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Lonegan v. State

June 27, 2001


On appeal from Superior Court of New Jersey, Law Division, Civil Part, Bergen County, BER-L-10869-00.

Judges Petrella, Newman and Wells.

The opinion of the court was delivered by: Petrella, P.J.A.D.


As amended September 6, 2001

Argued May 21, 2001

Plaintiffs Steven Lonegan, who is the Mayor of Bogota, and Stop the Debt.Com, LLC (collectively Lonegan) appeal from the entry of summary judgment in the Law Division declaring that the Educational Facilities Construction and Financing Act (EFCFA), N.J.S.A. 18A:7G-1 et seq., and other statutes authorizing contract bond financing do not violate the State Constitution's Debt Limitation Clause, N.J. Const., Art. VIII, § 2, ¶ 3.

On December 28, 2000, plaintiffs filed a verified complaint and obtained an order to show cause in an action in lieu of prerogative writs seeking declaratory and other relief in the Law Division to prevent the sale of contract bonds without voter approval. Plaintiffs alleged that the EFCFA and various other statutes authorizing contract bond financing have in effect unconstitutionally increased the State's debt without voter approval in violation of the cited Debt Limitation Clause. Plaintiffs sought a judgment declaring that all statutes authorizing the sale of contract bonds to be paid out of the State's General Fund without voter approval were unconstitutional. In addition, they sought an order permanently enjoining the Legislature from enacting such statutes without voter approval and preliminarily enjoining defendants from issuing contract bonds without voter approval during the pendency of the action. Defendants cross-moved for summary judgment.

When the matter was heard on January 24, 2001, the judge denied plaintiffs' application for preliminary injunctive relief on the basis that Lonegan could not demonstrate a reasonable likelihood of success on the merits. The judge then held that contract bond financing does not violate the Debt Limitation Clause and granted summary judgment in favor of defendants and dismissed plaintiffs' complaint.

Plaintiffs filed a timely notice of appeal and defendants filed a motion for direct certification to the Supreme Court. On February 22, 2001, the Supreme Court denied the motion. We denied plaintiffs' motion to stay the sale of bonds under the challenged statutes pending determination of this appeal.*fn1

On appeal, Lonegan argues the Law Division Judge erroneously concluded that the Debt Limitation Clause does not bar contract bond financing without voter approval. Essentially, Lonegan claims that so-called contract bond financing by the State and its agencies is a subterfuge employed solely to avoid and contravene the Debt Limitation Clause of our Constitution. Additionally, Lonegan contends that the judge erred in finding that plaintiffs were not entitled to a preliminary injunction enjoining the issuance of contract bonds pending resolution of the matter and in hearing defendants' cross-motion for summary judgment on less than twenty-eight days notice.


On July 18, 2000, the Governor signed into law the Educational Facilities Construction and Financing Act (EFCFA), N.J.S.A. 18A:7G-1 et seq. Enacted in response to Abbott by Abbott v. Burke, 153 N.J. 480 (1998) (Abbott V)*fn2 , the EFCFA was intended by the Legislature to meet the constitutional responsibility imposed on it by the Supreme Court to provide adequate educational facilities. N.J.S.A. 18A:7G-2b. Specifically, the EFCFA provides State funding and allows the Economic Development Authority (EDA), created by L. 1974, c. 80, effective August 7, 1974 (N.J.S.A. 34:1B-1 et seq.), to act as a general construction manager for the maintenance, construction and renovation of school facilities, predominantly in the Abbott districts.*fn3 N.J.S.A. 18A:7G-2c.

To that end, the EDA is authorized to issue bonds, incur indebtedness and borrow money to fund these projects.*fn4 N.J.S.A. 18A:7G-14a. Payment arrangements for debt service on the bonds issued by the EDA are made through a procedure referred to as contract bond financing. N.J.S.A. 18A:7G-17 and 18. The EDA and the State Treasurer are authorized to enter into a contract under which 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 ...." N.J.S.A. 18A:7G-17. A sinking fund*fn5 is also contemplated for the eventual retirement of the bonds at maturity, or any call date, again out of general treasury funds.

However, bonds issued by the EDA are the limited obligations of the EDA and

shall not be a debt or liability of the State or any agency or instrumentality thereof ... either legal, moral or otherwise, and nothing contained in this act shall be construed to authorize the authority to incur any indebtedness on behalf of or in any way obligate the State or any political subdivision thereof, and all bonds and refunding bonds issued by the authority shall contain a statement to that effect on their face. [N.J.S.A. 18A:7G-14f.]

Any obligations incurred by the State as a result of the contract and all payments from the General Fund are declared to be "subject to and dependent upon" annual appropriation of such funds by the Legislature. N.J.S.A. 18A:7G-17 and 18. The contract between the State Treasurer and the authority expressly states that it shall not constitute a debt of the State and disclaims any obligation on the part of future Legislatures. The sale documents provided to contract bond purchasers similarly state that there is no legal obligation on the Legislature to appropriate money to repay the bonds and no remedy should the Legislature fail to do so. Thus, contract bonds would appear to provide no legal right to compel payment by the State should the Legislature fail to make the necessary appropriations (see N.J.S.A. 18A:7G-14g), as opposed to general obligation bonds, wherein the State pledges its faith and credit, and its taxing power, towards their repayment.

Plaintiffs point out that the lack of a pledge on behalf of the State raises questions as to why an investor would purchase bonds from a non-revenue generating facility if there is no guaranteed source of funding for the repayment of principal, let alone interest. Abbott V points out that such bonds, even though not backed by the State's faith and credit, are viewed in the market as only "one notch less than a general obligation of the State, [because] there would be significant repercussions to the State and its credit rating were the Legislature not to make an annual appropriation." 153 N.J. at 523.

Contract bond financing similar to that provided in the EFCFA has become a common method of funding utilized by the Legislature to bypass or circumvent the voter approval requirement of the Debt Limitation Clause.*fn6

In all such statutes, neither the bond nor the contract between the State Treasurer and the authority places a direct obligation upon the State to appropriate money to pay bondholders. Although some of the authorities involved generate revenue, no independent revenue is generated to support the bonds issued under the EFCFA. The State Treasurer uses solely ...

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