New Jersey Supreme Court Greenlights State’s Billion Dollar Borrowing Plan

New Jersey’s highest court has signed off on the state’s plan to borrow $9.9 billion to address COVID-19-related revenue losses. The New Jersey Supreme Court held in New Jersey Republican State Committee v. Philip D. Murphy (A-82-19/084731) (Decided August 12, 2020) that the State’s plan to issue bonds and borrow funds from the federal government is constitutional.

New Jersey Supreme Court Greenlights State’s Billion Dollar Borrowing Plan

Facts of New Jersey Republican State Committee v. Murphy

To make up for the shortfall COVID-19 has created and to maintain the State’s fiscal integrity, the Legislature passed and the Governor signed into law a bill that authorizes the State to borrow up to $9.9 billion. Under the new law, the “New Jersey COVID-19 Emergency Bond Act” (Bond Act or Act), the State can issue bonds for private sale or borrow funds from the federal government. Up to $2.7 billion in borrowing can be used for the period from July 1, 2019 through September 30, 2020, and up to $7.2 billion for the period from October 1, 2020 through June 30, 2021.

Plaintiffs – the New Jersey Republican State Committee, Declan O’Scanlon, Hal Wirths, Lisa Natale-Contessa, and Ileana Schirmer – filed suit on July 16, 2020. Their complaint alleged that the Bond Act violated the State Constitution and accordingly sought to restrain the Governor from signing or enforcing it.  

The plaintiffs specifically maintain that the Bond Act is unconstitutional because it violates both the Appropriations Clause and the Debt Limitation Clause. The Appropriations Clause requires that “one general appropriation law covering one and the same fiscal year” be adopted. The Clause also calls for a balanced budget each year.

Meanwhile, the Debt Limitation Clause, as its name suggests, imposes limits on incurring debt. The Clause bars the State from creating debt that exceeds one percent of the total amount appropriated in the general appropriations law without voter approval. The Clause, however, provides an exception for any debts or liabilities created “to meet an emergency caused by disaster.”

The plaintiffs also contend the Act seeks to fund general operating expenses of the State with proceeds from bonds, contrary to the ruling in Lance v. McGreevey, 180 N.J. 590, 593 (2004). In that case, the New Jersey Supreme Court held that proceeds from contract bonds cannot be counted as revenue in balancing the budget.

The New Jersey Supreme Court granted direct certification because the “issues raised are critical to both the budget process and the public and because the matter needs to be resolved with finality before the end of the fiscal year on September 30, 2020.”

NJ Supreme Court’s Decision in New Jersey Republican State Committee v. Murphy

The New Jersey Supreme Court unanimously upheld the Bond Act. “We therefore conclude that the Act is valid under the Debt Limitation Clause and that the Appropriations Clause does not bar the new law,” Chief Justice Rabner wrote. “Subject to certain limits we impose, the Bond Act does not violate the Constitution.”

In reaching its decision, the court addressed several issues that the Bond Act presents: (1) whether COVID-19 qualifies as a “disaster,” and, if so, the nature of the emergency it has caused; (2) what type of borrowing “meet[s] an emergency caused by disaster”; and (3) the interplay between the Emergency Exception and the fiscal clauses of the Constitution. It ultimately concluded that COVID-19 is an emergency and that the State is permitted to incur debt and borrow money “to meet” the emergency. The Chief Justice wrote:

Here, borrowing may be allowed to meet all three aspects of the current emergency. In practical terms, debt can be incurred to provide not only for masks, respirators, and field hospitals, and for direct aid to individuals and families afflicted by the disease, but also for the impact on the public fisc caused by COVID-19. As to the latter category, the State, for example, may borrow to provide for public services like education, police, fire, first aid, child welfare, and prisons, among other services — to secure the continued functioning of government. In other words, because the collapse in revenue brought on by the pandemic affects the State’s ability to provide for direct aid and other government services, the Emergency Exception permits the State to borrow in order to meet them.

The New Jersey Supreme Court emphasized that not every act of borrowing would “meet” the current emergency. “To avoid borrowing in excess of what the law allows, and to be faithful to the Emergency Exception, the State cannot issue bonds or borrow funds beyond the actual fiscal exigency caused by the pandemic,” Chief Justice  Rabner wrote. “The state may not borrow more than the amount certified, and not more than $9.9 billion in total,” Chief Justice Rabner wrote. “In other words, if, at the time the state seeks to borrow money or issue bonds, the governor or the treasurer certifies that the shortfall resulting from the pandemic is estimated to be $7 billion, the state cannot borrow more than that amount.” He added, “In order to satisfy those concerns, it will be necessary for the Governor or the Treasurer to certify publicly the State’s projected revenue and consequent shortfall ‘as a result of the COVID-19 pandemic’ before each tranche of borrowing

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