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Holster v. Board of Trustees of Passaic County College

Decided: March 22, 1971.


Gordon H. Brown, J.s.c.


By the amended complaint substituted plaintiff William Holster alleges that chapter 12 of the Laws of 1971, approved and effective on January 28, 1971, violates Art. VIII, ยง II, par. 3 of our 1947 State Constitution which provides in pertinent part:

The Legislature shall not, in any manner, create in any fiscal year a debt or debts, liability or liabilities of the State, 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. Regardless of any limitation relating to taxation in this Constitution, such 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and discharge the principal thereof within thirty-five years from the time it is contracted; and the law shall not be repealed until such debt or liability and the interest thereon are fully paid and discharged.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.

The original plaintiff here was the City of Clifton with a complaint in lieu of prerogative writs setting up five counts. The first four were disposed of in the course of a hearing held on the return date of Clifton's order to show cause. It is the fifth count which raises the subject constitutional issue and only defendants Ralph A. Dungan, Joseph M. McCrane, Jr. and George F. Kugler, Jr. are involved in it. Legal argument on February 25, 1971 was precipitated by the State's motion for summary judgment to sustain the statute, in which motion the City of Paterson, as intervenor, joined. The relief demanded by the order to show cause implies a reciprocal summary judgment motion to invalidate the act.

The legislative arrangement under attack enables the State to offer capital "support" for county college projects, in the context of N.J.S.A. 18A:64A-22, by authorizing the issuance of county bonds in predetermined amounts and by appropriating the money required to pay interest and principal thereon.

Plaintiff contends that by such participation in the county college program the State will undertake a "debt" or "liability," with the result that chapter 12 contravenes the cited constitutional provision by which a public referendum is required. The State takes the stand that this financial aid is permissible without approval by the electorate because it is to be tendered in "annual appropriations," thus making its action only voluntary. Put the other way around -- no compulsion pushes the State into the position of being an obligor to any degree because no "debt" or "liability" as to it has been created.

It is undisputed that if the effect of chapter 12 is to create a State "debt" or "liability," the statute is unconstitutional.

Each side finds material for argument in the same body of decisional law. The following authorities govern the issue according to the briefs which have been submitted: Wilson, Atty.-Gen., v. State Water Sup. Co. , 84 N.J. Eq. 150 (E. & A. 1915); New Jersey Turnpike Authority v. Parsons , 3 N.J. 235 (1949); Behnke v. New Jersey Highway Authority , 13 N.J. 14 (1953); McCutcheon v. State Building Authority , 13 N.J. 46 (1963); Passaic v. Consolidated Police, etc., Pension Fund Comm'n , 18 N.J. 137 (1955); State v. Lanza , 27 N.J. 516 (1958), and Clayton v. Kervick , 52 N.J. 138 (1968). The court has been unable to find additional New Jersey material in point. At this level, then, the rationale for decision is to be derived from these sources.

The aim which the constitutional debt limit was meant to promote must be kept in mind. It should serve as a standard for determining analytical relevance. According to the court in Wilson, supra:

But a somewhat different objective has also been stated. In New Jersey Turnpike, supra , where it was held that the bonds in question were the debts of an entity independent of the State, there was reference to a theory that would free the bonds of constitutional control even if they were the direct obligations of the government:

This assertion is based on 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. [3 N.J. at 246]

The court went on to say that there was no need to consider the doctrine in the case at hand because the bonds were

issued by the autonomous Authority. But in the Clayton opinion, supra , 52 N.J. at 149, it was noted that where bonds are payable solely from "a self-liquidating enterprise such as the Turnpike," many jurisdictions have invoked the "special fund" doctrine in order to hold that such financing does not run counter to the purposes underlying the debt limitation clause.

The so-called special fund rule thus makes validity correlate with and turn upon the risk of taxation. What seems to be central in it is not simply whether there is a "debt" or "liability" but whether or not there is a source of payment independent of the State Treasury.

One finds a factor like that figuring throughout the decisions dealing with the debt limit problem. Indeed even in Behnke, supra , where the State had expressly guaranteed the Parkway bonds (to be paid from tolls) and had secured referendum validation in compliance with the Constitution, the court felt obliged to add to its approval the following gratuitous advice:

In Wilson , defendant commission, a state agency, contracted to buy land for $1,000,000. The transaction was secured by a mortgage with bonds to be paid by what might be appropriated by the Legislature "from time to time." It was the holding of the majority that this produced a constitutional type "debt" and that it was chargeable against the State. The dissent viewed the debt itself as being one not contemplated by the prohibition:

The plan avoids the evils which the constitutional provision was designed to meet, since the specific property acquired must be worth what is paid for it, or the owners would not sell on such favorable terms to the purchaser, and the public can at most lose no more than the specific property. The burden of taxation is not increased. [84 N.J. Eq. at 163]

In Clayton the court made this comment on the Wilson result:

Though its [the Commission's] undertaking expressly stipulated that the bondholders would have recourse only to the mortgaged property, the majority found the bonds to be debts of the State within the meaning of the Constitution. [52 N.J. at 147]

It was on an issue as to the quantum of financial risk to which the State was exposed that the court found one ground for division in McCutcheon, supra. In that case there was under review a statute creating the defendant Authority to acquire office space for lease to the State. Funding bonds were to be paid out of rent receipts. On its part the State agreed to provide annual budget appropriations for current rents.

The majority saw the arrangement as really one for purchase of the properties by bonds to be financed with annual appropriations in the guise of rent amounts. According to the minority there was no more involved than the application of good prevailing ...

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