Gov. Phil Murphy’s administration will soon have its chance to convince New Jersey’s highest court that new debt can be issued to fund the budget during a pandemic without violating the state Constitution.
The New Jersey Supreme Court is scheduled to hear oral arguments Wednesday in a case that will likely shape how much state taxes may be hiked or government services cut as Murphy and lawmakers try to manage the state’s finances during the coronavirus pandemic.
The justices’ ruling in the case has the potential to reset legal precedent on strong spending and borrowing restrictions written into the Constitution to keep the state from running up a huge credit-card bill without voter approval.
There could also be political implications for the 2021 gubernatorial election. A former Republican state lawmaker who has already declared his intention to run for governor next year is playing a role in the case.
Murphy, a first-term Democrat, is seeking to sell bonds to help offset the revenue losses his administration has projected as a result of the health crisis and the economic restrictions that were ordered to help slow the rate of new infections. The governor has argued the state Constitution’s generally strong fiscal restrictions are relaxed during times of war or major emergencies like the current health crisis.
But Republicans sued to block him from issuing up to $9.9 billion in new debt authorized in a new law by the Democratic-controlled Legislature last month. The GOP argues the Constitution’s fiscal limits still apply during times of emergency, and that a previous Supreme Court ruling disqualified the use of bond proceeds as general revenue for the budget under any circumstance.
The Republican challenge
A lawsuit challenging the new law was filed by the state Republican Party, Sen. Declan O’Scanlon (R-Monmouth), Assemblyman Hal Wirths (R-Sussex), and several others. Among the lawyers who drafted the suit was Sen. Michael Testa (R-Cumberland), a practicing attorney.
Rather than wait for the case to make its way through the courts amid the pandemic, Supreme Court Chief Justice Stuart Rabner issued an order last month that sent it directly to the state’s highest court.
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, 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.”
It’s that language the Murphy administration has pointed to in defending its push to use bonds to help offset significant revenue losses the Department of Treasury projects through the middle of next year.
The Murphy administration’s argument
In a brief submitted to the court late last week, the state Attorney General’s Office, arguing the Murphy administration’s position, said the Constitution’s emergency borrowing exception allows for the issuance of general-obligation bonds in response to the pandemic without needing the typically required approval of voters.
The brief also cited the deliberations of those who framed the last rewrite of the Constitution, in 1947, while making the case that they wanted a broad emergency exception after living through the Great Depression.
“A number of features of the Constitution, bolstered by history and practice, thus establish both that the State may issue General Obligation bonds to meet the present fiscal emergency, and that it may spend the General Obligation bond proceeds to make up for revenue deficiencies,” the brief said.
“In other words, the Framers crafted the Constitution to permit the State to meet a fiscal emergency, not succumb to it,” it went on to say.
The brief concedes that some $2 billion in spending that was deferred to help balance a stopgap budget passed for July, August and September was “premised on the notion” that those bills would be paid in the future with “bond proceeds.”
But the brief filed by Testa’s law firm on behalf of the state GOP and lawmakers makes the case that the Supreme Court has already put down a firm marker that bond proceeds of any kind cannot be counted as general budget revenues under any circumstances.
Lance v. McGreevey
That precedent, the GOP brief argues, was set in 2004 in a case known as Lance v. McGreevey that was filed after former Democratic Gov. Jim McGreevey used bond proceeds to balance that year’s annual budget. Former GOP state Sen. Leonard Lance was among those who sued to nullify the bond sale.
The court’s 4-1 ruling did not undo McGreevey’s borrowing, since it had been 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.”
“Debt financing of the State’s general expenses is thus unconstitutional,” the brief filed by Testa and several other lawyers argued.
“It is a straightforward notion that borrowed monies, which themselves are a form of expenditure when repaid, are not income (i.e. revenues) and cannot be used for the purposes of funding or balancing any portion of the budget pertaining to general costs without violating the Appropriations Clause,” the brief goes on to say.
Also referring to the Lance v. McGreevey ruling was an amicus or “friend of the court” brief filed by GOP gubernatorial candidate Jack Ciattarelli and Assemblyman Jay Webber (R-Morris). Webber, a practicing attorney, was a participant in the 2004 case.
GOP claim that election year is a factor
The borrowing bill, the amicus brief argues, is “an unconstitutional effort to satisfy the fiscal desires of the political branches in an election year.”
“It is an assault on Lance and the epitome of bad fiscal policy,” the brief said.
It also argues the Murphy administration has overstated the projected revenue losses the state could suffer and that monies New Jersey has received from the federal government specifically to respond to the pandemic have largely been unused by Treasury.
“Placed in proper context and considering the ample federal support the State has received to address the COVID-19 crisis, the State’s description of its fiscal condition seems unduly bleak,” the brief said.
Also granted standing as a “friend of the court” was Liberty and Prosperity 1776, a group based in Atlantic County that is led by Republican attorney Seth Grossman. The group’s brief argues that since Treasury officials have already said the state’s budget is balanced at least through the end of September, nothing would prohibit the Murphy administration from seeking voter approval for any emergency debt issue during this November’s statewide elections.
“So far, the State Defendants have offered no evidence of an emergency requiring the borrowing of $9.9 billion before that election can be held,” the brief said.