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Lonegan v. State

August 21, 2002

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.



On appeal from the Superior Court, Appellate Division, whose opinion is reported at 341 N.J. Super. 465 (2001).

SYLLABUS BY THE COURT

(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).

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, The opinion of the court was delivered by: Poritz, C.J.

Argued January 2, 2002

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 *fn1 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) *fn2 , 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.

I.

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. *fn3 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. *fn4 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 *fn5 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.

II.

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.

A.

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.]

B.

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. [Id. at 66-67.]

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).

C.

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. *fn6 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 ...


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