COVID-19 Bond Law Violates Constitution, NJ Justices Told

By Bill Wichert
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Law360 (July 27, 2020, 6:57 PM EDT) -- Garden State Republicans have asked the New Jersey Supreme Court to strike down as unconstitutional a state law permitting up to $9.9 billion in borrowing without voter approval to address financial problems arising from the COVID-19 pandemic, claiming the statute unlawfully enables the state to use debt to cover its general expenses.

In their lawsuit against Democratic Gov. Phil Murphy, the New Jersey Republican State Committee, two GOP lawmakers and two taxpayers told the justices Friday that the New Jersey COVID-19 Emergency Bond Act violates the appropriations clause of the state constitution, which requires a balanced state budget via an annual appropriations law.

"Thus, the annual general appropriation law may not spend in excess of the state's revenues. The budget must be balanced," the plaintiffs said in a brief. "More particularly, it is the plaintiffs' position that the budget's expenditures may not be 'balanced' by debt, as that would render the budget inherently unbalanced."

Such borrowed funds may not be considered revenues, the plaintiffs argued, citing the state Supreme Court's 2004 opinion in Lance v. McGreevey .

That opinion held that "borrowed monies, which themselves are a form of expenditure when repaid, are not 'income' and cannot be used for the purpose of funding or balancing any portion of the budget pertaining to general costs without violating the appropriations clause."

While the Lance decision dealt with appropriations bonds, not general obligation bonds like in the coronavirus legislation, "the principles enunciated in Lance should ring true regardless of the structure of the attempt to finance the state's general expenses through debt," the brief states.

"Current and future generations will be bound to this debt, without their consent. It is respectfully submitted that if the court is ever inclined to adopt a sweeping definition of the term 'revenue,' and one that would be at odds with the Lance decision, this is not the situation to do so," the brief said.

In a matter of hours on July 16, the Democrat-controlled state Legislature approved the bond act, Murphy signed it into law and the Republicans filed their initial suit in Mercer County Superior Court. The next day, the New Jersey Supreme Court took control of the litigation.

The law permits the issuance of $2.7 billion in general obligation bonds for the current fiscal year that ends Sept. 30 and another $7.2 billion for the next fiscal year.

The legislation says the borrowing is permitted under an exception within the debt limitation clause of the state constitution, which says voter approval and related restrictions do not apply to "the creation of any debts or liabilities for purposes of war, or to repel invasion, or to suppress insurrection or to meet an emergency caused by disaster or act of God."

But the Republicans asserted in Friday's brief that the measure ran afoul of the provision in the debt limitation clause that "the proceeds of any general obligation debt created by the state are confined to a 'single object or work.'" Contrary to that rule, the bond act would let the state use the debt for "any financial problem" faced during the two fiscal years, the brief said.

"While the COVID-19 pandemic is concerning for all, this act will create a dangerous precedent that will be felt for generations," the brief said. "If plugging gaps in the state's general budget ... passes muster under the single object requirement of the constitution, then the state could issue new binding debt without the approval of the electorate anytime the state projects a revenue shortfall."

The state may argue that the "single object rule" does not apply to debt incurred based on the emergency exception in the clause, the brief said. The structure of that section, however, "makes it evident that the [framers] of the constitution did not intend to give the state a blank check whenever an unspecified emergency arises," the Republicans argued.

"The numerous examples present in the clause instruct that the emergency debt is limited in use to combat the particular threat," according to the brief.

"For instance, such debt could certainly be used to repel a hypothetical invasion. But the state could not capitalize upon the emergency situation (the invasion) to borrow additional funds to renovate Drumthwacket," the brief said, referring to the governor's official residence.

The state attorney general's office declined to comment on Monday.

The plaintiffs are represented by Michael L. Testa Sr., Michael L. Testa Jr. and Justin R. White of Testa Heck Testa & White PA.

Counsel information for Murphy was not immediately available.

The case is New Jersey Republican State Committee et al. v. Philip D. Murphy, case number 084731, in the New Jersey Supreme Court.

--Editing by Haylee Pearl.

For a reprint of this article, please contact reprints@law360.com.

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