On appeal from the Superior Court, Appellate Division, whose opinion is reported at 341 N.J. Super. 465 (2001).
Plaintiffs initiated this litigation in December 2000, seeking a declaration that legislative programs financed through appropriations-backed debt violate the Debt Limitation Clause of the State Constitution (N.J. Const., art. VIII, § 2, ¶ 3). The trial court granted summary judgment to defendants, and the Appellate Division affirmed in a split decision. Lonegan v. State, 341 N.J. Super. 465 (App. Div. 2001). The matter came to the Court as of right because of the dissent in the Appellate Division.
In Lonegan v. State, 174 N.J. 435 (2002) (Lonegan I), this Court addressed plaintiffs' claim as to appropriations-backed debt authorized by the Educational Facilities Construction and Financing Act (EFCFA) only, and held that such debt did not violate the Debt Limitation Clause. The Court reasoned, in part, that debt authorized by EFCFA is sui generis because of its constitutional underpinnings in the Education Provision of our Constitution (N.J. Const. art. VIII, § 4, ¶ 1), as reinforced by the School Fund Provision (N.J. Const. art. VIII, § 4, ¶ 2), which separately authorizes state-backed school bonds without reference to the Debt Limitation Clause.
The Court chose to limit the holding in Lonegan I to EFCFA because plaintiffs failed to provide argument sufficiently anchored in the specific financing schemes authorized by other statutes they found objectionable. The Court scheduled additional briefing and argument on plaintiffs' remaining claims.
HELD: The Debt Limitation Clause does not apply to debt that is subject to future legislative appropriations because such debt is not legally enforceable against the State.
1. The Debt Limitation Clause prohibits the creation of certain state debt unless authorized by law for a specific purpose and approved by a majority of registered voters. In Lonegan I, the Court explained that the scope and meaning of the Clause has been discussed in an extensive body of case law, and that the Court has almost universally sustained statutes authorizing appropriations-backed debt when the issuance of the debt is not backed by the full faith and credit of the State. The repayment of such debt is subject to future legislative appropriations, and is not a legal obligation of the State. (pp. 6-10)
2. In response to the Court's directive in Lonegan I, plaintiffs have presented argument on several specific State statutes. Plaintiffs assert those statutes have the following common features that, taken together, render them unconstitutional: a State authority issues the bonds for a State purpose; the State Treasurer is permitted to enter into an agreement with the authority to pay the debt service; and payments on the bonds are subject to annual appropriations. In plaintiffs' view, the "subject to appropriation" qualification is meaningless because as a practical matter, the State cannot default on those bonds without substantial negative impact on its credit rating and its access to the financial markets. Accordingly, plaintiffs argue that the "subject to appropriations bonds" are effectively "full faith and credit bonds." (pp. 10-12)
3. Despite plaintiffs' broad claim of invalidity, their response defines contract debt in a manner that narrows the scope of their challenge. Debt that is retired from a special fund comprised of revenues generated by the financed facility or project is exempt because general tax revenues are not tapped for repayment. And although plaintiffs' definition does not on its face exempt bonds issued to finance the construction of facilities that are subsequently leased back to the State, plaintiffs consider these transactions distinct legal obligations that do not offend the Clause as long as there are bona fide leases reflecting the fair market rental of the facility. (pp. 12-14)
4. The State argues in its response that the new rule advanced by plaintiffs is unsupported by the language of the Debt Limitation Clause, and if adopted by this Court, would severely unsettle the State's financial operations. The State claims that a number of financing mechanisms that are far removed from bond financing, such as multi-year contracts subject to appropriations, would be rendered constitutionally suspect, causing additional disruption to the State's finances. The State argues that there are constitutionally significant differences between the Legislature being "highly likely," rather than being "legally bound," to repay its debts. The State points out that it has flexibility to renegotiate more favorable repayment terms of appropriations-backed debt, a benefit not available with general obligation debt. (pp. 14-16)
5. Under New Jersey case law, only debt that is legally enforceable against the State is subject to the Debt Limitation Clause. In reliance on that rule, the State has responded to changes in the financial markets that reflect modern economic realities. The Debt Limitation Clause was made a part of the State Constitution in 1844. The variety of functions assumed by the government since that time, and the sophisticated means now used to finance those functions, make it difficult if not impossible to differentiate among acceptable and unacceptable forms of twenty-first century appropriations-backed debt under a nineteenth-century paradigm. Even plaintiffs concede that the Clause does not require voter approval for some forms of appropriations-backed bonds. They fail, however, to articulate principled distinctions between structured lease payments and revenue bonds and the form of appropriations-backed debt they find objectionable. (pp. 16-19)
6. A majority of state courts follow the New Jersey approach and hold that debt limitation restrictions do not apply to appropriations-backed debt. Cases holding otherwise rely on practical considerations relating to the source of debt payments or the category of expenses funded by the debt. Although the dissent argues that the Debt Limitation Clause should apply broadly to any legislative enactment that binds the State to the payment of debt out of general revenues, it would exclude debt supported by adequate and independent revenues, as well as labor agreements and leases. The majority is unable to discover a principled basis for the exclusions accepted by the dissent. The concerns expressed by a minority of jurisdictions and the dissent can be addressed only by the Legislature in our tri-partite system of government. The Court is unwilling to disrupt the State's financing mechanisms in the circumstances presented, and agrees with most state courts interpreting their own constitutions, that the restrictions of the Debt Limitation Clause do not apply to appropriations-backed debt. (pp. 19-27)
Judgment of the Appellate Division is AFFIRMED.
JUSTICES LONG, VERNIERO, and ZAZZALI have filed a joint dissenting opinion, expressing the view that the Debt Limitation Clause is applicable to any legislative enactment that binds the State, either by design or by indirect result, to the payment of incurred debt out of general revenues. They would hold that the Debt Limitation Clause is violated when the Legislature, without voter approval, enacts legislation authorizing an authority or other State entity to borrow money or otherwise incur indebtedness, in excess of the threshold set forth in the Clause, that is (1) unsupported by adequate revenues that are independent of taxpayer funds, and (2) amortized primarily or completely by annual legislative appropriations. Excluded from that holding would be labor agreements, leases, and any other arrangement or transaction that does not require the State's contractual borrowing of funds.
JUSTICES COLEMAN, LaVECCHIA, and ALBIN join in CHIEF JUSTICE PORITZ's opinion. JUSTICES LONG, VERNIERO, and ZAZZALI have filed a separate dissenting opinion.
The opinion of the court was delivered by: Poritz, C.J.
Today we reject a broad challenge to the validity of fourteen New Jersey statutes authorizing contract or appropriations-backed debt. By our holding, we reaffirm over fifty years of precedent from this Court and align the Court, as before, with the decisions from a majority of our sister states. Our decision is based in the unambiguous and clear language of Article VIII, Section II, paragraph 3, of the New Jersey Constitution (the Debt Limitation Clause or Clause), and in the State's reliance on the Court's precedents when crafting complex financing mechanisms responsive to changing market conditions. We are well aware of the need to maintain stability in respect of the variety of financial instruments authorized by the Legislature, and of the litigation that would result if we attempt to establish classes of debt that are governed by the Clause and classes that are not. To reject, at this late date, traditional legal rules relating to debt could have unintended consequences not anticipated by the Court. We leave to the legislative and executive branches, where it properly resides, the policy decision whether to propose a constitutional amendment redefining or otherwise altering the scope of the Debt Limitation Clause, or whether to restrain the creation of appropriations-backed debt by other means should the other branches deem such measures appropriate.
I A The procedural posture of this case has been set forth in Lonegan v. State, 174 N.J. 435 (2002) (Lonegan I), and will not be repeated here except by way of a brief summary. We note only that plaintiffs filed their complaint in December 2000, when they sought a declaration "that [the Education Facilities Construction and Financing Act] and other statutes authorizing contract bond financing *fn1 are unconstitutional" under the Debt Limitation Clause. Lonegan I, 174 N.J. at 441. The trial court rejected plaintiffs' challenge by grant of summary judgment to defendants, and a majority in the Appellate Division concurred. Lonegan v. State, 341 N.J. Super. 465, 481 (App. Div. 2001).
The matter came before us as of right because of a dissent in our intermediate appellate court. N.J. Const. art. VI, § 5, ¶ 1; R. 2:2-1(a).
Lonegan I was decided on August 21, 2002. In its initial opinion, the Court held that the issuance of appropriations- backed debt authorized by the Educational Facilities Construction and Financing Act (EFCFA) was not violative of the Debt Limitation Clause. 174 N.J. at 441. Our holding recognized that the Legislature had enacted EFCFA to fulfill its constitutional obligation to fund new school construction mandated by this Court in Abbott v. Burke, 153 N.J. 480 (1998) (Abbott V). Lonegan I, supra, 174 N.J. at 441, 457-62 (discussing the State's obligations under N.J. Const. art. VIII, § 4, ¶ 1 (the Education Provision)). We observed that the "debt authorized by EFCFA is sui generis" because of its constitutional underpinnings in the Education Provision of our Constitution, as reinforced by Article VIII, Section IV, paragraph 2 (the School Fund Provision), which "separately authorizes state-backed school bonds without reference to the Debt Limitation Clause." Id. at 461. In light of the State's reliance on the Court's general approval of a similar financing scheme in Abbott V, and on "our long line of precedents validating similar debt issued by an independent authority," we sustained the state's school construction financing scheme. Id. at 462.
Although the EFCFA challenge was at the core of Lonegan I, the plaintiffs attempted a broad attack on all legislative programs financed through appropriations-backed debt. Id. at 439-41. Nonetheless, the Court chose to limit its holding to EFCFA because plaintiffs failed to provide argument sufficiently anchored in the specific financing schemes authorized by the statutes they found objectionable. Id. at 440-41, 464-65. Unwilling to resolve issues of constitutional import without legal and factual context, we sought a more focused discussion from the parties and "direct[ed] the Clerk of ...