SYLLABUS
(This syllabus is not part of the opinion of the Court. It has
been prepared by the Office of the Clerk for the convenience of the
reader. It has been neither reviewed nor approved by the Supreme Court. Please
note that, in the interests of brevity, portions of any opinion may not
have been summarized).
Argued January 2, 2002 -- Decided August 21, 2002
Poritz, C.J., writing for a majority of the Court.
The Court considers whether the State's use of contract bonds without obtaining voter approval, as authorized by the Education Facilities Construction and Financing Act, N.J.S.A. 18A:7G-1 to -44 (EFCFA), and by other State statutes, violates the Debt Limitation Clause of the New Jersey Constitution.
On December 29, 2000, plaintiffs filed a complaint in the Superior Court, Law
Division, seeking a declaratory judgment that EFCFA and other statutes authorizing contract bond
financing are unconstitutional. Contract bonds are bonds issued by an independent state authority
on a contract between the State Treasurer and the authority stating that payment
on the bonds by the State is subject to legislative appropriations (as opposed
to general obligation bonds, which are enforceable state debts backed by the full
faith and credit of the State). The trial court granted summary judgment to
the defendants on all claims, observing that New Jersey courts have repeatedly rejected
challenges to contract bonds issued by independent authorities when the payment on the
bonds is made subject to future legislative appropriations.
A majority of the Appellate Division panel affirmed the trial court on June
27, 2001. The majority explained that the purpose of the Debt Limitation Clause
is to prevent default on the State's obligations; therefore, the strictures of the
Clause have been met if the State is not obligated on the bonds
and cannot default. Based on prior opinions interpreting the Clause and on its
observation that contract bonds do not create a legal right to compel the
State to make payment on the bonds, the majority sustained EFCFA.
The dissenting member of the Appellate Division panel contended that there is little
if any difference between debt that the State is legally obligated to pay
and debt that the State is morally obligated to pay, and concluded that
contract bonds violate the Debt Limitation Clause. In respect of EFCFA, the dissenting
judge observed that the cost of school construction bonds will be born by
the taxpayers because no other revenue source is available for that purpose.
HELD : EFCFA does not violate the Debt Limitation Clause of the New Jersey
Constitution because it was enacted by the Legislature in reliance on the Court's
prior case law and in furtherance of the mandate found in Article VIII,
Section IV, paragraph 1, of the New Jersey Constitution (the Education Provision). Additional
briefing and reargument is necessary for the Court to address plaintiffs' challenges to
other statutes that authorize contract bond financing.
1. New Jersey's Debt Limitation Clause prohibits one Legislature from incurring debts, without
first obtaining approval by public referendum, that subsequent Legislatures would be obliged to
pay. Multiple state-government defaults that occurred during an economic depression in the 1800s
motivated the framers of the Debt Limitation Clause to craft a provision that
prevents Legislatures from burdening this State with debt that would encumber it from
generation to generation. (Pp. 10 to 13).
2. In its opinions interpreting the Debt Limitation Clause, this Court has held,
with rare exception, that independent state authorities issuing bonds or other debt obligations
that are not backed by the State's full faith and credit are not
debts of the State for purposes of the Debt Limitation Clause. Those cases
rely on the legal autonomy of the issuing authority and on specific language
disclaiming any enforceable obligation on the part of the State. To the extent
that they also rely on or recognize the availability of revenue sources for
debt payments, the cases invoke the Special Fund Rule. The theory of the
Special Fund Rule is that the purpose of a debt limitation in a
constitution is to protect the people of the state from the exercise of
the taxing power to pay obligations of the state. Therefore, the debt limitation
provision is not impinged upon by bonds that are payable solely from the
revenues of the project to be built with the proceeds of the bonds.
In general, this Court has held also that the Legislature's expression of intent
to provide future funding does not create debt subject to the Debt Limitation
Clause. An overview of the cases suggests a single theme: the Debt Limitation
Clause applies only when the State is legally obligated to make payments on
the debt authorized by the Legislature A few courts of other states, however,
have taken a more expansive view of similar debt limitation clauses. (Pp. 13
to 32).
3. EFCFA establishes the largest, most comprehensive school construction program in the nation.
Consonant with the constitutional mandate of Article VIII, Section IV, paragraph 1 (the
Education Provision) of the New Jersey Constitution, EFCFA was passed to provide for
the maintenance and support of a thorough and efficient system of free public
schools, including educating children in physical facilities that are safe, healthy, and conducive
to learning. In furtherance of that responsibility, EFCFA addresses inadequacies in the quality,
utility, and safety of educational facilities that have arisen among local school district
of the State. (Pp. 32 to 34).
4. To effectuate its goals, EFCFA states that the New Jersey Economic Development
Authority (EDA), an independent state authority, shall be responsible for the financing, planning,
design, construction, acquisition and completion of school facilities projects. EFCFA authorizes the EDA
to issue bonds, incur indebtedness and borrow money to fund those projects. The
financing scheme for the payment of the debt service on the bonds involves
the use of contract bonds. Those bonds, however, are issued subject to a
proviso in the authorizing legislation and in the bonds that payment is contingent
on annual appropriations by the Legislature and that the bonds are not the
debt of the State. Of the $8.6 billions in bonds that the EDA
is permitted by statute to issue, $6 billion is allocated to the Abbott
districts. As of May 2001, one-half billion dollars in bonds had been sold.
The question whether the bonds should be issued has not and will not
be put to the voters. (Pp. 34-35).
5. Article VIII, Section IV, paragraph 2 of the New Jersey Constitution (the
School Fund Provision) establishes a perpetual fund for the support of free public
schools. By its express terms, the School Fund Provision permits the State to
use the school fund and income therefrom and any other moneys duly appropriated
to the support of free public schools, as the Legislature so chooses, to
guarantee the school bonds of counties, municipalities or school districts. Approved in 1958
by the voters, the School Fund Provision separately authorizes state-backed school bonds without
reference to the Debt Limitation Clause. (Pp. 35 to 38).
6. EFCFA does not violate the Debt Limitation Clause. The debt issued by
the EDA effectuates the core purpose of the School Fund Provision of the
Constitution by providing for State support of school construction bonds. Further, in its
broad outline, EFCFA was approved by this Court in Abbott v. Burke,
153 N.J. 480 (1998) (Abbott V). In reliance on that approval and on the
Court's long line of precedents validating similar debt issued by an independent authority,
the State sought to fulfill its constitutional obligation to the school children of
New Jersey. For that reason, and because EFCFA is based in the Education
Provision and supported by the School Fund Provision of the New Jersey Constitution,
the Act does not violate the Debt Limitation Clause. (Pp. 38 to 40).
7. Plaintiffs' challenges to other statutes authorizing contract bond financing require additional briefing
and reargument, and the Clerk of the Court is directed to establish a
schedule for the Fall toward that end. (Pp. 40 to 45).
The judgment of the Appellate Division upholding EFCFA is AFFIRMED. Plaintiffs' general challenge
to contract debt is set down for reargument.
JUSTICE STEIN, concurring in part and dissenting in part, concurs in the majority's
decision sustaining the
EFCFA. He disagrees, however, with the majority's decision to reargue the issue of
the validity of contract or appropriations debt and believes that the issuance of
debt without voter approval by an independent state authority, unsupported by an adequate
independent revenue source and to be amortized primarily or exclusively by annual legislative
appropriations, violates the Debt Limitation Clause notwithstanding that the State has no legal
liability for repayment of the debt.
JUSTICES COLEMAN, LONG, VERNIERO, and LaVECCHIA join in CHIEF JUSTICE PORITZ's opinion. JUSTICE
STEIN filed a separate opinion concurring in part and dissenting in part. JUSTICE
ZAZZALI did not participate.
SUPREME COURT OF NEW JERSEY
A-
23 September Term 2001
STEVEN M. LONEGAN; STOP THE DEBT.COM, LLC,
Plaintiffs-Appellants,
v.
STATE OF NEW JERSEY; ROLAND M. MACHOLD, TREASURER OF THE STATE OF NEW
JERSEY; NEW JERSEY SPORTS AND EXPOSITION AUTHORITY; NEW JERSEY EDUCATIONAL FACILITIES AUTHORITY; NEW
JERSEY ECONOMIC DEVELOPMENT AUTHORITY; NEW JERSEY TRANSPORTATION TRUST FUND AUTHORITY,
Defendants-Respondents.
Argued January 2, 2002 – Decided August 21, 2002
On appeal from the Superior Court, Appellate Division, whose opinion is reported at
341 N.J. Super. 465 (2001).
Andrew T. Fede argued the cause for appellants (Contant, Atkins, Rogers, Fede &
Hille, attorneys).
Allison E. Accurso, Assistant Attorney General, argued the cause for respondents State of
New Jersey, Roland M. Machold, Treasurer of the State of New Jersey, New
Jersey Educational Facilities Authority, New Jersey Economic Development Authority and New Jersey Transportation
Trust Fund Authority (John J. Farmer, Jr., Attorney General of New Jersey, attorney;
Patrick DeAlmeida, Deputy Attorney General, on the briefs).
Matthew C. Johnston, on behalf of respondent New Jersey Sports and Exposition Authority,
relied upon the brief submitted on behalf of State of New Jersey, et
al., (Courter, Kobert, Laufer & Cohen, attorneys).
David G. Sciarra, Executive Director, Educational Law Center submitted a brief on behalf
of amicus curiae Abbott Plaintiffs (Mr. Sciarra, attorney; Mr. Sciarra and Paul J.
Dillon, on the brief).
Andrea L. Kahn submitted a brief on behalf of amicus curiae Garden State
Coalition of Schools (McManimon & Scotland, attorneys).
Douglas S. Eakeley submitted a brief on behalf of amicus curiae League of
Women Voters of New Jersey (Lowenstein Sandler, attorneys; Cecelia E. Haney and Maria
N. Maccone, on the brief).
Melissa R. Vance, Counsel, submitted a letter in lieu of brief on behalf
of amicus curiae New Jersey Association of School Administrators.
Richard A. Friedman submitted a letter in lieu of brief on behalf of
amicus curiae New Jersey Education Association (Zazzali, Fagella, Nowak, Kleinbaum & Friedman, attorneys;
Mr. Friedman and Kimberly A. Scurti, on the brief).
Michael F. Kaelber, Senior Associate Counsel, submitted a letter in lieu of brief
on behalf of amicus curiae New Jersey School Boards Association (Cynthia J. Jahn,
General Counsel, attorney).
John L. Kraft submitted a letter brief on behalf of amicus curiae United
Taxpayers of New Jersey.
The opinion of the Court was delivered by
PORITZ, C.J.
In this case the Court is asked to consider once again the contours
of Article VIII, Section II, paragraph 3 (the Debt Limitation Clause or Clause)
of the New Jersey Constitution. The scope and meaning of the restrictions imposed
on the legislative branch by the Clause have been discussed at length in
an extensive body of case law spanning more than fifty years and covering
a variety of bonding mechanisms adopted by the Legislature to meet the capital
funding needs of the State. See, e.g., Enourato v. N.J. Bldg. Auth.,
90 N.J. 396 (1982); N.J. Sports & Exposition Auth. v. McCrane,
61 N.J. 1,
appeal dismissed sub nom., Borough of E. Rutherford v. N.J. Sports & Exposition
Auth.,
409 U.S. 943,
93 S. Ct. 270,
34 L. Ed.2d 215
(1972); Holster v. Bd. of Trs. of Passaic County College,
59 N.J. 60
(1971); Clayton v. Kervick,
52 N.J. 138 (1968); N.J. Tpk. Auth. v. Parsons,
3 N.J. 235 (1949). In those cases the Court has almost universally sustained
statutes authorizing the issuance of debt that is not backed by the full
faith and credit of the State, generally when the debt is undertaken by
an independent authority, most often when that authority has a revenue source available
to service the principal and interest on the debt. The Court has reasoned
that the Debt Limitation Clause is not implicated when the State is not
legally obligated on debt issued subject to future annual appropriations.
Plaintiffs challenge the State’s use of contract debt
See footnote 1
without voter approval because in
their view it is “inconceivable . . . that the State Legislature will
fail to make the necessary appropriations to prevent a default.” Despite the “subject
to annual appropriation” language in the contracts, plaintiffs claim that the potential negative
impact of a default on the State’s credit rating ensures that the Legislature
will appropriate the amounts necessary to cover debt service obligations on contract bonds.
They urge the Court to reevaluate its prior holdings, curtail sharply the State’s
use of such capital financing, and rule impermissible without voter approval the creation
by the Legislature of contract debt or debt subject to appropriations.
Plaintiffs raise important and difficult issues. This Court, in a virtually unbroken line
of precedent, has applied the Debt Limitation Clause literally, holding that when the
full faith and credit of the State is not pledged the debt is
not the debt of the State. That clear, bright line has appeared to
serve well the financial needs of the State while, at the same time,
remaining true to the meaning of the Clause. But, more recently, there have
been substantial changes in the State’s debt arrangements and whether the Clause, as
interpreted, retains its fundamental purpose and vitality is today a troubling question. A
literal interpretation of the Debt Limitation Clause that eviscerates the strictures the Clause
expressly contains cannot serve the constitutional mandate.
That said, we are not in a position to rule on those issues
without additional argument. Plaintiffs’ broad challenge lists statutes containing a variety of financing
strategies structured as contract debt that have been reviewed by this Court and
thereafter sustained, see, e.g., N.J.S.A. 52:18A:78.1 to -78.32 (New Jersey Building Authority Act)
See footnote 2
,
as well as “all other statutes that offend the Debt Limitation Clause.” Those
strategies must be viewed in context to be understood. Simply put, plaintiffs’ sweeping
claim that all contract debt is invalid must be anchored in a discussion
of the financing mechanisms authorized in specific legislative enactments. Therefore, except for the
Education Facilities Construction and Financing Act (EFCFA or the Act), which we sustain,
we direct the Clerk of the Court to schedule this matter for additional
briefing and reargument as soon as practicable in the fall of 2002.
In respect of EFCFA, plaintiffs’ argument focuses on that statute “and the contract
bond . . . authorized.” Lonegan v. State,
341 N.J. Super. 465, 481
(App. Div. 2001). We consider EFCFA herein because the argument in respect of
the Act is put forward with particularity; we uphold the Act because of
reliance by the State on our prior case law, including Abbott v. Burke,
153 N.J. 480 (1998) (Abbott V), and for the separate and distinct reason
that EFCFA was enacted by the Legislature in furtherance of the mandate found
in Article VIII, Section IV, paragraph 1 (the Education Provision) of the New
Jersey Constitution.
On December 28, 2000, plaintiffs filed a Verified Complaint in Lieu of Prerogative Writs in the Superior Court, Law Division, seeking injunctive relief and a declaratory judgment that EFCFA and other statutes authorizing contract bond financing are unconstitutional. Plaintiffs named the State of New Jersey, Roland Machold (then Treasurer of the State of New Jersey), the New Jersey Educational Facilities Authority, the New Jersey Economic Development Authority (EDA), the New Jersey Sports and Exposition Authority, and the New Jersey Transportation Trust Fund Authority as defendants. See footnote 3 Shortly thereafter the trial court determined that plaintiffs could not demonstrate a reasonable likelihood of success on the merits warranting an injunction. In then granting summary judgment to defendants on all claims, the court observed that this Court has repeatedly rejected challenges to contract bonds issued by independent authorities when the payment on the bonds is made subject to future legislative appropriations.
A majority of the Appellate Division panel affirmed the trial court on June 27, 2001.See footnote 4 Lonegan, supra, 341 N.J. Super. at 481-82. After discussing the mechanics of contract bond financing, the majority observed that unlike general obligation bonds, which are backed by the full faith and credit of the State, contract bonds do not create a “legal right to compel” the State to make payment on the bonds. Id. at 472. The majority also considered our precedents in respect of the Debt Limitation Clause, concluding that the relevant case law “reveal[s] a consistently narrow construction of the . . . Clause by the Court, so that as long as future Legislatures are not legally bound to make future appropriations to pay the indebtedness the [C]lause is satisfied.” Id. at 478. Although the majority could find no case addressing contract debt as such, the “rationale” of our prior cases suggested that the Debt Limitation Clause is satisfied even when an independent authority issuer has no separate source of income and is dependent on annual legislative appropriations to pay the amount due on the bonds. Ibid. In the view of the majority, because the purpose of the Clause is to prevent a default by the State, the “strictures of the . . . Clause [are] met if the State is not obligated on the bonds and cannot default.” Ibid. Based on that reasoning, the majority sustained EFCFA.
Notably, the two judges speaking for the court expressed approval of their dissenting colleague’s approach, stating: “Were we not barred by that precedent we might join in our colleague’s thoughtful dissenting opinion.” Id. at 481 n.9.
The dissenting member of the panel would have held that contract bonds violate the Debt Limitation Clause. Lonegan, supra, 341 N.J. Super. at 482 (Wells, J.A.D., dissenting). In his view, there is little if any difference between debt that the State is legally obligated to pay and debt that the State is morally obligated to pay. He observed that Moody’s See footnote 5 considers “‘appropriation debt [to be] no different than ‘true’ debt.’” Id. at 484 (citation omitted). In respect of EFCFA, the dissent concluded that the EDA is simply a conduit for the sale of school construction bonds whose cost ultimately will be borne by the taxpayers because no other revenue source is available for that purpose. Id. at 483.
EFCFA follows a long line of statutes authorizing debt that has not been subject to the restrictions of the Debt Limitation Clause. The genesis of the Clause and the extensive case law interpreting it provide a framework for analysis and consideration of the Act, and for an understanding of the various questions posed by plaintiffs’ challenge.
As in most states, New Jersey’s Debt Limitation Clause had its origins in the depression years that followed the economic boom of the 1830s. See Margaret G. Myers, A Financial History of the United States 143 (1970). In the late 1830s, only a handful of states had refrained from issuing long-term debt in connection with a variety of projects, including such “public improvements” as the expansion and development of canals, roadways and railroads. Ibid.; see Clayton, supra, 52 N.J. at 146-47; McCutcheon v. State Bldg. Auth., 13 N.J. 46, 67 (1953) (Jacobs, J. dissenting), overruled by Enourato, supra, 90 N.J. at 410; V Proceedings of the Constitutional Convention of 1947: Committee on Taxation and Finance 590 (1953); Amos Tilton, Constitutional Limitations on the Creation of State Debt, in II Constitutional Convention of 1947 1708 (1951); Susan Oxford, Voters’ Right to Approve State Debt -- How Much Choice is Allowed? New Jersey Association on Correction v. Lan, 33 Rutgers L. Rev. 198, 202 (1980). During the years of prosperity, the states easily sold their bonds and many states engaged in heavy borrowing to support those and other projects. Clayton, supra, 52 N.J. at 146; McCutcheon, supra, 13 N.J. at 67-68 (Jacobs, J., dissenting). The boom was followed, however, by the failure of American crops in 1835 and 1837, leading to the panic of 1837 and the banking collapse of 1839. Davis Rich Dewey, Financial History of the United States 243-44 (1903); Tilton, supra, at 1709. The states most affected had speculated in western lands, become involved in the cotton trade or state banking schemes, or had invested in the Erie Canal. Dewey, supra, at 224-27. By 1842 nine states had defaulted on their obligations. Tilton, supra, at 1709.
Although New Jersey was not a defaulting state, it nonetheless sought to protect against the type of financial debacle experienced elsewhere by adopting, in 1844, one of the first debt limitation clauses in the country. N.J. Const. of 1844, art. IV, § 6, ¶ 4; Proceedings of the Constitutional Convention of 1844 311 (1942); Tilton, supra, at 1709; Oxford, supra, 33 Rutgers L. Rev. at 202. At that time, the framers expressed their concern about “opening a door for burthening the State with a debt which would encumber it from generation to generation.” Proceedings of the Constitutional Convention of 1844 519 (1942). Later, the Court, echoing the framers’ concern, explained that the Clause “prohibits ‘one Legislature from incurring debts [that] subsequent Legislatures would be obliged to pay, without prior approval by public referendum.’” City of Camden v. Byrne, 82 N.J. 133, 152 (1980) (quoting N.J. Sports & Exposition Auth., supra, 61 N.J. at 13-14).
The predecessor clause remained essentially unchanged in the Constitution of 1947 except that the amount of permissible unrestrained debt in a given year was altered from a predetermined amount ($100,000) to one-percent of the amount appropriated by the Legislature in the general appropriation act for that fiscal year. N.J. Const. art. VIII, § 2, ¶ 3; see McCutcheon, supra, 13 N.J. at 67 (Jacobs, J., dissenting). With that exception, today, as in 1844, the Debt Limitation Clause states, in relevant part:
The Legislature shall not, . . . create in any fiscal year a debt or debts, . . . which together with any previous debts or liabilities shall exceed at any time one per centum of the total amount appropriated by the general appropriation law for that fiscal year, unless the same shall be authorized by a law for some single object or work distinctly specified therein. . . . [S]uch law shall provide the ways and means, exclusive of loans, to pay the interest of such debt or liability as it falls due, and also to pay and discharge the principal thereof within thirty-five years from the time it is contracted; and the law shall not be repealed until such debt or liability and the interest thereon are fully paid and discharged. No such law shall take effect until it shall have been submitted to the people at a general election and approved by a majority of the legally qualified voters of the State voting thereon.
[art. VIII, § 2, ¶ 3.]
In In re Loans of the New Jersey Property Liability Insurance Guarantee Association, 124 N.J. 69, 75-76 (1991), we explained that the cases
in which this Court has construed the debt limitation clause fall into two
categories. One group of decisions holds that the constitutional provision does not apply
to the creation of debt by independent public corporate entities, . . . [whereas] a second line
of decisions generally find[s] that legislative expressions of intent to provide future funding
do not create present debts of the State subject to the debt limitation
clause . . . .
That formulation provides a convenient way to examine our case law, although there
are other interpretive strands woven throughout various of the Court’s opinions as well
as substantial overlap between the two categories. Thus, for example, certain of the
cases suggest that when the Legislature has established an independent revenue source for
debt repayment, e.g., turnpike tolls, or when payment from general appropriations would in
any event be a necessary expenditure, e.g., lease installments for government offices, the
Debt Limitation Clause is not violated. See, e.g., Enourato, supra, 90 N.J. at
409-10 (discussing funding source for payment of bond principal and interest in lease
case); N.J. Sports & Exposition Auth., supra, 61 N.J. at 25 (explaining that
“[f]unds to meet interest and principal of the bonds are derived solely from
revenues generated by the agency’s operation, which remain a special fund for that
purpose until the bonds are fully paid”); Clayton, supra, 52 N.J. at 154-55
(discussing independent revenue source and lease payments). Those sub-themes are important in respect
of the issues raised by plaintiffs’ challenge and we will return to them.
See infra at ___ (slip op. at 20, 24-28, 44-45). An overview of
our cases suggests, however, that whatever way they are grouped and whatever the
focus in a particular case, our prior holdings generally consist of variants on
a single theme: the Debt Limitation Clause applies only when the State is
legally obligated to make payments on the debt authorized by the Legislature.
The cases involving independent authorities are exemplars of that theme. We have, with
rare exception, held that independent state authorities issuing bonds or other debt obligations
that are not backed by the State’s full faith and credit are not
debts of the State for purposes of the Debt Limitation Clause. See, e.g.,
In re Loans, supra, 124 N.J. at 75 (citing cases that hold Debt
Limitation Clause does not apply to debt created by independent public corporate entities);
Enourato, supra, 90 N.J. at 410 (noting that “[a]lthough the [Building Authority] Act
not only contemplates that the State will make the necessary appropriations but also
seeks to ensure this result, the State is under no legal obligation to
do so”) (internal citation omitted). But see McCutcheon, supra, 13 N.J. at 66,
overruled by Enourato, supra, 90 N.J. at 410 (declaring void Building Authority’s leases,
contracts, and proceedings because “it is fundamental in the Constitution that, . .
. one Legislature cannot charge succeeding Legislatures with the duty of making appropriations”).
More than fifty years ago, in New Jersey Turnpike Authority, supra, the Court
reviewed a statute authorizing the Turnpike Authority to construct and maintain “modern express
highways” through the issuance of bonds “payable solely from tolls and revenues.” 3
N.J. at 238 (citations omitted). Despite the “explicit and unambiguous language of the
statute [that] entirely negatives any possibility of the proposed bonds being [i]n any
manner debts or liabilities of the State . . . ‘or a pledge
of the faith and credit of the State,’” id. at 242, it was
argued that the debts of the Turnpike Authority, a creature of the State,
were the responsibility of the State. Id. at 243.
Writing for the Court, Chief Justice Vanderbilt rejected that argument. Relying on a
substantial body of law that defines public corporations such as the Turnpike Authority
as “independent entities,” he determined that “the State is not responsible for their
debts and liabilities.” Ibid. Because an independent authority stood between the bondholder and
the State, because the authority, not the State was legally obligated on the
debt, the Debt Limitation Clause was not violated. The Court found it unnecessary
in that case to reach the question whether bonds supported by a revenue
source independent of the taxing power, i.e., the Special Fund Rule, “would have
been valid even if the Legislature had not set up the . .
. Authority, . . . and even if the bonds were in fact
direct obligations of the State.” Id. at 246.
Four years later, the Court invalidated debt supported by lease-purchase agreements between the
State and an independent authority. McCutcheon, supra, 13 N.J. at 65-66. McCutcheon involved
a challenge to a statute that created a State Building Authority with the
power to issue debt in order to acquire, construct, furnish, and operate office
buildings for use by State entities, and to lease those facilities to the
State at amounts “sufficient . . . to liquidate . . . bonds”
issued by the authority. Id. at 59. Because the State was to acquire
the Authority’s facilities at the end of the lease period, the Court viewed
the leases as “installment purchase contracts under the guise of leases” and invalidated
the entire scheme. Id. at 66.
Justice Jacobs, with Justice Brennan, dissented. The dissent looked to “generally accepted accounting
practice
. . . [wherein] future rentals [were not considered to be] debts or
liabilities,” id. at 70, and to the statute, which expressly stated that bonds
of the Authority were not debts of the State. For those reasons, the
dissent would have followed New Jersey Turnpike Authority and sustained the Building Authority
Act. Id. at 73-74.
Subsequently, in an opinion written by Justice Jacobs, the Court upheld a statute
authorizing the Educational Facilities Authority to issue bonds for the construction of buildings
to be leased to New Jersey colleges. Clayton, supra, 52 N.J. at 157.
Although it adverted to the dissent in McCutcheon, and to a myriad of
out-of-state cases upholding the use of an independent authority for that purpose, Clayton,
supra, 52 N.J. at 149-55, the Court specifically relied on the Special Fund
Rule, reasoning that the annual rentals on the Authority’s leases “were intended to
come mainly from sources unrelated to legislative appropriations.” Id. at 154.
Similarly, in New Jersey Sports & Exposition Authority, supra, the Sports Authority issued
bonds to fund the construction of a sports complex in the Hackensack Meadowlands.
61 N.J. at 9-10. The State promised the bondholders that it would not
prejudice or limit the right of the Authority to construct and operate the
sports complex in any manner that would jeopardize the bondholders’ interests until the
bond obligations were paid, reserving revenues raised from the Authority’s operations for that
purpose. Id. at 12. The Court held that the pledge of revenues without
prior voter approval did not violate the Debt Limitation Clause because the revenues
were “generated by the agency’s operation . . . [and would] remain a
special fund for that purpose until the bonds are fully paid.” Id. at
25.
Ten years later, in Enourato, supra, 90 N.J. at 402, the Court considered
an act authorizing the Building Authority to issue up to $250,000,000 in bonds
for state office building construction and operation, much like the statute challenged in
McCutcheon. The bonds contained language explaining that the State neither was obligated to
pay the debt service, nor was pledging its full faith and credit toward
payment. Ibid. The Authority depended on rental receipts from lease contracts with the
State that were calculated to satisfy the Authority’s obligations on the bonds. Ibid.
As a result, the bondholders depended on the Legislature to appropriate “sufficient money
each year to pay the rental fees that are used to repay them.”
Ibid.
The Court determined that the Authority did not have an enforceable promise from
the State that it would appropriate monies to cover the lease payments when
due. Id. at 410. Yet, the Court acknowledged that the Building Authority Act
“not only contemplates that the State will make the necessary appropriations but also
seeks to ensure this result.” Ibid. (internal citation omitted). Otherwise, the Legislature’s failure
“to appropriate the necessary money would not only bankrupt the Authority and force
it to default on its obligations, but would also cripple the State’s ability
subsequently to borrow money for any purpose.” Id. at 402-03. The Court nonetheless
held that the bonds were not debts subject to the Debt Limitation Clause
because the bond documents clearly stated that the State was under no legal
obligation to make payment on the bonds. Id. at 410. In so holding,
the Court “expressly overruled” McCutcheon and reaffirmed the principle enunciated by Chief Justice
Vanderbilt in New Jersey Turnpike Authority that only debt the State is legally
obligated to pay is subject to the requirements of the Debt Limitation Clause.
Ibid.
Those cases stand for the proposition that the debts of an independent authority
are not debts of the State under the Debt Limitation Clause. They rely
on the legal autonomy of the issuing authority and on specific language disclaiming
any enforceable obligation on the part of the State. To the extent that
they rely also on the availability of revenue sources for debt payments, or
even recognize that revenue sources are available, the cases directly or indirectly invoke
the Special Fund Rule,
the theory of which is that the purpose of a debt limitation in
a constitution is to protect the people of the state from the exercise
of the taxing power to pay obligations of the state, and therefore such
a constitutional provision is not impinged upon by bonds that are payable solely
from the revenues of the project to be built with the proceeds of
the bonds.
[N.J. Tpk. Auth., supra, 3 N.J. at 246.]
The second line of cases described by the Court in In re Loans,
supra, 124 N.J. at 76, holds generally that the Legislature’s expression of intent
to provide future funding does not create debt subject to the Debt Limitation
Clause. In those cases, the Court has validated bond financing even when the
expectation is that subsequent Legislatures will appropriate money to meet the debt service
on the bonds. Thus,
in Holster, supra, the Court upheld the County College Bond Act, which authorized
the State and the counties to share equally in the capital costs of
building community colleges using a mechanism whereby the counties would issue bonds and
the State would appropriate monies to pay the principal and interest.
59 N.J. at 64-65. The statute explicitly provided that the bonds would not
be a debt or liability of the State despite the State’s expressed intention
to make payments on the bonds through future appropriations. Id. at 65. The
Court determined that the Debt Limitation Clause was not violated:
Although there is doubtless a strong likelihood that payment of the bonds will
in fact be met by legislative appropriations, we find nothing in the statute
compelling the State to make such payments as a matter of law. Hence,
both issuing counties and purchasing bondholders are on notice that the faith and
credit of the State will not be pledged in respect of bonds issued
pursuant to this enactment, but that payment on the part of the State
will be dependent upon appropriations provided from time to time. Lacking such appropriations,
recourse can be had only against the county which
will have no recourse over against the State.
It is a basic tenet of Holster that “a projected or anticipated future legislative appropriation is not a present debt or liability . . . [because a] future legislature is not bound to make the appropriation.” Id. at 71.
In In re Loans, supra, the Court relied on that principle. 124 N.J. at 77. There, the Court held that acceptance of statutorily-imposed loans from the Property Liability Insurance Guaranty Association (PLIGA) to the Automobile Insurance Guaranty Fund (Automobile Fund) did not violate the Debt Limitation Clause because “[t]he provisions . . . for repayment of the PLIGA loans clearly fall within the types of assurances of future payments that this Court has traditionally found not to be ‘debts.’” Ibid. In that case, the Automobile Fund was to repay the loans “‘out of whatever monies are available . . . subject to . . . appropriation by the Legislature’” and after various other conditions were met. Id. at 72 (internal citation omitted).
The Court examined earlier cases holding that State promises to make future annual payments did not create a present debt, including Bulman v. McCrane, 64 N.J. 105 (1973) and City of Passaic v. Consolidated Police & Firemen’s Pension Fund Commission, 18 N.J. 137 (1955). In Bulman, supra, the Court held that a twenty-five year lease arrangement under which the State would assume ownership of a building at the end of the lease did not create a present debt subject to the Debt Limitation Clause even though future rent installments would be paid out of current revenues annually appropriated. 64 N.J. at 117-18. Similarly, in City of Passaic, supra, a statute requiring the State to contribute annually to the Police and Firemen’s Pension Fund was held not violative of the Clause because no present debt was created. 18 N.J. at 147; see also State v. Lanza, 27 N.J. 516, 525 (1958) (holding statute requiring State to pay certain municipalities amounts equal to property taxes lost after condemnation for reservoir did not violate Clause because “[t]here is no bargain or professed contractual, conventional or legal undertaking to recompense the given loss of tax revenue, but rather a truly ‘voluntary appropriation’ for a ‘lawful object’”), appeal dismissed, 358 U.S. 333, 79 S. Ct. 351, 3 L. Ed.2d 350 (1959).
Based on that case law, In re Loans held that the State’s promise of future payments subject to appropriations does not constitute debt within the meaning of the Debt Limitation Clause. 124 N.J. at 77. Notably, the author of In re Loans later pointed out that the loan “arrangement . . . was an integral part of the regulation of the insurance industry . . . [and, further, that] under the arrangement, the contributions of insurers were a separate source of revenue directed to meet the claims of threatened policy holders.” Spadoro v. Whitman, 150 N.J. 2, 11-12 (1997) (Handler, J., dissenting in part).
Many states have employed a variety of creative and sophisticated financing devices much like those used in New Jersey to fund large capital projects. Some states also have established independent authorities charged with such duties as securing or coordinating project funding, implementing sale-leaseback agreements, and issuing bonds backed by specific revenue sources. As in New Jersey, the state courts that have reviewed those financing mechanisms in the context of debt limitation clause restrictions generally have held that they are constitutionally permissible. See, e.g., State ex rel. Fatzer v. Armory Bd., 256 P.2d 143 (Kan. 1953) (evaluating and sustaining Kansas statute that empowered Kansas Armory Board to build, establish, and maintain armories funded by revenue bonds backed solely by State rental payments); In re Okla. Capitol Improvement Auth., 958 P.2d 759 (Okla. 1988) (reviewing and sustaining Oklahoma statute authorizing Oklahoma Capital Improvement Authority to issue highway bonds secured by pre-paid user fees, direct taxes, and State Transportation Rainy Day Funds); Baliles v. Mazur, 297 S.E.2d 695 (Va. 1982) (analyzing and sustaining Virginia statute under which Virginia Public Building Authority was charged with construction, maintenance, and operation of public buildings funded by Authority-issued notes and bonds and secured by State rental payments).
Various other state courts have approved the issuance of bonds that are debt-serviced through future discretionary legislative appropriations. Again as in New Jersey, those courts have focused primarily on the discretionary nature of the state’s duty to make the appropriation, and clear language in the bonds informing purchasers that the State has no legal obligation to service the bond debt through future appropriations or otherwise. See, e.g., In re Interrogatories by the Colo. State Senate, 566 P.2d 350, 355 (Colo. 1977) (holding that in order for there to be state debt in the constitutional sense, “one legislature, in effect, must obligate a future legislature to appropriate funds to discharge the debt created by the first legislature”); Wilson v. Ky. Transp. Cabinet, 884 S.W.2d 641, 644 (Ky. 1994) (upholding road revenue bonds because disclaimer language clearly places risk of loss on bondholders); Dep’t of Ecology v. State Fin. Comm., 804 P.2d 1241, 1245-46 (Wash. 1991) (stating that lease and trust agreements do not violate debt limitation clause because future legislatures are not legally obligated to appropriate funds for lease payments).
State courts that have held to the contrary have criticized what they view as legislative decisions to circumvent debt limitation restrictions through the use of future discretionary appropriations that in practice are not discretionary at all. Those courts are unwilling to accept at face value declarations that the bonds issued do not constitute state debt, and instead closely examine the nature of the State’s obligation. See, e.g., Montano v. Gabaldon, 766 P.2d 1328, 1330 (N.M. 1989) (refusing to apply literal interpretation of debt limitation clause in holding unconstitutional county jail lease with option to purchase); State ex rel. Ohio Funds Mgt. Bd. v. Walker, 561 N.E.2d 927, 932 (Ohio) (finding revenue anticipation note statute “inconsistent” with debt limitation clause based on statute’s practical effect, that is, “not only for what it purports to be, but what it actually is”), reh’g denied, 564 N.E.2d 502 (Ohio 1990).
Cases from West Virginia and Wyoming are instructive as to the considerations that have informed decisions in those states. In Winkler v. School Building Authority, 434 S.E.2d 420, 436 (W. Va. 1993), the West Virginia Supreme Court found that bonds issued by the State of West Virginia School Building Authority violated that state’s debt limitation clause. Payment on the bonds was secured only by a legislative pledge of future appropriations. Id. at 425. Further, the proposed bond language expressly informed purchasers that the funds provided “‘are subject to annual appropriation by the State Legislature[, which] is not legally obligated to make appropriations in amounts sufficient to pay debt service on the bonds.’” Ibid. (internal citation omitted).
Despite those disclaimers, the court was unwilling to “abandon . . . logic and common sense” regarding the true nature of the State’s obligation. Id. at 435. Instead, the court held that “where the only source of funds for revenue bonds is general appropriations, it defies logic to say that the Legislature has no obligation to fund such bonds.” Id. at 433. The court distinguished the funding mechanism before it with others it had approved in the past, e.g., lease-financing arrangements and special fund revenue bonds, stating as to lease financing “that state agencies have recurring needs for services, such as rental space and utility services,” id. at 428, and, as to special fund bonds, that such bonds “are liquidated out of . . . a tax or a fee generated from the facility itself, such as tolls for the use of a bridge or road, or parking-garage fees.” Id. at 429.
In Witzenburger v. Wyoming, 575 P.2d 1100, 1120 (Wyo. 1978), the Wyoming Supreme Court determined that statutorily authorized bonds issued by the Wyoming Community Development Authority violated that state’s debt limitation clause. In reaching that conclusion, the court looked beyond what it described as “the legislative self-serving declaration that the bonds [were] not debts of the state,” id. at 1117, and instead scrutinized “the substance, not the form” of the transaction. Ibid. The court concluded:
The notice on the bonds does not preclude a finding that as a matter of fact and as a matter of legislative fiat, future tax money is offered as security for and payment of revenue bonds, though reached in a round-about way . . . . The legislature cannot do indirectly what it cannot do directly.
[Ibid. (internal citations and footnote omitted).]
Those cases suggest other approaches to the Debt Limitation Clause analysis that rely,
not on a legal construct, but rather on practical considerations relating to the
source of debt payments or the category of expenses funded by the debt.
D
Two recent cases of our Court require separate and individual consideration. In one, relied on by plaintiffs, the Court issued an order with a dissent, see Spadoro, supra, 150 N.J. at 2, and in the other, relied on by the State, there is a discussion of a pre-EFCFA financing proposal for the construction of school facilities in the Abbott Districts. See Abbott V, supra, 153 N.J. at 523-24.
Spadoro involved a challenge to the Pension Bond Financing Act of 1997, N.J.S.A. 34:1B-7.45 to -21, in which the plaintiffs alleged that by establishing a mechanism for the creation of state debt without voter approval, the Act violated various provisions of the State Constitution, including the Debt Limitation Clause. Spadoro, supra, 150 N.J. at 2. Under the Pension Bond Financing Act, the EDA is authorized to issue approximately $2.7 billion in state contract bonds “to pay the State’s obligations for the unfunded accrued liability of several state pension systems.” Ibid. (Handler, J., dissenting in part). Payment on the bonds is to come from the State, “subject to future legislative appropriations.” Ibid. A majority of the Court found that the matter was moot and entered an order dismissing the plaintiff’s appeal and petition for certification. See footnote 6 Ibid. Justice Handler filed an opinion, joined by Justice Stein, concurring in part and dissenting in part. He believed the Court should adjudicate the case “because of the importance of the underlying issue and the possibility of its recurrence.” Id. at 3.
As in In re Loans, supra, Justice Handler reviewed our prior case law, but, on reevaluation of the State’s bonding practices, he suggested a three part test that would consider whether the bonds “are created by an independent authority,” are “dependent on a ‘special fund’ or separate revenue source for
. . . repayment,” and are dependent on a “pledge on the part of the state to repay the debt.” Id. at 8-9. Using that formulation, the dissent concluded that the EDA was not an independent authority because it “serve[d] no governmental function other than to issue the bonds for the State itself, becoming, in effect, a shield to insulate the State from being labeled a debtor.” Id. at 10. Moreover, under the second prong of the test, the EDA had “no separate source of income . . . [that would] enable [it] to repay the bonds.” Ibid.
Finally, the dissent expressed particular concern that the proceeds were to be used to offset “the ordinary expenses entailed in the regular operation of government.” Ibid. Justice Handler observed that prior bond acts validated by the Court “involved government purposes, such as major capital improvements, capital construction and the provision of special services,” and not the day-to-day costs of operating State government. Ibid. He did not discuss the third prong of his test -- whether the State had pledged repayment on the debt -- but, rather, relied principally on the lack of both a “separate source of income . . . to repay the bonds,” and a fully functioning authority as support for his view that the Pension Bond Financing Act violated the Debt Limitation Clause. Id. at 11, 12. In the instant case, plaintiffs rely on Justice Handler’s dissent as “persuasive authority” and urge the Court to adopt his reasoning.
In Abbott V, supra, the Court approved the State’s proposal to use contract bonds to finance the construction and repair of school facilities. 153 N.J. at 524. During the remand proceedings ordered in Abbott v. Burke, 149 N.J. 145, 223-26 (1997) (Abbott IV), the State had proposed that the Abbott districts issue bonds through a “private placement” with a state agency, the Educational Facilities Authority (EFA), “which would, in turn sell [the bonds] to the public.” Abbott V, supra, 153 N.J. at 523. More specifically, concerned that property-poor districts with low bond ratings faced difficulties securing school construction financing, the Department of Education “recommended that the Legislature amend N.J.S.A. 18A:72A-1 to –58 to empower the . . . EFA . . . to finance the construction and renovation of elementary and secondary schools in the Abbott districts.” Abbott V, supra, 153 N.J. at 523. As the remand court observed, “[b]ecause they are property-poor, Abbott districts have great difficulty issuing bonds in the open market; even if they could go to the bond market, the bonds would carry a substandard rating and high interest rate.” Id. at 631 (App. I) (Report and Decision of Remand Court). In contrast, it was anticipated that the proposed EFA bonds would receive an AAA rating, and that the districts would obtain other benefits from the arrangement because, as “construction manager” the EFA “would prepare specifications for construction, solicit bids for all work and materials required, enter into project contracts, invest any monies not required for immediate disbursement, and review all completed work before dispensing requisitioned funds.” Id. at 523-24.
The Court found that the State’s proposal “would ensure efficient and satisfactory construction” and “would effectively address the need for adequate facilities and capital improvements” in the Abbott districts. Id. at 524. As the Abbott plaintiffs, amici in this case, correctly point out, in Abbott V the Court “accepted the State’s preliminary proposal to fully finance needed construction through the issuance of contract bonds by EFA.”
Plaintiffs center their more general argument on EFCFA as illustrative of the class of statutes that authorize unconstitutional debt. The more focused discussion of EFCFA by the parties and by various amici, as well as the Act’s unique underpinning in the Education Provision of our Constitution, permit disposition of the EFCFA claim.
EFCFA establishes the largest, most comprehensive school construction program in the nation. See N.J.S.A. 18A:7G-1 to
-30; id. at -57 to -71; New Jersey Department of Education, Summary of the Educational Facilities Construction & Financing Act, at http://www.state.nj.us/njded/facilities/act_summ.htm. Consonant with the constitutional mandate of the Education Provision, the Act was passed “to provide for the maintenance and support of a thorough and efficient system of free public schools,” including educating children in “physical facilities that are safe, healthy, and conducive to learning.” N.J.S.A. 18A:7G-2a. In furtherance of that responsibility, EFCFA addresses “[i]nadequacies in the quality, utility, and safety of educational facilities [that] have arisen among local school districts of this State,” id. at -2b, most particularly, in the Abbott Districts:
Educational infrastructure inadequacies are greatest in the Abbott districts where maintenance has been
deferred and new construction has not been initiated due to concerns about cost.
To remedy the facilities inadequacies of the Abbott districts, the State must promptly
engage in a facilities needs assessment and fund the entire cost of repairing,
renovating, and constructing the new school facilities determined by the Commissioner of Education
to be required to meet the school facilities efficiency standards in the Abbott
districts. In other districts, the State must also identify need in view of
anticipated growth in school population, and must contribute to the cost of the
renovation and construction of new facilities to ensure the provision of a thorough
and efficient education in those districts.
[Id. at -2c.]
To effectuate its goals, the Act states that the EDA, established pursuant to N.J.S.A. 34:1B-1 to -21.15, “shall be responsible for the financing, planning, design, construction management, acquisition, construction, and completion of school facilities projects.” N.J.S.A. 18A:7G-13a. EFCFA authorizes the EDA “to issue bonds and refunding bonds, incur indebtedness and borrow money” to fund those projects and to provide for the administrative and operating costs of the Authority in connection with its school construction activities. Id. at
-14a.
The financing scheme for the payment of the debt service on the bonds involves the use of contract bonds. Id. at -17 and
–18. The Act permits the EDA and the State Treasurer to enter into a contract wherein the Treasurer agrees to pay from the General Fund to the EDA “an amount equal to the debt service amount due to be paid in the State fiscal year on the bonds or refunding bonds” issued by the Authority. Id. at -17; see id. at -14c. Those bonds, however, are issued subject to a proviso in the authorizing legislation, and in the bonds, that payment is contingent on annual appropriations by the Legislature and that the bonds are not the debt of the State. See id. at -14f, -17, and -18.
Pursuant to N.J.S.A. 18A:7G-14a, the Authority is permitted to issue no more than $8.6 billion in bonds for the purpose of funding new schools and repairing existing facilities. Of that $8.6 billion, $6 billion is allocated to the Abbott districts to fully fund school facilities projects, and $2.5 billion to non-Abbott school projects. See footnote 7 Ibid. As of May 2001, one-half billion dollars in bonds had been sold. Lonegan, supra, 341 N.J. Super. at 483 (Wells, J.A.D., dissenting). The question whether EFCFA bonds should be issued has not been and will not be put to the voters.
The contract debt authorized by EFCFA is sui generis. We are unaware of any other authorized state bonds dedicated to the provision of constitutionally required facilities. Indeed, in the purpose provisions of EFCFA the Legislature specifically acknowledges its constitutional obligation under the Education Provision to provide safe and adequate school buildings in every school district in the State. See N.J.S.A. 18A:7G-2a to -2c. In Abbott V, supra, we recognized
that the school buildings in Abbott districts are crumbling and obsolescent and that
this grave state of disrepair not only prevents children from receiving a thorough
and efficient education, but also threatens their health and safety. Windows, cracked and
off their runners, do not open; broken lighting fixtures dangle precipitously from the
ceilings; fire alarms and fire detection systems fail to meet even minimum safety
code standards; rooms are heated by boilers that have exceeded their critical life
expectancies and are fueled by leaking pumps; electrical connections are frayed; floors are
buckled and dotted with falling plaster; sinks are inoperable; toilet partitions are broken
and teetering; and water leaks through patchwork roofs into rooms with deteriorating electrical
insulation.
[153 N.J. at 519.]
Because “[t]hese deplorable conditions have a direct and deleterious impact on the education
available to . . . at-risk children,” we held that “[t]he State’s constitutional
educational obligation includes the provision of adequate school facilities.” Ibid.
That mandate is reinforced in our Constitution by Article VIII, Section IV, paragraph
2 (the School Fund Provision), wherein a perpetual “fund for the support of
free public schools” is established. That provision states, in relevant part:
The bonds of any school district of this State, issued according to law,
shall be proper and secure investments for the said fund and, in addition,
said fund, including the income therefrom and any other moneys duly appropriated to
the support of free public schools may be used in such manner as
the Legislature may provide by law to secure the payment of the principal
of or interest on bonds or notes issued for school purposes by counties,
municipalities or school districts or for the payment or purchases of any such
bonds or notes or any claims for interest thereon.
[art. VIII, § IV, ¶ 2.]
By its express terms, the provision permits the State to use the school
fund and “income therefrom and any other moneys duly appropriated to the support
of free public schools, as the Legislature so chooses, to guarantee the school
bonds of “counties, municipalities or school districts.” Ibid. (emphasis added). Approved in 1958
by the voters, the School Fund Provision separately authorizes state-backed school bonds without
reference to the Debt Limitation Clause. Although there is little extant legislative history
on the provision, a May 1958 Statement of the State Federation of District
Boards of Education of New Jersey before the Education Committee of the Assembly
outlines the simple purpose behind its enactment -- to enable the State to
support school bonds.
By allowing the State to guarantee local debt, the School Fund Provision advances
the constitutional guarantee of a thorough and efficient education. In practical effect, as
noted in Abbott V, supra, state support allows school districts to obtain more
favorable interest rates for their bonds thereby lowering the costs of school construction.
153 N.J. at 523. Indeed, the bond strategy approved in Abbott V appears
to follow closely the structure permitted by the School Fund Provision. As originally
proposed in the Abbott IV remand hearings, Abbott V, supra, 153 N.J. at
630-32 (App. I), and as approved by the Court in Abbott V, a
State authority would have purchased local debt and then sold that debt to
the public. Id. at 524. We can see little difference between the tiered
financing approach originally proposed and the simpler des