Gov. Phil Murphy’s proposal to use proceeds from bond sales to help plug budget holes opened by the ongoing pandemic has reignited a public debate on constitutional control over budgeting and borrowing.
Earlier this month the administration sent lawmakers draft legislation that highlighted exceptions to the state Constitution’s otherwise strict restraints on spending and issuing debt. According to the administration’s interpretation, bonds can be issued on an emergency basis — without voter approval — during wartime or when the state is contending with a major natural disaster.
Given New Jersey’s ongoing struggles with COVID-19 and uncertainty over potential bailouts for state budgets from a divided federal government, Murphy has called on state lawmakers to approve emergency borrowing powers so bonding can help obviate the need for dramatic cuts.
Not everyone convinced
But others have taken the position that those constitutional exceptions are not as wide-ranging as the Murphy administration is contending. Among them, a Republican lawmaker who participated over a decade ago as a lawyer in a landmark state Supreme Court case that probed the Constitution’s fiscal restrictions. The 2004 case ended with a ruling that seemed to firmly shut the door on counting bond proceeds of any kind as “revenue” for the state budget.
“The Supreme Court said very clearly proceeds from debt issuance is not revenue,” said Assemblyman Jay Webber (R-Morris).
“I don’t read any equivocation (in the ruling),” he added.
It remains to be seen whether Webber or any other lawmaker will step forward to seek an injunction on constitutional grounds — as some Republicans did more than a decade ago — if Murphy’s borrowing proposal eventually picks up enough steam in the Legislature to be enacted. But even the uncertainty could complicate discussions about the state’s next fiscal-year spending plan that, for now, has been put off for several months by the governor and lawmakers in another piece of major legislation that was recently signed into law.
The key passages in the state Constitution that pertain to budgeting and borrowing are in Article VIII, Section II. They are generally known as the appropriations and debt-limitation clauses. Taken together, they restrict the state from operating with an imbalanced budget — meaning expenditures and revenues have to line up every fiscal year — and also require voter approval for any general-obligation debt issue that equals more than 1% of total spending in a given fiscal year.
Determining a legal definition of ‘revenue’
The 2004 state Supreme Court case known as Lance v. McGreevey centered on whether the administration of former Gov. Jim McGreevey could count proceeds from bond sales as “revenue” that could be used to balance the budget in a single fiscal year without running afoul of constitutional restrictions.
The McGreevey administration argued that the Constitution doesn’t explicitly define the word “revenue” and also leaves it up to the governor to certify revenues for each fiscal year. But several lawmakers who sued the administration, including former Sens. Leonard Lance and Joseph Kyrillos, and former Assemblyman Alex DeCroce, argued the administration’s use of nearly $2 billion in bond proceeds to balance the fiscal year 2005 budget violated both the appropriations and the debt-limitation clauses.
The court’s 4-1 ruling did not undo McGreevey’s borrowing, since it was issued in the middle of a fiscal year. But it also said the lawmakers basically had it right, and that a strict definition of “revenue” that did not include bond proceeds should be applied “on a prospective basis.”
“Our decision, therefore, will apply only in connection with next fiscal year’s budget and thereafter,” the ruling said.
The New Jersey COVID-19 Emergency Bond Act proposal drafted by Murphy’s administration earlier this month, cites another passage in Section II as the apparent grounds for allowing long-term bonds to be issued to help the state ride out the economic turbulence caused by the pandemic, which has hit New Jersey particularly hard in recent weeks.
That part of the section’s third paragraph lists emergency bonding powers that apply to “the creation of any debts or liabilities for purposes of war, or to repel invasion, or to suppress insurrection or to meet an emergency caused by disaster or act of God.”
The draft legislation appears to assert that the exception applies to all of the restrictions on borrowing and spending listed in Section II.
Not covered by emergency powers exception
But Webber — who participated in the Lance v. McGreevey case on behalf of the lawmakers, as well as a subsequent Superior Court case that followed up on it a year later — said the exception is much narrower. He said it may allow for general-obligation bonds to be issued without first getting voter approval during a war or emergency, but the appropriations clause, which is listed in a prior paragraph of Section II, is not covered at all by the emergency powers exception.
“The framers in 1947 put in a balanced-budget clause for a reason,” Webber said.
Asked if he would be willing to sue the administration as Lance and the other lawmakers did over a decade ago to enforce his reading of the Constitution, Webber said, “Let’s see what the governor’s actual plan is.”
But he also said constitutional restrictions on spending and borrowing hold even during difficult times, such as the pandemic.
“We have an obligation to do what’s constitutional,” Webber said. “It’s very important to acknowledge these provisions in the Constitution and abide by them.”
Murphy’s office declined to comment on Webber’s stance.
For now, the constitutionality of Murphy’s borrowing proposal remains untested since it is still just draft legislation that hasn’t been formally introduced or voted on. While the draft left blank how much the governor may be seeking to borrow, a recent bond disclosure issued by the Murphy administration suggested it could be at least $5 billion — or more than 12% of the state’s annual budget.
Willing to work with governor
Still, Murphy’s proposal has strong support from liberal groups that can wield influence with New Jersey’s Democratic lawmakers, and Assembly Speaker Craig Coughlin (D-Middlesex) has already shown a willingness to work with the governor.
But Senate President Steve Sweeney (D-Gloucester) has yet to come out in favor of the administration’s borrowing plan, and several Republican lawmakers have said they favor using borrowing only as a last resort. Others have suggested spending cuts should be enacted as part of any fiscal response to the pandemic, something Murphy has so far largely resisted.
New Jersey Policy Perspective, a liberal think tank based in Trenton, is among the groups that have come out in favor of Murphy’s proposal, which would also allow the state to do shorter-term borrowing using a new Federal Reserve lending proposal.
In a 2016 report that scrutinized historic state fiscal errors, NJPP faulted the practice of using “long-term borrowing to plug short-term budget holes.” But the group also issued another report earlier this week that said cuts made during the tenure of Republican Gov. Chris Christie have hampered the state’s response to the ongoing health crisis, especially at the departmental level of state government.
“Borrowing, especially at the levels that would be required in this crisis, should always be viewed with skepticism, especially because New Jersey in the past has too often justified massive borrowing to support tax cuts that reduced the state’s ability to invest in the building blocks of economic growth,” said NJPP President Brandon McKoy.
“This situation is different,” he said. “Borrowing now will speed our recovery out of this recession.”