Nonpartisan OLS Opinion Addresses Borrowing For COVID-19 Response

Legislature’s legal counsel says issuing debt on emergency basis and using bonds to buy health equipment passes constitutional muster, but draws line at using bonds to balance future budgets
Credit: (Rich Hundley III, The Trentonian)
During his regular coronavirus media briefings in Trenton, Gov. Phil Murphy has pitched his borrowing plan.

A new opinion from the state Legislature’s nonpartisan legal counsel could make lawmakers think twice about backing a borrowing plan that Gov. Phil Murphy is pitching as part of the state’s ongoing response to the coronavirus pandemic.

Drafted by the Office of Legislative Services, the written opinion concludes bond proceeds may not be counted generally as revenue to help balance future state budgets, even amid the pandemic.

Murphy’s plan would allow for debt to be issued for budget-financing purposes in fiscal years 2020 and 2021, and it also permits refinancing that debt, including with long-term bonds maturing decades from now.

Still, some portions of Murphy’s borrowing plan are likely on safe ground, including debt issued on an emergency basis without voter approval to offset COVID-19-related revenue losses in the current fiscal year.

Bond proceeds could also fund the purchase of new equipment needed to respond to the health crisis, such as ventilators or personal-protective equipment, according to a copy of the opinion obtained by NJ Spotlight that is dated May 1.

Open questions about Murphy plan

Some lawmakers have already openly questioned whether Murphy’s plan is constitutional, including Senate President Steve Sweeney (D-Gloucester) and Assemblyman Jay Webber (R-Morris). But the presence of a written opinion raising constitutional questions from the Legislature’s own nonpartisan counsel has the potential to cause more concern among lawmakers — and just as Murphy is increasing the public pressure on them to sign onto his plan.

The governor’s office did not comment when reached Wednesday to see if it had a response to the OLS opinion.

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, the two clauses restrict the state from operating with an unbalanced 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.

But the same section of the Constitution also allows for some noteworthy exceptions to the debt-limitation clause, including “for purposes of war, or to repel invasion, or to suppress insurrection or to meet an emergency caused by disaster or act of God.”

Draft legislation that Murphy’s administration sent over to lawmakers in recent weeks cites the emergency exception as it seeks authority for new borrowing in response to the pandemic. The draft legislation calls for short-term bonds to be issued without voter approval to raise funds to “provide effective cash flow management for revenues and expenditures … in the implementation of the annual appropriations acts for Fiscal Year 2020 and Fiscal Year 2021.”

A blank check

The draft legislation left blank the amount of new borrowing that lawmakers are being asked to approve, but a bond disclosure issued by the Murphy administration last month indicated up to $5 billion in general-obligation bonds could be issued under its plan.

The bond disclosure also said the state will “experience a cash flow low point in July and a very stressed liquidity position in late August due to the economic impact of the COVID-19 pandemic.” Other documents obtained by NJ Spotlight suggest the Department of Treasury was forecasting revenue losses on a preliminary basis of at least $3.1 billion in FY2020, and $4.7 billion in  FY2021, as of last month. The state’s annual budget has totaled a little less than $40 billion in recent years.

In pitching the borrowing plan during his regular coronavirus media briefings in Trenton, Murphy, a first-term Democrat, has maintained he needs to be given the authority to take advantage of a new Federal Reserve lending facility that is being funded through the federal government’s $2 trillion CARES Act. The new fed initiative is designed to help states and large municipalities manage their budget woes amid the pandemic, and it allows for the debt to be repaid within three years.

But Murphy’s draft legislation also lays a foundation for the short-term borrowing issues to eventually be refinanced, and allows for a maturity of up to 35 years, which could push the envelope on what could be considered short-term, cash-flow borrowing from a constitutional perspective.

The new opinion from the OLS legal counsel details the history of the language in the state Constitution that relates to borrowing, including the exceptions allowed for emergencies.

The opinion suggests borrowing that is done to offset revenue losses in the current fiscal year, which has been extended by Murphy and lawmakers this year from June 30 to September 30, would likely be constitutional.

“The shortfall of revenue in the current fiscal year was unanticipated and caused by the COVID-19 pandemic,” according to the opinion. “Therefore, it is fair to conclude that the State can borrow both for expenses directly addressing COVID-19 and to meet the needs of the State at the time the 2020 appropriations act was enacted.”

It also concludes that borrowing without voter approval to raise cash for purchasing equipment needed to respond to the pandemic would pass constitutional muster.

A landmark ruling

But the opinion goes on to cite a landmark 2004 state Supreme Court ruling that defined the word “revenue” for state budgeting purposes in a way that specifically disqualifies bond proceeds from being used for anything other than funding capital projects or purchases. The opinion also calls into question any plan to use cash raised from borrowing “to replace general revenue to support non-COVID-19 related spending in future budgets.”

“What future expenses are directly related to COVID-19 is a matter to be resolved jointly by the Legislature and Executive branches through the legislative process, including future budget acts,” the opinion said.

In addition, the new opinion echoed a 2005 opinion, also issued by the OLS, that was drafted in response to a plan that was being floated at the time by former Gov. Richard Codey that also involved using revenue from bond proceeds to balance the budget. That opinion said bond proceeds “may not be used for the purpose of funding or balancing any portion of the budget pertaining to general costs without violating the Appropriations Clause of the State Constitution.”

Assembly Speaker Craig Coughlin (D-Middlesex) has already shown a willingness to entertain Murphy’s borrowing plan, but Sweeney — a former gubernatorial candidate who has previously clashed with the governor on fiscal issues — has taken a harder line.

Meanwhile, several Republican lawmakers have called for borrowing to be used only as a last resort and have also raised concerns that it could require future tax increases.