It’s unclear how quickly the justices might rule but it is likely to be within the next few weeks given that financial pressure and a new deadline of Oct. 1 for a state budget.

Sen. Michael Testa (R-Cumberland), representing Sen. Declan O’Scanlon (R-Monmouth), Assemblyman Hal Wirths (R-Sussex) and other Republicans who challenged the borrowing in court, made the case that the amount proposed would place a huge burden on New Jersey taxpayers for decades.

Testa: Debt for ‘generations to come’

“We must keep in mind the magnitude of what is at hand: $9.9 billion in borrowed money,” Testa said. “And, as explicitly stated in the act, if sales tax revenue does not cover the payment of the bonds issued, a statewide tax on real property will be levied … All of this debt will be incurred on the backs of 9 million residents in generations to come for 35 years.”

Testa argued that the state Constitution does not allow the state to incur general obligation debt that equals more than 1% of total spending in a given year without voter approval. Further, he cited a 2004 Supreme Court ruling in a case involving former Gov. Jim McGreevey’s use of bond proceeds to balance that year’s budget. In that case, the court ruled that “borrowed monies … cannot be used for the purpose of funding or balancing any portion of the budget pertaining to general costs without violating” the Constitution.

But justices on Wednesday noted that the Constitution allows for bonding to cover “purposes of war, or to repel invasion, or to suppress insurrection or to meet an emergency caused by disaster or act of God” and asked whether the pandemic doesn’t qualify as such.

“The state has argued that COVID-19 is the disaster that has befallen us, and the consequences include the impact on health, on our economy and so on,” Rabner said. “Why is that not the correct way to look at this?”

Testa agreed that the pandemic does constitute an emergency but asserted that “the framers did not intend to give the state a blank check whenever an unspecified emergency arises.” He said the bond funds can only be used for one of two purposes: expenses directly tied to the pandemic, such as related to health care and hospitals, or one specific purpose, such as aid to education.

“The Constitution requires that the proceeds of any general obligation bonds created by the state are confined to a single object or work,” he said. “The proposed act violates this constitutional requirement by allowing the state to use the new debt for any financial problem during fiscal years 2020 and 2021. The single object rule prevents monies from being expended for one purpose under the guise of another.”

What justices had to say

Several justices tried to get Testa to agree that the economic downturn that has led to lost state revenues is directly tied to the pandemic.

“Is not the emergency a public health crisis, an economic crisis coursing through every artery of our society and a fiscal crisis that is confronting the government, or are those not the emergencies caused by the disaster?” Associate Justice Barry Albin asked. “Close to one million people applied for unemployment insurance. Businesses closed throughout the state. No tax revenue coming in through sales tax, through property tax … and as a result of the property tax not being paid, there’s no money to be going into the government to pay for firefighters, police. Aren’t all those related to this emergency?”

“They are related,” Testa said, “but the state hasn’t been able to prove that the anticipated revenue shortfall is actually there.”

Associate Justice Anne Patterson said it is clear that the framers of the 1947 Constitution had the Great Depression in mind when drafting the document and asked whether they meant for the state to be allowed to use bond funds to deal with severe economic crises.

“One of the themes you see when you read through the record of the constitutional convention … is the aftereffects of the Depression,” she said. One clear theme is “the Legislature needs flexibility, because we know what can happen, and can happen fast.”

“If our framers wanted to have that in the framework of our Constitution, they would have put it in there,” Testa replied.

Options other than borrowing

Mark Sheridan represented former GOP Sen. Leonard Lance in the 2004 case against McGreevey and filed an amicus brief in the current case on behalf of former Assemblyman Jack Ciattarelli, the only declared Republican candidate for governor to date. Sheridan told the court Wednesday the Great Depression was not a disaster but “a macroeconomic event” and cautioned against allowing for borrowing without voter approval to address such an event.

“If you allow any slight economic downturn to be declared a disaster, you will be allowing borrowing whenever there is a bubble,” he said.

Sheridan said the issue revolves around the state’s ability to use bond funds only for unanticipated costs, not for regularly budgeted expenses.

“You cannot borrow for anticipated expenses,” he said. “There are other tools in the toolkit to deal with anticipated expenses: We raise revenues, we cut costs, we defer payments, we impound money.”

Associate Justice Jaynee LaVecchia, the only justice on the current bench who also ruled in the 2004 McGreevey case — she issued a partial dissent —  said that during the Civil War, the state used general obligation bond funds for a host of purposes beyond paying for troops. These included payments to schools, subsistence to families of service members and payments for the state library, State House and the governor’s expenses.

“They were funding items that would have been the equivalent today of our direct state service portion of the budget; it was not just a state aid portion of the budget,” LaVecchia said. “When you look at the array of things that were being funded through those bonding efforts, it encompasses a number of ways in which government was responding to the particular emergency that was permitted under the 1844 Constitution.”

Concerns about what the money can be spent on

On the other hand, several justices seemed concerned that there are few, if any, limits on how the state can spend bond proceeds. They asked whether the state could use them to, for instance, build a new $1 billion sports arena. At first, Reilly said no, but then she changed her mind, saying it could be used for such a purpose as a way to boost the economy.

“I think the ultimate question of what would constitute an acceptable expenditure is one not for me to decide … it’s ultimately one that would have to be worked out by the Legislature and the executive during the annual checks-and-balances negotiations of the appropriations process,” she said. “If the Legislature, who has a wider view than I have of the economic need and the best means to remediate that, if they were to be able to come up with an explanation of why this arena were necessary to meet the fiscal emergency that the pandemic has caused, then yes, I think that would be acceptable.”

Rabner made note of Reilly’s reversal, saying, “You’ve advanced a rather broad standard of what meets an emergency.”

LaVecchia said that past bond issues at least specified some purpose for the money.

“When the Depression bills were passed through GO (general obligation) bonds, there was at least a descriptor of the use — unemployment relief, school relief,” she said. “Here, it’s rather nebulous. It says, ‘address the state’s financial problems that have arisen as a consequence of COVID-19.’ The best and most precise thing I can glean from that language is that the problem has to have arisen directly as a consequence to COVID. So, is that what we’re supposed to take from this language? Is that the best limitation that we can glean from it?”

Lesson from the Great Depression

Reilly said history shows the state has spent liberally to meet many needs during past crises. In 1939, in the wake of the Great Depression, the state spent $21 million in bond proceeds when the annual budget was only $39 million. During four years of the Civil War, “you have a $278 million deficit spending, when the annual revenues in any given year hovered around $278,000, so you have a tenfold increase there,” she said. “I think the framers explicitly provided for deficit spending of an unlimited amount in an emergency because you simply don’t know what’s going to occur.”

There is one check on the governor’s power in the new borrowing law: It created a four-member select committee of lawmakers — the leaders and chairs of the budget committees in both houses — who would have the power to approve or reject individual borrowing proposals.

Patterson asked why the law did not require the committee to “determine whether there is a sufficient nexus between the proposed borrowing and whatever expenditures would derive from that.”

Reilly also said that committee only gets to OK or veto bonding. The entire Legislature will have to approve specific spending either through laws or the spending plan for the coming fiscal year; a stopgap budget to cover July through September of this year was already adopted.

Finally, justices also asked how dire an emergency would need to be to give a governor such extraordinary borrowing power. Would Superstorm Sandy in 2012 have met the standard? Reilly said she didn’t think so, because that was a limited event, but conceded she did not know how to draw the line.

“What I’m hearing is this line-drawing is going to be very difficult,” Albin said. “Wherever that line is drawn, it’s clear that if this doesn’t constitute a disaster … then nothing does. A once-in-a-century pandemic that has killed 15,000 of our citizens and continues to kill them and shut down the entire state — if this doesn’t fit into that category, nothing does.”

Reilly closed with an impassioned appeal to the court about the dire consequences if the state can’t borrow to balance the budget, answering one of Testa’s arguments at the same time.

“The plaintiffs mention that future generations will have to carry the burden of repaying any debt that the state incurs to meet this unprecedented emergency,” she said. “This isn’t a burden that the state imposes lightly. But the alternative, not borrowing and imposing devastating cuts as the treasurer called them, is to visit upon future generations a far more grievous legacy, namely, the indelible imprint of a generation or more lost to poverty and unemployment.”

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