Lonegan v. State

Evidence, must ensure that admitted scientific evidence is reli- able). discretion, Without that have we nó standard at all. stated,

For I judgment the reasons affirm would Appellate Division. join

Justices opinion. VERNIERO LaVECCHIA this STEIN, For reversing COLEMAN, and remanding —Justices LONG, ZAZZALI —4. affirming

For Justice PORITZ and Justices —Chief join. (cid:127)VERNIERO and LaVECCHIA —3. LONEGAN; DEBT.COM, LLC,

STEVEN M. STOP THE PLAIN- TIFFS-APPELLANTS, JERSEY; v. OF STATE NEW ROLAND MACHOLD, M. TREASURER OF THE OF JER- STATE NEW SEY; AUTHORITY; NEW JERSEY AND SPORTS EXPOSITION AUTHORITY; NEW JERSEY EDUCATIONAL FACILITIES AUTHORITY; NEW JERSEY ECONOMIC DEVELOPMENT AUTHORITY, NEW JERSEY FUND TRANSPORTATION TRUST DEFENDANTS-RESPONDENTS.

Argued January August 2002 Decided 2002. Fede, (Contcmt, Andrew T. argued appellants the cause for Atkins, Hille, Rogers, attorneys). Fede & Accurso, General, Attorney

Allison E. argued Assistant respondents Machold, cause for Jersey, of Roland State New M. Jersey, Treasurer Jersey New New Educational Authority, Jersey Development Facilities New Economic Authori- (John ty Jersey Transportation and New Trust Fund J. Farmer, Jr., Attorney attorney; Jersey, General of New Patrick DeAlmeida, briefs). General, Deputy Attorney on the Johnston,

Matthew respondent Jersey C. on behalf' of Sports Exposition Authority, upon relied the brief submitted al., (Courier, Robert, Jersey, on behalf of State New et Laufer Cohen, attorneys). & Sciarra, Director, David G. Executive Educational Law Center (Mr. submitted a brief on behalf amicus curiae Abbott Plaintiffs Sciarra, brief). Dillon, attorney; Mr. Sciarra and Paul J. on the Kahn, L.

Andrea submitted a brief on behalf of amicus curiae (McManimon Scotland, Garden State Coalition of Schools & attorneys).

Douglas Eakeley S. submitted a brief on behalf of amicus curiae (Lowenstein League Sandler, Jersey Women Voters of New attorneys; Maccone, Haney Cecelia E. and Maria N. on the brief). Vance, Counsel,

Melissa R. submitted a letter in lieu of brief on behalf of Jersey amicus curiae New Association of School Adminis- trators. Friedman,

Richard A submitted a letter lieu of brief on (Zazza- behalf of Jersey amicus curiae New Education Association li, Nowak, Friedman, Fagella, attorneys; Kleinbaum & Mr. Scurti, brief). Kimberly Friedman and A on the Kaelber, Counsel, Michael F. Senior Associate submitted a letter lieu of brief on behalf of amicus curiae New School John, Boards (Cynthia Counsel, Association J. General attorney). Kraft, L. John submitted a letter brief on behalf of amicus Taxpayers curiae Jersey. United of New opinion The of the by Court was delivered PORITZ, C.J.

In this case the Court is asked again to consider once VIII, (the II, contours of paragraph Article Section 3 Debt Clause) Limitation Clause or of the New Constitution. scope meaning imposed legisla- restrictions on the by tive branch the Clause have length been discussed at in an

439 body spanning extensive of case fifty years law more than covering variety bonding adopted by Legisla- mechanisms See, capital funding ture to meet e.g., needs of the State. Auth., 396, (1982); v. N.J. Bldg. Enourato 90 N.J. 448 A.2d 449 McCrane, Sports 1, & Exposition N.J. Auth. v. 61 N.J. 545, nom., appeal Borough dismissed sub E. v. N.J. of Rutherford Auth., Sports Exposition & 409 U.S. 93 S.Ct. 34 L.Ed.2d (1972); 215 College, Holster v. Trs. County Bd. Passaic 59 (1971); Kervick, Clayton N.J. 279 A.2d 798 v. N.J. (1968); Parsons, Tpk. A.2d 281 Auth. v. 3 N.J. (1949). In universally those cases the has Court almost authorizing

sustained statutes the issuance of debt is not that State, by backed the full generally faith and credit of the when the independent authority, debt is undertaken an most often when authority has a revenue source available to service principal and interest on the debt. The Court has reasoned that implicated Debt Limitation is not Clause when the is not State legally obligated subject on debt issued appropri- to future annual ations. challenge

Plaintiffs State’s use contract with debt1 approval out voter because their view it is “inconceivable ... Legislature appro will necessary fail to make the priations prevent “subject Despite a default.” annual appropriation” contracts, language plaintiffs in the claim that the potential negative impact rating of a default on the State’s credit appropriate ensures that will the amounts neces sary obligations They cover service contract on bonds. urge prior holdings, the Court to its sharply reevaluate curtail use of capital financing, impermissible State’s such rule (or debt”) 1 The term “contract bond” "contract an describes bonds issued independent authority state aon contract between the State and the Treasurer authority stating payment subject legislative the bonds State is contrast, appropriations. general obligation are enforceable state debts backed the full faith and credit of the State. John Downs & Jordon Goodman, Dictionary Elliott Barron’s Finance Investment Terms (1991). approval the creation of contract without voter subject appropriations. debt or debt Court, important difficult Plaintiffs raise and issues. This a virtually precedent, applied unbroken line of has Debt Limita- literally, holding tion that when the full faith and credit of Clause pledged is not debt is not the of the debt State. clear, bright That line appeared has serve well financial while, time, remaining of the State at the same true to needs But, meaning recently, more Clause. there have been changes arrangements in the debt substantial State’s whether Clause, interpreted, purpose as retains its fundamental vitality today troubling interpretation A question. literal the Debt Limitation Clause that eviscerates the strictures expressly Clause contains cannot serve the constitutional mandate. said, position That we are not in a those to rule on issues argument. challenge without additional Plaintiffs’ broad lists stat- containing variety financing strategies utes structured as contract that have reviewed been this Court thereaf- (New sustained, see, e.g., ter N.J.S.A 52:18A:78.1to -78.32 Act)2, Building Authority as well as “all other statutes that offend strategies the Debt Limitation Clause.” Those be viewed in must Simply put, plaintiffs’ sweeping context to be understood. claim that all contract debt is must be invalid anchored a discussion of financing specific legislative mechanisms authorized in enact-' Therefore, except ments. for the Education Facilities Construc- (EFCFA Act), sustain, Financing tion and Act or the which we we direct the Clerk of the schedule Court to this matter additional reargument briefing practicable fall of as soon in the 2002. EFCFA, respect plaintiffs’ argument focuses on that State, Lonegan statute “and the contract ... v. bond authorized.” Building 90 Enourato, Act was sustained Authority supra, (holding Building ”[s]ince 448 A.2d 449 Act not authorize does State, the creation debts the debt ... limitations clause does not any obligations to the debts or of the State on its lease apply Authority's agreements Authority”). with the 465, N.J.Super. 341 (App.Div.2001). 775 586 We consid argument respect er herein EFCFA because in is the Act put particularity; forward with uphold we the Act because of law, prior our reliance State on case including Abbott v. (Abbott Burke, (1998) V), A 153 N.J. .2d 450 for the and separate and distinct reason that was EFCFA enacted VIII, in furtherance of the in mandate found Article IV, (the Provision) paragraph Section Education of the New Jersey Constitution.

I 28, 2000, plaintiffs December On Complaint filed a Verified Prerogative Court, Division, Lieu of Superior Writs Law injunctive seeking a declaratory judgment relief and that EFCFA authorizing financing other statutes contract bond are uncon- stitutional. Jersey, Plaintiffs named the New State of Roland (then Machold Treasurer of the Jersey), State of New New Jersey Authority, Educational Facilities Jersey the New Economic (EDA), Development Authority Jersey Sports Expo- Authority, sition Transportation and the New Trust Fund Shortly as defendants.3 the trial thereafter court deter- plaintiffs mined that could not demonstrate reasonable likelihood on the warranting injunction. success merits an In then granting summary judgment claims, on all court defendants rejected repeatedly observed this Court has challenges to by independent contract bonds issued pay- authorities when the independent statutory authority Each of the entities named has to issue (EDA); (same); contract bonds. N.J.S.A. 34.-1B-7.16 N.J.S.A. 34:1B-7.50 (same); (New Jersey N.J.S.A. 34:1B-21.13 N.J.S.A. 18A:72A-5 Educational Facil Authority); (same); (same); ities N.J.S.A. 18A:72A-12.4 N.J.S.A. 18A:72A-42 (same); (same); (New N.J.S.A. 18A:72A-57 N.J.S.A. 72A-65 N.J.S.A. 5:10-5 Jersey Sports Exposition Authority); (same); N.J.S.A. 5:10-14.3 N.J.S.A. (New Jersey Transportation Authority). 27:1B-6 Trust Fund In their brief to this Court, statutes, plaintiffs Division, point by Appellate also to other mentioned debt, and, above, unconstitutionally authorizing contract as noted "all other statutes that offend the Debt Limitation Clause.” subject on legislative

ment the bonds made future appropria- is tions. majority Appellate panel

A Division the trial affirmed Lonegan, supra, N.J.Super, court June 2001.4 at 481- A discussing 775 .2d586. After the mechanics of contract bond financing, majority general obligation observed that unlike bonds, State, which are the full backed faith credit of the “legal right compel” contract bonds do not create a the State to payment make on the 775 A bonds. Id. at .2d 586. The majority precedents respect also our considered of the Debt Clause, concluding Limitation that the relevant case “reveal[s] law consistently Court, ... narrow construction of the Clause long Legislatures that as are legally so as future bound to [Cjlause pay make future the indebtedness the 478, Although majority satisfied.” Id. at 775 A.2d 586. could such, addressing no case find contract debt as the “rationale” of prior our suggested cases that the Debt Limitation Clause is independent authority even sepa satisfied when an issuer has no dependent legislative rate source of income and is on annual pay the amount due In on bonds. Ibid. of the majority, purpose view because the of the Clause is to State, prevent a default of “strictures the ... Clause met if the is on obligated [are] State the bonds and cannot reasoning, default.” Ibid. on majority Based sustained EFCFA.

Notably, judges speaking expressed for two the court approval of dissenting colleague’s approach, their stating: “Were precedent join we not barred might colleague’s we in our thoughtful opinion.” 9, dissenting n. Id. at 481 775 A.2d 586. The dissenting panel member of the have would held that contract Lonegan, bonds violate the Limitation supra, Debt Clause. 341 N.J.Super. (Wells, J.A.D., at dissenting). In his 4 Plaintiffs were denied relief in the Division March preliminary Appellate 2001, and in this Court on 2001. September view, if there is little between difference debt that the legally obligated pay morally obligat- and debt that the State is “ pay. Moody’s5 ed to observed ‘appropriation He considers ” Id. debt different [to be] no than ‘true’ debt.’ (citation omitted). EFCFA, In of respect the dissent conclud- simply ed that the EDA is a conduit for the sale school ultimately construction bonds whose cost will be borne taxpayers because no other source revenue is available for that Id. purpose. 775 A.2d 586.

II long EFCFA authorizing follows line of statutes debt that has subject not been to the restrictions the Debt Limitation Clause. genesis Clause and interpreting the extensive case law provide it Act, a framework analysis consideration understanding posed and for an questions of the various plaintiffs’ challenge.

A states, As in Jersey’s most Debt Limitation had its Clause origins depression years in the that followed the economic boom of History Margaret Financial Myers, 1830s. See A G. (1970). United 1830s, States only the late a handful of issuing long-term states had refrained from in connection projects, with a variety including “public such improvements” as 5 Service) Moody's (Moody's Corporation Moody’s Investors describes itself leading global rating, analysis publishes credit and research risk firm that securities, opinions, ratings credit research and on fixed-income other credit obligations company publishes rating and issuers of The securities.... opinions range obligations. on a broad of credit These include various corporate governmental obligations, structured securities finance paper programs commercial issued in domestic and international markets. [Moody’s, Moody's: Moody's, http://www.mood- About Introduction to at ys.com/moodys/cust/staticcontent/2000200000265777.asp? section=about & topic=intro.] 444 canals, expansion development roadways of railroads.

Ibid.; 146-47, 281; Clayton, supra, see 52 N.J. at 244 A.2d Auth., 46, 67, Bldg. McCutcheon v. State 13 N.J. 97 A.2d 663 (1953) (Jacobs, Enourato, dissenting), supra, J. overruled 90 449; Proceedings at N.J. V the Constitutional of Finance Convention Committee Taxation and 590 1947: of (1953); Tilton, Amos Constitutional Limitations on Creation Debt, (1951); in II Constitutional Convention 1708 of of 1947 Oxford, Right Approve Susan Voters’ State Debt —How Much Jersey Lan, Allowed? Choice is New Association on v. Correction (1980). Rutgers During 33 L.Rev. years prosperi 202 of ty, easily many engaged sold bonds and states their states heavy borrowing support projects. Clayton, and other those 281; McCutcheon, supra, supra, 52 N.J. at 244 13 N.J. (Jacobs, J., dissenting). at 97 A.2d 663 The boom was followed, however, by of crops the failure American 1835 and 1837,leading to panic banking collapse of and the of 1837 1839. Dewey, History Davis Rich Financial States United 243-44 of (1903); Tilton, supra, at 1709. states affected had most speculated lands, in western become involved in the cotton trade schemes, banking or state or had invested in the Erie Canal. Dewey, supra, By at 1842 nine 224-27. states defaulted on had Tilton, obligations. their supra, 1709.

Although defaulting state, was not it nonetheless sought protect against type experienced of financial debacle by adopting, elsewhere one of the first debt limitation Const, ¶ IV, country. 6, 4; § clauses in art. Proceedings (1942); the Constitutional Convention Tilton, 1709; Oxford, supra, supra, Rutgers L.Rev. at 202. time, At that expressed “opening framers their concern about burthening a door for the State with a debt which would encumber generation generation.” it from Proceedings the Constitu- (1942). Court, Later, tional echoing Convention concern, explained the framers’ that the “prohibits Clause ‘one incurring subsequent Legislatures [that] debts obliged pay, prior approval by would be public without referen-

445 ” City Byrne, Camden v. N.J. dum.’ 82 462 Auth., (1980) Exposition Sports supra, N.J. & 61 N.J. (quoting 545). predecessor essentially unchanged The clause remained in the except permissible Constitution the unre amount given year predetermined strained debt a was from a altered ($100,000) one-percent amount appropriated by of the amount Legislature general appropriation the act for that fiscal Const, ¶ McCutcheon, VIII, supra, year. 3; § N.J. art. see (Jacobs, J., N.J. dissenting). A.2d 663 With that today, states, exception, as in the Debt Limitation Clause part: relevant shall ... create in a ... not, fiscal debt or which any year debts, together with debts or liabilities shall exceed at one any time previous per general centum of the total amount law for that appropriated appropriation object single fiscal unless the same shall be law for authorized a some or year, therein____[S]uch

work law shall distinctly specified provide means, ways loans, exclusive of interest of such due, debt as it falls pay liability discharge also to thereof within from the principal pay thirty-five years time it is shall contracted; and the law not be until such or liability debt repealed discharged. interest and the thereon are No such law shall take fully paid general it effect until shall have submitted to at a been election and people majority legally thereon, voting a of the approved qualified voters State ¶ § [art. VIII, 2, 3.]

B Jersey Property Liability In In re Loans the New Insurance Association, 69, 75-76, (1991), Guarantee 124 590 A.2d 210 explained we that the cases categories.

in which this Court has fall construed debt limitation clause into two group of One decisions holds that the constitutional does not provision apply creation of debt ... entities, [whereas] second independent public corporate generally legislative find[s] line of decisions of intent to expressions provide funding subject future do not debts of present create clause____ limitation way provides That formulation convenient examine our ease law, although interpretive through- there are other strands woven opinions overlap out various of the Court’s as well substantial Thus, categories. example, between the two certain suggest cases Legislature when the has established an inde pendent tolls, repayment, e.g., revenue source for debt turnpike payment general when appropriations from any would in event be necessary expenditure, e.g., lease government installments for offices, the' See, Debt Limitation Clause is not e.g., violated. Enourato, 409-10, supra, 90 N.J. at 448 A.2d (discussing funding payment source for principal of bond and interest in lease case); Auth., Sports Exposition & supra, 25, 61 N.J. at (explaining A.2d 545 that “[f]unds to meet principal interest and solely bonds are derived generated revenues agency’s operation, which special remain a purpose fund for that until fully paid”); the bonds are Clayton, supra, 52 N.J. at (discussing independent A.2d 281 revenue source and lease payments). Those important sub-themes are in respect of the by plaintiffs’ issues raised challenge and we will return to them. 447, 450-53, 462-63, See 98, 99-101, 809 A .2d at 107-08. infra An suggests, however, overview of our cases way that whatever they grouped are case, and whatever particular the focus in a our prior holdings generally consist of single variants on a theme: the Debt applies Limitation Clause only when the legally State is obligated payments to make on the debt Legis authorized lature. involving independent eases exemplars authorities are have,

that theme. We exception, with rare held independent state issuing authorities bonds or obligations other debt that are not backed the State’s full faith and credit are not debts of the purposes See, of the Debt Limitation Clause. e.g., In re Loans, supra, 75, 124 N.J. at (citing 590 A.2d 210 cases that hold Debt Limitation Clause apply does not by indepen debt created public entities); dent corporate Enourato, supra, 410, 90 N.J. at (noting 448 A.2d 449 “[although [Building Authority] Act only contemplates that the State will make necessary result, but also seeks to ensure this the State is so”) (internal legal obligation under no omitted). to do citation McCutcheon, But see supra, 13 N.J. at overruled Enourato, supra, 90 N.J. at (declaring A.2d 449 void Building Authority’s leases, contracts, proceedings because “it that, ... one fundamental in the Constitution succeeding Legislatures duty making charge with cannot fifty years ago, in New appropriations”). More than Authority, supra, a statute authoriz Turnpike the Court reviewed “modern ing Turnpike Authority to construct and maintain solely through “payable express highways” the issuance of bonds (citations revenues.” 3 N.J. at 69 A.2d 875 from tolls and omitted). unambiguous language of the Despite “explicit proposed entirely negatives any possibility of statute [that] ... being debts or liabilities of the State manner [i]n ” State,’ 242, 69 credit of the id. at pledge ‘or a of the faith and Turnpike Authority, argued that the debts of the it was State, responsibility of the State. Id. at a creature of the were the 243, 69 A.2d 875. rejected Court,

Writing Justice Vanderbilt for the Chief body Relying a of law that defines argument. substantial Authority “indepen- Turnpike public corporations such as the entities,” responsible he determined that “the State is dent independent an authori- and liabilities.” Ibid. Because their debts State, the ty and the because stood between bondholder debt, legally obligated on the authority, not the State was found it was not violated. The Court Debt Limitation Clause question whether bonds unnecessary in that case to reach the taxing power, independent of the supported a revenue source ie., Rule, if valid even Special Fund “would have been if Authority, ... and even up had not set the ... 246, Id. at obligations direct of the State.” bonds were fact A.2d 875. later, supported by years invalidated debt lease-

Four the Court independent an au agreements purchase between State 65-66, McCutcheon, at 97 A.2d 663. thority. supra, 13 N.J. that created a State challenge to a statute McCutcheon involved Authority power issue debt in order to Building with the to construct, furnish, buildings operate office for use acquire, entities, facilitiés to the State at amounts and to lease those liquidate “sufficient ... to ... Id. authority. bonds” issued 59, at 97 A.2d 663. Because the acquire State was to Authority’s period, facilities at the end the lease the Court viewed the leases as purchase “installment contracts under the guise Id. of leases” and invalidated the entire scheme. at Jacobs, Brennan, A.2d 663. Justice with Justice dissented. The “generally dissent looked accepted accounting practice ... future rentals [wherein] not considered [were be] debts or liabilities,” id. at statute, 97 A.2d and to the which expressly Authority stated that bonds were not debts of the reasons, New State. For those the dissent would have followed Jersey Turnpike Authority Building Authority and sustained the Act. Id. at 73-74, 97 A.2d 663.

Subsequently, opinion Jacobs, in an written Justice the Comet upheld a authorizing statute Educational Facilities issue buildings bonds for the construction leased to Jersey colleges. Clayton, supra, 52 N.J. at New McCutcheon, Although 281. it adverted to the dissent in to a myriad of upholding out-of-state cases the use of independent an purpose, Clayton, authority supra, 52 N.J. at 149-55, for that specifically Rule, A.2d the Court Special relied on the Fund reasoning that the annual Authority’s rentals on the leases “were mainly intended to come legislative sources unrelated to 154, 244 Id. appropriations.” 281. Jersey Sports Exposition

Similarly, in Authority, supra, & Sports Authority issued fund the construction sports complex in the Hackensack Meadowlands. 61 N.J. A 292 .2d 545. promised The State the bondholders that it would prejudice right or limit Authority the of the to construct and operate sports complex the manner jeopardize that would the bondholders’ obligations interests until the bond paid, were reserving revenues raised from Authority’s operations the for that 12, Id. purpose. 292 A.2d 545. The pledge Court held that the prior approval revenues without voter did not violate the Debt Limitation “generated Clause because the revenues were the special ... remain a fund for that agency’s operation would] [and fully paid.” 292 A.2d 545. until the bonds are Id. purpose Enourato, later, years supra, 90 N.J. at Ten authorizing Building the Authori considered an act the Court $250,000,000 building up in bonds for state office ty to issue operation, challenged the statute much like construction language explaining that the The contained McCutcheon. service, nor was obligated pay neither was the debt State payment. Ibid. The pledging its full faith and credit toward receipts from lease contracts with Authority depended on rental Authority’s obligations satisfy calculated to the the State were result, depended the on on the bonds. Ibid. As bondholders money year pay appropriate “sufficient each repay them.” Ibid. rental fees that are used to Authority did not have an determined that The Court appropriate promise it would enforceable State Id. at payments to cover the lease when due. monies Yet, Building acknowledged that the Authori- A.2d 449. the Court only contemplates that will make the ty Act “not State to ensure this result.” necessary appropriations but also seeks Ibid, omitted). (internal Otherwise, Legislature’s citation only necessary money would not bank- appropriate failure “to obligations, Authority it to default on its but rupt the and force ability subsequently cripple to borrow would also the State’s money any purpose.” Id. at 448 A.2d 449. Court subject were not debts to the held that the bonds nonetheless clearly documents stated Limitation Clause because bond Debt obligation payment to make legal under no that the State was holding, the A.2d 449. In so Court the bonds. Id. at principle “expressly McCutcheon and reaffirmed overruled” Jersey Turnpike in New enunciated Chief Justice Vanderbilt obligated pay is only legally State subject requirements Limitation Clause. Ibid. to the Debt that the debts of an proposition stand for the

Those cases authority under the Debt independent are not debts 450 They rely legal autonomy

Limitation Clause. on the of issuing the authority specific language disclaiming any and on enforceable obligation part on they the of the State. To the rely extent that on availability also the of payments, revenue sources for debt or recognize available, even revenue sources are the cases directly indirectly Rule, Special invoke the Fund of is that the of which a debt limitation in theory purpose a constitution is to taxing of the state from the protect exercise people power pay obligations of the state, therefore such constitutional is not provision

impinged project are upon bonds that payable the revenues solely built with the of the bonds. proceeds [N.J. N.J. at Auth., 875.] A.2d supra, Tpk.

The second line of cases described the Court in In re Loans, supra, 590 A.2d generally holds Legislature’s expression provide funding of intent future subject does create debt the Debt Limitation Clause. cases, those the Court has financing validated bond even when the expectation subsequent Legislatures is that appropriate will mon ey Thus, Holster, meet service on supra, the bonds. in upheld County Act, the Court College Bond which authorized the State and equally the counties to share capital in the costs of building community colleges using whereby a mechanism counties would issue bonds and appropriate the State would pay principal monies to and interest. 59 N.J. at explicitly provided 798. The statute the bonds would liability not be a debt or despite expressed State the State’s payments intention to through make on the appropri future ations. Id. 279 A.2d 798. The Court determined that the Debt Limitation Clause was not violated: Although strong there is doubtless a likelihood that will the bonds payment legislative nothing compelling fact be met by we appropriations, find the statute the State issuing to make such as a matter law. payments Hence, both counties purchasing bondholders are notice that the faith and credit of the will State pledged not be of bonds respect issued to this pursuant enactment, but that on the will payment part be dependent upon appropriations provided Lacking against

from time to time. such can recourse be had appropriations, only against which will have no over county recourse the State.

[Id. at 66-67, 798.] anticipated- projected “a or Holster that It is a basic tenet of liability present debt or appropriation is not a legislative future to make the legislature is not bound future [because a] ... 71, A.2d 798. Id. at 279 appropriation.” Loans, principle. that 124 supra, relied on In In re the Court There, 77, acceptance A. the Court held at 590 2d 210. N.J. Property Liability Insurance from the statutorily-imposed loans (PLIGA) Insurance to the Automobile Guar Guaranty Association Fund) (Automobile the Debt Limitation did not violate anty Fund repayment of the PLIGA provisions ... for “[t]he Clause because payments of future clearly types of assurances fall within loans ” Ibid. In traditionally found not to be ‘debts.’ has that this Court “ case, loans ‘out of repay Fund was to the Automobile subject appropriation ... to ... are available whatever monies met. conditions were and after various other Legislature’” omitted). (internal 72, citation Id. at 590 A.2d 210 holding promises earlier eases State examined Court debt, present a payments did not create future annual make (1973) McCrane, 105, A.2d 857 64 N.J. 312 including Bulman v. & Firemen’s Pension City v. Police Passaic Consolidated (1955). Bulman, Commission, 22 18 N.J. Fund arrangement twenty-five year lease held that a supra, the Court ownership building would assume under which State subject present debt not create a the end of the lease did though future rent installments Limitation Clause even Debt 64 annually appropriated. paid of current revenues would be out Passaic, City supra, Similarly, in 312 A.2d 857. N.J. annually to the Police to contribute requiring the State statute of the Clause Fund was held not violative Firemen’s Pension 22; 18 N.J. at present debt was created. because no (1958) Lanza, 516, 525, A.2d 571 also v. see State municipalities requiring pay certain (holding statute after condemnation equal property taxes lost amounts “[tjhere bargain or is no not violate Clause because reservoir did contractual, legal undertaking to recom- professed conventional pense given revenue, loss of tax truly but rather a ‘voluntary appropriation’ object’ ”), dismissed, for a ‘lawful appeal 358 U.S. (1959). 79 S.Ct. 3 L.Ed.2d 350 law,

Based on that case In re Loans held that the State’s promise payments subject of future does not constitute debt within meaning of the Debt Limitation Clause. 124 N.J. at Notably, 590 A .2d210. the author of In re Loans pointed later out that the loan “arrangement ... integral was an part regulation of the industry [and, further, insurance ... arrangement, that] under the the contributions of insurers were a separate source of revenue directed to meet the claims of threat policy ened Spadoro Whitman, holders.” 2, 11-12, v. 150 N.J. (1997) (Handler, J., A.2d 654 dissenting part).

C Many states employed variety have sophisti creative and financing cated devices much like those used in New large fund capital projects. Some states also have established independent charged authorities with such duties securing as coordinating project funding, implementing agree sale-leaseback ments, issuing by bonds specific backed revenue sources. As Jersey, the state courts that have financing reviewed those mechanisms in the context of debt limitation clause restrictions generally have they held that are constitutionally permissible. See, e.g., Bd., State ex rel. Fatzer v. Armory 174 Kan. (1953) P.2d 143 (evaluating and sustaining Kansas statute that empowered Armory build, Kansas establish, Board to and main tain by armories funded revenue bonds solely by backed State payments); rental Capitol Auth., re Okla. Improvement (1988) P.2d 759 (reviewing and sustaining Oklahoma statute autho rizing Capital Improvement Oklahoma Authority highway issue fees, bonds secured pre-paid taxes, user direct and State Transportation Rainy Funds); Day Mazur, Baliles v. 224 Va. (1982) 297 S.E.2d 695 (analyzing sustaining Virginia statute Virginia under which Building Authority Public charged was with buildings maintenance, public fund- construction, operation and secured State Authority-issued notes and bonds ed payments). rental issuance of bonds approved have state courts

Various other discretionary legislative through future that are debt-serviced fo Jersey, those courts have Again in New appropriations. duty to discretionary the state’s nature of primarily on the cused informing language the bonds appropriation, and clear make the legal obligation to service has no purchasers that the State See, e.g., appropriations or otherwise. through future bond debt Senate, 298, 566 193 Colo. Interrogatories by the Colo. State In re (1977) in order for there to be state (holding that P.2d effect, sense, must legislature, in “one in the constitutional debt discharge the funds to legislature appropriate obligate a future Ky. Transp. v. legislature”); first Wilson created Cabinet, (Ky.1994) (upholding road revenue 884 S.W.2d clearly of loss on language places risk because disclaimer Comm., 116 2d bondholders); Fin. Wash. Dep’t Ecology v. State (1991) and trust (stating that lease 1241, 1245-46 804 P.2d future clause because debt limitation agreements do not violate lease obligated appropriate funds for legally legislatures are not payments). contrary criticized what have that have held to the courts limitation circumvent debt

they legislative decisions to view as discretionary appropriations through use of future restrictions courts are discretionary at all. Those practice are not issued that the bonds accept at face value declarations unwilling to debt, closely examine and instead state do not constitute Gabaldon, See, e.g., Montano v. obligation. of the State’s nature (1989) 1328, (refusing apply literal 94, P.2d 1330 108 N.M. 766 holding unconstitutional limitation clause interpretation of debt rel. Ohio purchase); State ex jail option to county lease with 927, Walker, N.E.2d 932 561 55 Ohio St.3d Mgt. Funds Bd. v. with debt note statute “inconsistent” anticipation (finding revenue effect, thatis, “not practical based on statute’s limitation clause 454 be, is”),

only purports actually it but reh’g for what what it denied, (1990). St.3d 502 55 Ohio 564 N.E.2d Virginia Wyoming

Cases West are instructive as to that considerations have informed in those decisions states. In Authority, Winkler v. School Building W.Va. (1993), Virginia S.E.2d Supreme West Court found that Virginia bonds issued the State West Budding School that Payment violated state’s debt limitation clause. only legislative the bonds secured á pledge was of future Further, appropriations. Id. at proposed 425. language bond expressly purchasers informed provided the funds ‘“are subject appropriation to annual Legislature!!, the State which] obligated legally is not to make in amounts suffi ” Ibid, (internal pay cient to debt service on bonds.’ citation omitted). disclaimers,

Despite unwilling those court was to “abandon logic ... regarding and common sense” nature true Instead, obligation. State’s Id. at 435. the court held that “where only source of funds for general appropria- revenue bonds is tions, logic say it obligation defies that the has no fund such Id. distinguished bonds.” at 433. The court funding mechanism before it approved with others it had in the past, e.g., lease-financing arrangements special fund revenue bonds, stating financing agencies as to lease “that state have recurring services, needs for space utility such as rental services,” 428, and, special bonds, id. at as to fund that such bonds liquidated generated “are out of ... a tax a fee facility or from the itself, road, such tolls for bridge the use of a parking- or garage Id. at fees.” 429. Witzenburger

In v. Wyoming, (Wyo.1978), P.2d Supreme the Wyoming statutorily Court determined that autho- Wyoming rized bonds issued Community Development Authority violated that reaching state’s debt limitation clause. conclusion, beyond the court looked what it described as “the legislative self-serving declaration [were] debts substance, state,” “the and instead scrutinized id. at concluded: Ibid. The court of the transaction. not the form” finding that as a matter of fact and does not The notice on the bonds preclude legislative for and tax is offered as fiat, security payment future money a matter legislature though cannot reached in a round-about way----The bonds, revenue it cannot do directly. do what indirectly omitted).] (internal citations and footnote [Ibid, Limitation approaches to the Debt suggest other Those cases construct, but rather on rely, legal on a analysis that Clause payments or relating to the source of debt practical considerations funded the debt. category expenses D individual require separate and of our Court recent cases Two one, an by plaintiffs, the Court issued relied on consideration. dissent, Spadoro, supra, 150 N.J. at see order with a State, other, discussion by the there is a relied on and in the construction of school financing proposal for the pre-EFCFA of a V, supra, 153 N.J. at Abbott Districts. See facilities in the Abbott 523-24, 710 A.2d 450. Financing Bond challenge to the Pension

Spadoro involved -21, plaintiffs which N.J.S.A 34:lB-7.45 Act of the creation of state establishing a mechanism for alleged provisions of Act violated various approval, the debt without voter Constitution, Limitation Clause. including the Debt' the State the Pension A.2d 654. Under N.J. at Spadoro, supra, 150 Act, approximate authorized to issue Financing the EDA is Bond pay the State’s obli bonds “to in state contract ly billion $2.7 liability pension of several state unfunded accrued gations for the (Handler, J., Payment on the dissenting part). systems.” Ibid. State, “subject legislative to future from the is to come found that majority of the Court Ibid. A appropriations.” dismissing plaintiffs an order and entered was moot matter appeal petition Ibid. Justice Handler for certification.6 filed Stein, opinion, joined by concurring part an Justice in dissenting part. He adjudicate believed the should Court the importance case underlying “because the the issue and the of of ” 3, possibility its recurrence. Id. at A.2d6 695 54. Loans, supra, As in In re Justice prior Handler reviewed our law, but, case on bonding practices, reevaluation of the State’s he suggested part a test that three would consider whether the bonds independent “are authority,” “dependent created an are on a ‘special separate repayment,” fund’ or revenue ... source for dependent “pledge are part on a on the the repay state to formulation, debt.” Id. at 695 Using A.2d 654. dissent that the EDA independent concluded was not authority an governmental because it no “serve[d] function other than to issue itself, effect, the bonds for State becoming, a shield to being insulate the State labeled a debtor.” Id. at 695 Moreover, A.2d 654. test, under the prong second the EDA separate had “no source of ... income [that would] enable [it] to repay the bonds.” Ibid.

Finally, expressed particular dissent concern pro- that the ceeds were to ordinary expenses be used offset “the entailed in regular operation government.” Ibid. Justice Handler prior observed that bond acts validated the Court “involved government purposes, major such capital improvements, as capital provision services,” construction and the special and not the day-to-day operating government. costs of Ibid. He did not prong discuss the third his pledged test —whether State had repayment but, rather, principally relied on the lack debt — “separate of both a repay bonds,” source of income ... fully functioning authority support as for his view that Financing Pension Bond Act violated the Debt Limitation Clause. Financing The Pension Bond Act was dismissed moot as because "the bonds ... were sold Court before the had an ... to hear the on the opportunity appeal merits.” Id. at 695 A.2d 654. case, plaintiffs rely on 11, 12, In the instant A.2d 654. Id. at urge authority” and “persuasive Handler’s dissent Justice reasoning. adopt his Court V, proposal to approved the State’s supra, the Court Abbott repair construction and of school to finance the

use contract bonds During the remand 710 A.2d 450. facilities. 153 N.J. at Burke, 223-26, 693 in Abbott v. 149 N.J. proceedings ordered (1997) (Abbott IV), proposed that the State had A.2d 417 through “private placement” with a Abbott districts issue (EFA), “which Facilities agency, the Educational state V, would, public.” supra, Abbott to the [the bonds] turn sell concerned that specifically, More 450. ratings faced difficulties districts with low bond property-poor Edu financing, Department securing construction school amend N.J.S.A. “recommended that cation . finance the empower the ... EFA to -58 to 18A:72A-1 secondary elementary and schools and renovation of construction V, 523, 710 supra, 153 N.J. at Abbott in the Abbott districts.” observed, they are “[b]eeause court A.2d 450. As the remand difficulty issuing great have bonds property-poor, Abbott districts market, market; they go if could to the bond open even in the rating high interest rate.” carry and would a substandard I) of Remand (App. (Report and Decision at 710 A.2d 450 Id. Court). contrast, proposed EFA anticipated that the In it was rating, and that the districts would receive an AAA bonds would because, arrangement as “construc from the obtain other benefits for con prepare specifications manager” the EFA “would tion enter struction, required, materials for all work and solicit bids contracts, required for immedi any monies not project invest into dispens disbursement, before completed all work and review ate 450. requisitioned funds.” Id. at ing ensure effi- proposal “would found that State’s Court effectively address satisfactory and “would construction” cient and improvements” capital adequate facilities the need plain- As the Abbott 710 A.2d 450. districts. Id. at Abbott tiffs, ease, out, correctly point amici this in Abbott V the Court proposal “accepted preliminary fully the State’s finance needed through construction issuance contract bonds EFA.”

Ill general argument center their more Plaintiffs EFCFA of the class of illustrative statutes authorize unconstitution al debt. The more parties focused discussion of EFCFA various unique underpinning as well as Act’s amici Constitution, permit disposition Education Provision of our claim. EFCFA A largest, comprehensive EFCFA establishes the most school - program in construction the nation. See N.J.S.A 18A:7G-1 to 30; -71; Jersey Department Education, id. at -57 to Summary the Educational Facilities & Construction Financ- Act, ing http://www.state.nj.us/njded/facilities/acU-Summ.htm. Consonant with the mandate constitutional of the Education Provi- sion, passed provide the Act was “to for the maintenance and support thorough system schools,” of a public efficient of free including educating “physical safe, children in that are facilities healthy, learning.” and conducive to N.J.S.A 18A:7G-2a. of that responsibility, furtherance “[¡Inadequa- EFCFA addresses utility, safety cies in quality, of educational facilities [that] State,” among -2b, have arisen local school districts of id. this particularly, most in the Abbott Districts: greatest Educational infrastructure are in the Abbott districts where inadequacies maintenance has been deferred new construction and has not been initiated due to concerns cost. To about the facilities of the Abbott remedy inadequacies districts, engage the State must in a facilities needs and promptly assessment fund the repairing, renovating, constructing entire cost of and the new school facilities determined the Commissioner of Education to be to meet the school required facilities efficiency standards in the districts. districts, Abbott other the State growth must also need in identify view in school anticipated and must population, the cost contribute to of the and renovation construction of new facilities to ensure thorough the of a education in provision and efficient those districts. [Id. at-2c.] EDA, goals, To effectuate its the Act states that the established -21.15, pursuant responsible to 34:1B-1 to N.J.S.A. “shall be financing, planning, design, management, acquisi- the construction tion, construction, completion projects.” and of school facilities the EDA N.J.S.A 18A:7G-13a. EFCFA authorizes “to issue bonds, refunding bonds and incur indebtedness and borrow mon- ey” projects provide to fund those and to for the administrative operating Authority of the and costs connection with its school IcL at construction activities. -14a. financing payment

The scheme for the of the debt on the service bonds involves use of contract bonds. Id. at -17 and -18. The permits Act EDA Treasurer into a and State enter agrees pay contract wherein the Treasurer from the General equal Fund to the EDA “an amount to the debt service amount paid year refunding due to be in the fiscal on the Authority. -17; bonds” issued Id. at see id. at 14c. Those bonds, however, subject proviso authorizing are issued to a bonds, legislation, payment contingent is on annual appropriations by the bonds are not 14f, -17, See id. at and -18. State. 18A:7G-14a, permitted

Pursuant to N.J.S.A is funding purpose issue no more than billion in bonds for the $8.6 billion, existing repairing new schools and facilities. Of that $8.6 fully Abbott districts to fund school billion allocated $6 projects, projects.7 facilities billion to non-Abbott school $2.5 May Ibid. As of one-half billion dollars in bonds had been (Wells, Lonegan, supra, N.J.Super. sold. J.A.D., dissenting). question whether EFCFA bonds should put be issued has not voters. been will designated One hundred million dollars is “for the State share of costs for county projects." vocational school district facilities N.J.S.A. 18A:7G-14a.

B generis. The contract debt authorized EFCFA is sui We any of are unaware other authorized state bonds dedicated to the Indeed, provision constitutionally required in facilities. provisions purpose Legislature specifically of EFCFA the ac knowledges obligation its constitutional under the Education Pro provide adequate buildings every vision safe and school in school district in the State. See N.J.S.A 18A:7G-2a to -2c. V, supra, recognized we Abbott buildings crumbling school in Abbott districts are and obsolescent and that grave receiving thorough this state prevents children from disrepair only and efficient also threatens health education, but their safety. Windows, lighting dangle cracked off runners, their do not broken fixtures open; ceilings; from the alarms precipitously fire and fire detection fail to systems meet standards; even code rooms are minimum'safety heated boilers have leaking critical exceeded their life and are fueled expectancies electrical pumps; falling connections are floors are buckled and dotted with frayed; sinks plaster; teetering; through are toilet are inoperable; broken and and water leaks partitions deteriorating into roofs rooms with patchwork electrical insulation. [153 450.] N.J. at 710A.2d deplorable

Because “[t]hese conditions have a direct and deleteri- impact children,” ous on the education ... available to at-risk we held that State’s constitutional obligation “[t]he educational in- provision adequate cludes the school facilities.” Ibid. That mandate reinforced in our Constitution Article VIII, IV, (the paragraph Provision), Section School Fund where perpetual support “fund for public free schools” is states, provision established. That part: relevant according The bonds of any school district of this issued State, shall law, be and secure investments for the said fund proper and, said addition, fund, including income therefrom and other any moneys duly appropriated of free schools used in support public such manner as the may may law secure the provide by of or on bonds payment principal or interest notes issued for school counties, or school purposes by municipalities districts or for the payment purchases or notes or claims for any any interest such.bonds thereon. ¶ § [art. 2.] VIII, IV, By terms, express its provision permits the State use school moneys fund and “income duly therefrom and other schools, appropriated support to the public Legisla- as the of free chooses, guarantee counties, ture so the school bonds of munici- Ibid, added). palities (emphasis or school districts.” Approved in voters, the separately School Fund Provision autho- rizes state-backed school bonds without reference to the Debt Although Limitation Clause. legislative there is little extant history provision, May 1958 Statement of the State Federation of District Boards of Education of New before the Education Assembly Committee of the simple outlines the purpose behind its enactment —to enable the support State to school bonds.

By allowing debt, guarantee the State to local the School Fund Provision guarantee advances the constitutional thorough of a effect, efficient practical V, education. as noted in Abbott supra, support state allows school districts to obtain more favor able thereby interest rates for their lowering the costs of Indeed, school construction. 153 N.J. at 710 A.2d 450. strategy approved bond appears in Abbott closely V to follow permitted by structure originally the School Fund Provision. As proposed V, hearings, in the Abbott supra, IV remand Abbott I), N.J. at (App. 710 A.2d 450 and as approved by V, authority Court in Abbott purchased State would have local debt and then public. sold that debt to the Id. at 450. We can see little difference financing between the tiered approach originally proposed simpler design and the found in Certainly, EFCFA. debt issued the EDA effectuates the core purpose of the by providing School Fund Provision support state constitutionally for required school construction bonds.8 then, surprising,

It is not approval that the relied State on our Moreover, enacting Abbott V when EFCFA. both the executive note, also, previously power We that we have affirmed the of the Commis- sioner of Education to direct the issuance of bonds a local school district to pay necessary repairs approved school even when the voters have not Dist., 265, 281, Upper Reg'l bonds. In re Freehold Sch. 86 N.J. 430 A.2d 905 (1981). that, good under the legislative branches had reason believe Court, withstand a Debt Limita- precedents of this EFCFA would challenge. example a classic tion Clause EFCFA bonds are non-binding explicit language themselves contain debt. The bonds full faith they to the effect that are not backed the State’s Also, bonds, contract Treasurer credit. between EDA, accompanying and documents the bonds and the and the contract, clearly all indicate that the bonds are the “limited liability obligations of the EDA” and “shall not be a debt or - -17, 18A:7G-14f; 18A:7G-14c, State.” N.J.S.A. see N.J.S.A. respect approved by 18. In this the bonds are similar to in its earlier cases. Court details, Finally, in those its EFCFA tracks mechanisms previously by this Court. In conformance have been endorsed law, power placed in the hands of an with our case substantial independent authority carry range out a wide of activities improvement buildings. related to the construction and of school authority pow That EDA —has broad N.J.S.A. 18A:7G-13. —the financing adequate ers to oversee the and construction of facilities thorough to meet the mandate of a and efficient education for the -5; V, supra, school children of this State. Id at see Abbott 519-20, 710 A.2d 450. N.J. outline, approved by

In its in broad EFCFA was this Court approval long In on that and on our line of Abbott V. reliance validating independent precedents similar debt issued an au- thority, sought obligation fulfill the State its constitutional reason, Jersey. the school children of New For that and because supported by in EFCFA is based the Education Provision and Constitution, Fund of our hold that the Act School Provision we Jersey does not the Debt Limitation of the New violate Clause Constitution.

IV Over five decades of case law in New have established constitutionality variety of contract debt in a of forms and essence, settings. Distilled to its our cases have held that when the bonds impose legal obligation authorized do not on the State they Auth., are not a debt of the Tpk. State. See supra, (“To N.J. at bring proposed A.2d 875 bond issue under the ban of the Constitution it appear must first that the bonds will debts, ”). ‘create ... a debt liability or or liabilities of the State.’ Yet, case, plaintiffs question in this viability the continued of that concept. dissent, Spadoro

In his Justice Handler concluded from his review Financing of the Pension Bond Act that “[i]f the State is permitted to incur order to meet operating current ex- penses, payable only revenues, general the State’s it is hard imagine any debt issuance .agency a state run would afoul of the Debt Limitation Clause.” 150 N.J. at 695 A.2d 654. Concerned about various devices now used to avoid “the ibid., Clause,” adjured restrictions of the ... he the Court to meaning: revisit its “fundamental” evaluating In validity bond issue under the Debt Limitation Clause, we enjoined are accord the status that it provision deserves, that of an namely, structural in our important Constitution. Its essential provision is central purpose government. to the constitutional structure Its broad and fundamentally binding majorities of not important purpose future to the financial policies majorities overriding current must be construed with that constitutional theme mind. Under no circumstance should it be out of deflated read the Constitution as a mere nuisance that serves no provision to define an purpose adminis- except selling trative debt. procedure [Id. 654.] When, Justices Jacobs and Brennan dissented in McCutcheon, Justice Jacobs wrote: authorizing executing the actual leases in us before controversy Legislative and Executive Branches have sound and economical simply applied incurring current business without new state bonded practices any indebtedness or imposing endangering taxes, new without any the State’s credit and without

violating delegates. restrictive constitutional policies expressed by N.J. [13 663.] Justice telling Jacob’s caveat is a reminder of the concerns that brought about the Debt in Today, Limitation Clause it 1800s. appears likely that the “State’s “endanger[ed]” credit” would be if appropriate declined to monies sufficient to cover payments on the contract debt it has authorized. part of our State Consti- Limitation Clause became

The Debt through speculation avoid wished to because New tution conditions that financing by limiting its use. The economic debt Clause, the amount of debt accumulated particularly led to the states, brought collapse “the financial several many about [sjtate Dewey, supra, at 243. One historian governments.” ... conditions as follows: describes those Encouraged which was and commercial enterprise industry expansion during States, half of the century, many in this the first country witnessed invest in such borrowed internal North, money improvements, in particularly developing in the resources; which would aid in their canals, as railroads and largely engage degree borrowed order West, and in a less States South, banking in the States borrowed for commercial enterpris- West schemes, undertakings or too cases either unremunerative proved es. These many and in some of the newer commonwealths for the State to carry; expensive was the determination, an honest even where there there was not particularly maturing obligations of interest and to meet the ability, principal. [Id. 243-44.] taxpayers should generations that future The framers believed generation’s pay for their mistakes. have history, have taken a Perhaps of that other state courts because like See expansive view of debt limitation clauses ours. more We, also, have supra at 809 A. 2d at 99-101. considered authorizing whether a statute the issu other means to evaluate Clause, Debt Limitation includ ance of contract debt violates the independent ing payment on the is derived from an whether general future tax revenue source such that required, will not be or whether the authorized revenues lease/ necessary space office rather than payments are state speculative some venture. approaches provide a useful framework for

Those different analysis. to establish We therefore direct the Clerk of Court briefing reargument in the fall. a schedule for additional financing on the mecha Plaintiffs should center their discussion they objectionable statutes find and on nisms authorized in the case categories those of contract debt reviewed different parties assume in of this and other states. We ask the law presentations their prece- that the intends its Court to reconsider (or subject dents sustaining appropri- contract debt debt to future ations), present argument and to ap- related to other those proaches.

Thus, example, parties for should whether discuss purposes Debt of the Limitation are Clause served when debt sufficient, authorized is a stream. backed revenue Is it purposes analysis, realistically of the revenue is “antici- pated” enabling at the time the statute enacted or should that And, revenue be considered at the time debt issuance? must project (self-liquidat- revenue be derived from the financed tolls, tuition, ing), e.g., turnpike college or can it be from another (the Doctrine, Special supra source Fund see 96-98)? payments Are lease structured to cover service on issued buildings to construct state office payments violation of the Debt Limitation Clause? Must the analysis reflect fair market value Would it if rentals? affect the typical containing gener- lease is a lease terms and conditions ally Although found in payments commercial leases? such resem- “ordinary expenses ble government” that concerned the dissent, Spadoro they/should they can be differentiated from pension parties present contributions? We invite the other relevant dissenting colleague’s considerations based on our view of matters, parties’ understanding those or based on the of the bonding practices. financial markets state Finally, although any dispose we do here these matters, result, suggest any particular parties we ask whether, dissent, suggested discuss by the decision Court’s given should be if future effective date of the State’s bonding practices are under invalidated the Debt Limitation Clause.

Y judgment Appellate upholding Division EFCFA is general challenge affirmed. Plaintiffs’ to contract debt is set down for reargument.

STEIN, J., concurring part dissenting part. in and in appeal The critical issue in this of so- is whether issuance “appropriations” approval called “contract” or debt without voter authorities, independent by unsupported by adequate state an independent by legisla- revenue source and to be amortized annual appropriations, tive violates the Constitution’s Debt Limitations ¶ Clause, VIII, 2, 3,9 § notwithstanding N.J. Const Art. that the liability legal repayment State has no of that debt. The State’s reliance on in appropriations increased recent years undisputed. is approximately That debt amounts to now billion, roughly seventy-five percent or of the total $10.8 State’s undisputed bonded debt. Also is that the State never has default- and, matter, practical ed as a appropriations cannot default on its’ debt, rating agencies regard and that the markets credit and bond appropriations substantially equivalent debt as general obli- gation debt because “a failure to appropriate will result significant types credit deterioration for all of debt issued Poors, defaulting government.” Standard & Revised Lease and (June 2001) (S Appropriation Rating Backed Debt P Criteria & Criteria). Rating The dispute State does not classic description of the “

purpose of the prohibits Debt Limitation is that it Clause ‘one 9 In relevant that clause part, provides: Legislature not, manner, The shall create fiscal a debt or any any year together debts, or liabilities of the State, which with liability previous any debt or liabilities shall exceed at one time centum of total per general amount law for appropriated by that fiscal year, appropriation single object unless the same shall authorized a law for some or work [Sjuch therein____ shall distinctly law and specified provide ways means, loans, exclusive of the interest of such debt it pay liability discharge due, falls also to thereof within pay principal thirty- five from the time it is years contracted; and law shall not be repealed

until such debt or and the interest thereon are liability fully paid discharged. as hereinafter no such law shall take it shall Except effect until provided, general been have submitted at a election and people approved majority legally voting voters of the State qualified thereon. incurring subsequent Legislatures debts [that] obligated pay, prior approval public would be without ” City 133, 152, Byrne, referendum.’ v. Camden (1980) (quoting A.2d 462 Sports Exposition & Auth. v. McCrane, (1972)). 1, 13-14, 61 N.J. 292 A.2d 545 that, even though practical State contends as a matter the Legislature annually appropriate necessary must amounts for debt bonds, service on the Debt Limitations Clause implicated not may compel because “the bond holders principal State to make payments independent and interest on the view, my analysis authorities’ bonds.” In effectively the State’s would write Debt Limitations out of Clause the Constitution nullity. it a analysis render That implies that the can ignore approval requirement the voter of Debt Limitation Clause money and borrow at almost the same interest rate general obligation simple expedient available for of authority an substituting independent state as the borrower State, place though of even appropriations annual state are the primary or of exclusive source funds to amortize the debt. opinion validity

The upholds Court’s of bonds to finance school construction and renovation authorized the Education (EFCFA Act), Financing Facilities Construction and Act or the -44, N.J.S.A. 18A:7G-1 a determination in which I The concur. elects, however, reargue Court than rather decide the critical validity debt, issue of the appropriations contract or an issue that in my view should be decided now and not deferred. public clearly requires question interest this Court resolve the constitutionality appropriations Reargument debt. will delay not illuminate —that determination. —but

I would hold that approval by the issuance of debt voter without independent authority, an unsupported by state an adequate inde- pendent primarily revenue source and to be amortized exclu- sively by legislative appropriations, annual violates Limi- the Debt notwithstanding tation legal liability Clause that the State has no State, repayment for disagrees the debt. No one that as a matter, practical repay appropriations must its debt in order to stability maintain the of its credit in the bond market. As a result, appropriations effectively legislatures, commits future appropriations authorize repayment for debt without voter approval notwithstanding that legal liability the State has no — such debt —in contravention purpose and intent of the Debt Limitation Clause. assuming appropriations ap- debt issued without voter

proval unsupported by independent an revenue source did not Constitution, offend legislative and executive branches obviously heavily have past relied decisions of this Court. Whether or not the extent wholly justified of that reliance was debatable, may be but the reliance itself is incontestable. The Attorney General’s brief states that over a recognized more than period fifty this Court has years, repeatedly

bonds issued by independent authorities, without the State’s full faith and credit, and backed only by promise the State Treasurer to make if payments future Legislatures decide to make for such do not payments, constitute State debt for constitutional purposes. That brief also asserts that enacted EFCFA in part response as a Burke, to this Court’s decision in Abbott v. (1998) (Abbott V), 710 A.2d 450 point and various amici portions opinion of that fairly could be read as endorsing essentially the financing same bond mechanism for school con struction incorporated that was in the Act. Id. at Moreover, 450. fifty excess of put school districts have school construction bond issues on Act, the ballot in reliance on the with a success rate eighty percent. of over

Moreover, explain, 498-500, as I 131-32, at 809 A.2d at I infra also am concerned that the Debt may Limitation longer Clause no be the most relevant contemporary standard for determining whether the issuance of additional economically State debt sound. I note rating that the bond agencies consider the ratio of debt service to annual revenues to be a more gauge accurate of a capacity State’s carry additional Accordingly, debt. I consider likely it to be that a decision invalidating appropriations debt prompt would Legislature give expeditious serious and feasibility consideration to the of a constitutional amendment relating to the appropriations issuance of debt. detail, I 501-06, As later demonstrate in more 809 A .2d infra determining remedy judicial whether for a

invalidation a state on grounds statute constitutional should apply retroactively prospectively, weigh ‘“reliance interests heavily in the shaping appropriate equitable an remedy.’” Glaser, (1983) v. Salorio (quoting 461 A.2d 1100 (Lemon II), 192, 203, Lemon v. Kurtzman 411 U.S. 93 S.Ct. (1973)). L.Ed.2d longstanding Because of the widespread legislative reliance and executive branches government of State prior this Court’s decisions on this issue past fifty years, V, over the specifically including Abbott I am persuaded holding that a that the issuance approval without voter independent an authority, unsup state ported an adequate independent revenue source and to be legislative amortized annual appropriations, violates the Debt Clause, apply only Limitation prospectively, should effective Janu 1, 2004, ary order to afford the time to take appropriate steps, including possible approval of a constitutional voters, preserve amendment submission the State’s access to financial markets.

I challenge Plaintiffs constitutionality contract bond financ- ing complaint seeking injunctive in a declaratory relief and a judgment EFCFA, that the and various other statutes that autho- financing, rize contract bond violate the Debt Limitation Clause. Treasurer, In addition to the State and its the defendants include Jersey (EFA), the New Authority Facilities Eco- Educational Development Authority (EDA), nomic Jersey Transpor- (TFA), tation Trust Fund Sports and the New Exposition Authority (Sports Authority), all of which are independent statutory power Authorities with the to issue contract granted judgment debt. Law Division summary favor 470 defendants, concluding EFCFA and other statutes

all authorizing financing did not violate the Constitu contract bond Division Lone Appellate of the affirmed. panel A divided tion. (2001). State, A.2d N.J.Super. 586 gan v. financing was dissenting bond concluded that contract member unconstitutional, spirit entire noting “ignores it Clause,” line the letter of the first “ignores Limitation] [Debt ‘in prohibits] creating debt manner’ [that Clause J., (Wells, Id. at violation the Clause.” dissenting). remanded the matter to Judge Wells would have injunctive grant court to relief. Ibid. trial challenge consti- Although appeal implicates its to the plaintiffs’ tutionality authorize bond numerous statutes that contract financing, challenge financing provisions contract bond appeal perhaps best illus- of the EFCFA central this my prospective application of determina- trates the rationale for independent financing unsupported an tion that contract bond legislative amortized annual revenue source and violates Debt Limitation Clause. provide

The EFCFA enacted maintenance was “to schools[, system support thorough public of a and efficient of free safe, including educating physical facilities that are children] healthy, learning.” N.J.S.A. and conducive 18A:7G-2a. “[i]nadequa- responsibility, EFCFA addresses furtherance of that utility, safety quality, [that] in the of educational facilities ciés -2b, State,” among have arisen local school districts of this id. at particularly, most in the Abbott Districts. EDA, pursuant provides

The Act established -21.15, financing, responsible N.J.S.A. 34:1B-1 to “shall be for the acquisition, planning, management, construc- design, construction projects.” facilities N.J.S.A. completion tion and school EDA “to bonds and 18A:7G-13a. EFCFA authorizes the issue indebtedness, bonds, fund refunding money” incur and borrow projects provide operating administrative and those and to for the costs of the in connection with its school construction activities. N.J.S.A. 18A:7G-14a. financing payment

The for scheme the of the debt on service the bonds the appropriation involves use of or contract bonds. N.J.S.A. 18A:7G-17 and -18. Act authorizes the EDA and agreement pursuant the Treasurer to enter into an to which agrees pay the Treasurer the to General Fund the to EDA equal “an amount the service due paid amount to be in the year State fiscal on by the bonds or refunding bonds” issued Authority. N.J.S.A. 18A:7G-17. See N.J.S.A. 18A:7G-14c. “special obligations Those bonds are authority,” limited of the State, not the “contain must a statement that effect their Accordingly, any face.” N.J.S.A. 18A:7G-14f. contractual com- regarding payments mitment made the Treasurer from the general “subject fund to meet the debt service on is dependent upon” appropriations by Legislature. annual 18A:7G-17, N.J.S.A. -18.

' distinguishing A feature of school facilities construction to be financed debt authorized EFCFA the need for those facilities in the school so-called Abbott districts been has determined this Court to be a matter constitutional Burke, (1997) mandate. In Abbott v. 149 N.J. 693 A.2d 417 (Abbott IV), Comprehensive this Court held that the Educational - (CEIFA), Improvement Financing Act N.J.S.A 18A:7F-1 to 36, was applied unconstitutional Abbott districts respects including several its failure “to address one most (SND’s)] significant problems facing [Special Needs Districts unsafe, dilapidated, and overcrowded facilities.” Id. at A.2d 417.

We observed: neglects The statute to consider dire need facilities improvement.

Amicus out that omission contributes to the of the statute points inadequacy argu- as a measure remedial and renders it unconstitutional. Contrary ment of State, condition school facilities has been constitu- always Deteriorating tional facilities relate to the educational import. physical State’s obligation, and we have continually noted facilities are an physical adequate essential of that constitutional II, mandate. See Abbott component supra, (“A thorough N.J. at 362, 575 A.2d 359 and efficient education also requires facilities.”); I, Robinson 62 N.J. at adequate physical supra, (“We existing operating have discussed the scene in terns of current expenses. obligation The State’s includes as well the without which the expenditures capital provided.”); educational could not be required see also N.J.S.A opportunity 18A:7A-5(f) (repealed) (stating thorough that one of a and efficient edu part facilities”). cation and secure requires “Adequately equipped, sanitary buildings school in the Many needs districts are special disrepair____ dramatic crumbling The accounts of and obsolescent schools inundate the record. Forty- buildings age nine in the State are one-hundred public-school older. years buildings of those Seventy-three percent are located SNDs. Further- century-old buildings more, of the total number of school forty-one statewide are over percent buildings old. In the fifty years SNDs, are over sixty-four percent fifty old. years (the Funding In 1994,the Governor’s Education Review Commission Commis- sion) “[flacilities found that is a critical which improvement issue must be addressed if educational is to be within improvement achieved the needs special Funding Financing districts.” Education Review Commission, New Jersey’s 1994). (July Public Schools 16 The Commission recommended that the DOE financing a conduct study determine the most method to appropriate “address the unmet facilities needs of school districts.” It does not physical appear such has been and CEIFA fails to study conducted, address the estimated billion facilities needs for New schools.” a Jersey’s Such failure of public “$6 significance disadvantaged constitutional cannot children to achieve expect —we relegated buildings when are that are they unsafe and often of incapable housing programs needed to very educate them. obligation The State as of must, its part under education clause, provide facilities for in children needs districts that will special be sufficient to enable thorough those students to achieve the substantive standards that now define and efficient education. (footnotes omitted) (citations omitted).] [Id. at 186-88, 693A.2d deficiencies, remedy Court, To of its Abbott IV part those remanding Division, order the matter to the Law mandated that the Commissioner of Education assess the facilities needs Abbott districts and make addressing recommendations those needs, id. observing adequacy facilities in “depend Abbott districts could not on the districts’ willingness ability or to raise taxes or to incur debt[.]” Id. 693 A.2d 417. order, response Department the Court’s of Education

(DOE) completed engineering study an only addressed existing deficiencies in school facilities all Abbott districts but in long-term addition the need for new construction. The DOE’s plan contemplated preparation by facilities each Abbott district of Management a Facilities Plan to approved be submitted DOE. a proposal

The DOE submitted to the remand court to finance renovations new facilities in the construction Abbott districts through bonds issued the New Educational Facilities (EFA) Authority repaid appropriations. annual State specific funding The proposal contemplated DOE’s that each Abbott privately payable district would issue bonds to the EFA in equal implementing an amount ap to the cost of that district’s plan. proved facilities The EFA would then sell its public offering, approval, without voter equal an amount to the aggregate districts, cost facilities construction for all Abbott repayment with to be appropriations. financed annual State court remand noted that “EFA bonds rated slightly are lower bonds, general than obligation resulting higher in a interest V, only supra, .1 or rate .2%.” Abbott 153 N.J. at I). (App. A.2d 450 reviewing proposal After the DOE’s to finance districts, renovation and construction of facilities in the Abbott expressed approval funding plan: this Court its rating In the had a districts that bond unable to past, property-poor poor were Recognizing finance construction. this, needed has DOE recommended that amend N.J.S.A. 18A:72A-1 to -58 to Educational empower (EFA Authority) to finance the Facility construction and renovation of in Abbott schools districts. Under the elementary secondary proposed a would in an plan, district issue bonds amount with its consistent facilities needs as in its Plan. district then expressed The would sell these bonds to the privately which in sell Authority, would, turn, them The bonds public. Authority’s rating, using a would “A” receive and the debt be annual triple would serviced from the State. Because EFA-issued bonds are viewed in the general obligation market as one notch less than of the would State, there significant rating Legislature to the State and its credit were repercussions to make an annual appropriation. allowing through Besides with districts credit to finance their poor construction arrangement indirect market this has The other benefits. EFA participation, manager projects. would serve construction for all The would for solicit bids for all work construction, and materials prepare specifications project contracts, enter into invest monies not for required, any immedi- required dispensing ate all disbursement, and review work before completed requisitioned In short, funds. the EFA would ensure efficient and construction. We satisfactory funding determine that the State’s and administer proposal provide for would address the need capital improvements effectively adequate facilities and capital improvements. (citation added).] omitted)(emphasis [153 A.2d 450 emphasized underpinning We also the constitutional for our fully remediating mandate that the all facility fund costs of capacity deficiencies in Abbott districts: funding We conclude that formula that does not fund the any cost of complete remediating the infrastructure and life cycle deficiencies have been identified in the Abbott districts or that does not fund the construction of new fully any classrooms needed to correct deficiencies will not with capacity the State’s comport thorough constitutional mandate to facilities to ensure a provide adequate efficient education. [153 450.] N.J. at 710A.2d recognition in both Abbott IV and Abbott V that thorough

constitutional mandate of a and efficient education also encompassed adequate the need for educational facilities echoed earlier decisions this Court to Upper the same effect. In In re District, Regional Freehold School 86 N.J. 430 A.2d (1981), upheld we an order the Commissioner of Education mandating that a school district issue finance essential repairs structural regional high to the roof building school despite prior rejection project on two occasions voters concluding school district. the absence of voter approval preclude did not ordering Commissioner district to issue critically bonds to finance the repairs, needed we stated: recognize obtaining We that the traditional and method for preferred necessary project of bonds for a in a approval II district is to capital obtain voter Type In this approval. case, however, the critical situation spite faced the local rejected seeking the voters

board, twice referenda of the issuance of the approval Although Legislature bonds. has that voters of a school provided district may authorize the issuance of bonds, the has not that voter specified is the method. The lack of approval only acceptable such restriction should be light assessed of the constitutional mandate and for a statutory provisions thorough rejection, and efficient education. We that, conclude after voter the project Commissioner authorize issuance of for a for a may capital public school. N.J.

[86 905.] 430 A.2d Elizabeth, also City See Bd. Educ. Elizabeth v. Council of (1970) (“Thus duty it is the every Commissioner to see to it provides that district a thorough system. necessarily and efficient school This adequate includes materials, physical facilities and educational proper curriculum funds.”). and staff and sufficient Legislature’s

In addition obvious this reliance on Court’s apparent approval in Abbott V of the essential elements of the capital funding Act, adopted by mechanism the record informs fifty us that over school throughout districts the State have relied by seeking approval Act capital financing voter for EFCFA, projects eligible financing construction for under Moreover, eighty percent. with rate of success over all of the have approval Abbott districts submitted and received of their Long Range required by Facilities Plans Act. conclu- is inescapable Legislature sion that both the and the affected school districts have relied on the constitutional mandate adequate school facilities and this Court’s Abbott decisions in the enactment of EFCFA planning approval process and in the proposed for the renovation and construction of school facilities.

II In addition its reliance on our decisions Abbott IV and adopting financing Abbott V mechanism contained in the EFCFA, Attorney apparently General have relied on series of prior support decisions this Court assumption their that authority the issuance of a state approval, obligated without voter legally State is not repay, does not violate Debt Limitation A Clause. careful analysis suggests may those decisions reliance reflect overreading precedents. an our chronological A brief review of Limitation will illumi- concerning the Clause

our decisions Debt nate the issue. holding case, only that the one of two cases earliest

The violated, the of Errors and was is Court Debt Limitation Clause Commission, Supply v. State Water 84 Appeals decision in Wilson (1915). validity in Wilson was 150, the A. N.J.Eq. 93 At issue 732 by Supply Commission into the Water of a contract entered purchase price a land of purposes tract of for a acquire to for state by by dollars, mortgage be amortized secured a to one million Attorney Legislature. The annually by the appropriated funds it sought enjoin ground on the to transaction General of the Limitation Clause. violation Debt authorized State reasoning chancery injunction, that the debt The court denied by by not the State. had incurred the Water Commission and been Appeals “there Reversing, the Court of Errors and observed that why in the very practical are the word ‘debt’ Constitution reasons payable by legislative appro to include those should be construed N.J.Eq. 159, A. court priation!;.]” 84 93 732. The added: dealing this of the with of these down pare provision all attempts must in mind that it is the one constantly only it be borne Constitution, right a law it has been by instrument which the after enacted upon entire pass Legislature a be is reserved to the Such should people. provision expressly object, its is frustrate, so as to which latter result effectuate, construed magnitude a can, a of this if the of accomplished propriety purchase surely citizens____It general or five cannot be that the law, be turned over four bodily constitutional functions can this wholesale abdication of its defeat organic of law. unique provision [84 732.] A. 159, 93 N.J.Eq. Parsons, Jersey Turnpike Authority v. 3

New (1949), Debt Limitation Clause decision this 875 first Court, constitutionality provisions of the concerned and. L.1948, Act, 454, L.1949, Authority Jersey Turnpike c. ec. to issue revenue bonds that authorized enabling Jersey Turnpike. The finance of the New construction “payable solely from legislation provided that the bonds shall that such “shall not be [turnpike] tolls and revenues” and bonds liability ... a debt of the State or deemed to constitute pledge the faith and credit the State.” The Court held that Turnpike Authority did Act not violate the Debt Limitation Clause, noting Turnpike Authority, that the although created State, an independent entity was for whose debts the State liability. had no Id. at emphasized A.2d 875. Court statutory language explicitly stating Authority’s that the State,” “shall not be deemed to liability constitute a debt or language stating as well as the repaid the bonds were to be only project. tolls or revenues the turnpike Id. at explicit A.2d 875. In statutory provisions, view those the Court availability declined to decide whether the of a dedicated revenue source, itself, in and of was sufficient to sustain Act’s constitu tionality. Id. at 875. Jersey

Behnke v. Highway Authority, New 13 97 N.J. A.2d (1953), implicated only the Debt Limitation indirectly. Clause Act, issue constitutionality At was the Guaranty of the so-called L. 1952, 17, c. that guarantee payment authorized the State to of the principal exceeding $285,000,000 and interest on bonds not issued by the Highway Authority to finance construction of Parkway. the Garden State with Consistent the Debt Limitation Constitution, authorizing guaran Clause the the Act the State’s ty Highway Authority’s of the bonds was to the submitted voters general Nevertheless, at the 1952 approved. election and was the Guaranty VIII, II, challenged Act violating was as Article Section paragraph 1 of provided: the Constitution that credit of “The the directly indirectly State shall not be loaned in case.” Rejecting contention, by compli the Court observed that if ance with the Debt Limitation Clause the State could incur the itself, necessarily debt it “provide followed that the State could in public the service of the support necessary interest the financial performance for an economical and undertaking, efficient of the guaranty payment the form of an unconditional the of the bonds Authority issued the to that end.” Id. A.2d 647. Accordingly, validity Guaranty the Court sustained the of the Act. Authority, 13 Building v. State

McCutcheon (1953), Jersey Building Au v. New Enourato overruled (1982), 396, 410, only is the other 448 A.2d 449 thority, 90 N.J. it authorized the issuance of a statute because case invalidate The statute in of the Debt Limitation Clause. violation Authority an Building inde established the State McCutcheon buildings only lease agency acquire for pendent state authorized acquisitions by issuance their the to the State and to finance bonds, solely by approval, to be amortized rentals without voter Authority. The statute mandated that paid by the State liability debt or of the Authority’s did not constitute a bonds paid The rentals and the bonds be so endorsed. State an to amortize the required were to be in amount sufficient constitutionality Authority’s challenged of the The suit debt. specific enabling legislation, challenged four leases be also Authority ground State’s tween the State aggregate obligation under those leases also violated the rental Limitation Clause. Debt vote, as violative of

By a 5-2 the Court invalidated the statute although noted that the Debt Limitation Clause. Court payments Authority to the rentals “are denominated as the State’s purchase price property, effect in substance and defray Authority’s they in amount to are be sufficient liquidate principal operating expenses and the end thereon,” accruing id. the interest producing ... that the was “non-revenue observed taxation,” wholly moneys raised dependent upon state id. [and] ' 62, 97 stated: at A.2d 663. Court providing building in in of the State with leasehold interests While form way design in act is to the facilities for the enable State use, by public reality buildings to for state use and constructed contracts purchase acquire possessed the the means of issues sustained State’s to by promise bond by Authority by guise in the the available money bonds, of rentals sufficient to liquidate only supply through disregard of And this in medium annual appropriations. organic limitation the restraints laid law upon constitutional debt is it is not the form but the label unimportant; appropriation process____The It is truism constitutional limitations essence that controls. an obvious may naught not be set at indirection.

[Id. 57, 663.] at 97 A.2d Dissenting, Justices Jacobs and Brennan were satisfied that the Debt Limitation Clause was not offended because the as- State liability bonds, Authority’s sumed no for the and also asserted that Authority acquire buildings the State’s use of the to that the State previously occupied and occupy would continue to constituted a (Jacobs sound business decision. Id. 97 A.2d 663 Brennan, Jr., JJ., dissenting). Their observations about the likeli- occupy hood that buildings the State would whether or not that, owned could suggest be understood to value, buildings’ the extent of the Authority’s fair rental debt issuance did not appropriations. increase State rejected challenges

Debt Limitation Clause were on similar City Passaic v. Consolidated Police and grounds in both Commission, Firemen’s Pension Fund 18 N.J. Lanza,

(1955) (1958). and State v. 27 N.J. 143 A.2d 571 Passaic, City amendment, L. at issue was a 1952 c. that, concerning pensions police firefighters the statutes in part, obligated ensuing thirty years over the to contrib annually pension ute to the fund such amounts as would be required solvency. Unanimously to restore the fund to rejecting challenge, constitutional the Court observed “[n]o here, has been created present legislation merely but rather provides annually that the State shall contribute to the fund.” 18 Lanza, Similarly, challenged 113 A.2d 22. statute authorized the then Commissioner Conservation and Development acquire Economic County land Hunterdon supply system, obligated establish a water and also the State to municipalities gradually decreasing reimburse the affected property amounts for acquisi taxes lost reason of the State’s property, tion of the proceeds the State to be reimbursed out of rejected received from the sale of water. The Court the conten obligation municipalities statutorily tion that the imposed to the the State violated the Debt Limitation Clause. The Court ob “[tjhere contractual, bargain professed served that no con legal undertaking recompense given ventional or loss of tax 480

revenue, truly ‘voluntary appropriation’ rather but a for a ‘lawful ” omitted). (citations object.’ at N.J. 27 143A.2d571. Kervick,

Clayton v. 52 N.J. (1968), 244 A.2d was declaratory judgment against by filed action the State Treasurer Acting the validity Commissioner of Education to test the of a establishing statute the New Educational Facilities Author L. ity, 1966, c. Authority independent 106. The agency was an empowered projects participating construct educational be Authority institutions to financed bonds issued the that liability were not be implicate deemed a of the State nor pledge of State’s projects the credit. The undertaken the Authority generally revenue-producing were to involve facilities Id. such as dormitories. at A.2d 281. The facilities constructed were to participating colleges be leased to the return for rentals sufficient to cover amortization the related “ bonds, colleges expected and the were to pay ‘by the rentals ” deriving projects,’ revenues from such using also annual 144, 244 Id. Legislature. received from the A.2d 281. The stipulation matter was tried on a of facts that acknowl edged Authority’s anticipated the bond issuance would exceed triggered requirement the amount approval for voter Id. under the Debt Limitation Clause. 281. upheld constitutionality The Court legislation rejected the proposed contention that the bond issuance violated Clause, the Debt Limitation relying essentially fact colleges primarily generated would use projects revenues from the Authority. source of payments rental to the The Court analogized funding mechanism self-liquidating financing to the Jersey Turnpike Authority, sustained in methodology supra, 69 A.2d875. Although along these with decisions, McCutcheon, the dissent to us appear the more clearly Educational Facilities persuasive, stands on even Authority ground. Building firmer in McCutcheon Authority was created to aid the government State and, statute, under terms it its explicit could lease buildings designated whose rental only departments would come payments legislative entirely On the other appropriations. hand, the Educational through Facilities was created to benefit public expansion college and facilities within the and the annual university State, rentals on its participating leases with the and educational institutions were public private legislative intended to come sources unrelated to mainly appropriations. mind, With that in its the to operations may favorably compared many self- liquidating projects which have been in our sustained State and elsewhere. light foregoing, expressing In the of all of the we have no in our hesitancy agreement holding legislative trial with the court’s that the in embodied the plan Educational in Facilities law did not violate the limitation anywise (art. 3). § clause of the Constitution VIII, II, par. added) (citations (emphasis 52 N.J. at A.2d 281 [Clayton, supra, omitted).] Hall, concurring part in dissenting part, agreed Justice and in the independent distinguish that revenue source was sufficient to McCutcheon, earlier, years the case from decided fifteen but expressed majority concern that the had “whittled [McCutcheon] substantially nothing down that so is left.” He added: agency of a so-called autonomous between the and interposition agency the state benefited such a situation is to department me, realistically, doing means of a what only conduit be done indirectly by may validly directly, absent referendum approval. longer project If it is felt we can no live with the debt limitation and aid public ought of the 1947 Constitution, be amended the provisions they prescribed through legislative judicial method rather than nullification or evasion and sanction thereof. (Hall, concurring dissenting part).] [Id. at 97 A.2d 663 159, J., part County College, Holster v. Board Trustees Passaic 59 N.J. of of (1971), challenge 279 A.2d 798 was the first case in to a which allegedly subject issue bond to the Debt Limitation Clause and to solely by legislative appropriations rejected by be amortized was Court, notwithstanding independent the the an absence of revenue constitutionality source. The issue in Holster concerned the of the Act, County College L. Bond C. a statute intended to implement provisions original County College enabling legislation, County colleges L. 1966 C. authorized apply support up for and receive State of one-half the cost capital projects. County See N.J.S.A. 18A: 64A-22. The College contemplated County Bond Act in which the County bonds, College proceeds was located would issue and the applied pay fifty percent

would be the State’s share of the capital project, payments principal interest maturity paid solely legislatively to be authorized appropriations. specified pur- The statute also that bonds issued suant to the Act “shall not be deemed to constitute a debt or liability pledge of the State or a faith credit State....” N.J.S.A 18A:64A-22.8.

Unanimously sustaining against challenge the statute on based Clause, “accepted the Debt Limitation Court relied that, principle statutory interpretation possible, if legislation be so Id. constitutionality.” will read to sustain its A.2d 798. The Court also focused on the fact issuer was a State, County emphasized rather than the analogy its Passaic, supra, 137, in 18 N.J. earlier decisions 113 A.2d 22 and Lanza, 516, supra, 27 N.J. 571, 143 A.2d in which cases statutes imposing obligations payments State to make of appro out annual priations against were sustained Debt Limitation Clause chal lenges: Passaic v. Of the eases discussed Police, Consolidated etc., Pension Fund above, Commission and State v. McLean Lanza are closest in to the matter point before us. In each of cases, those as is true here, the statute under review funding for, clearly or purported provide future or of anticipated, repayment legislative a or proposed commitment later expenditure and in appropriation, each case this was held not to create a or on the of present liability part language College might State. of Bond which Despite County seem on Act, its face to the State to we do pay bonds, not so require the statute. interpret noting Eather, as we must the declaration in explicit the act itself that obligations bearing shall not of be debts in mind the trend of own State, our obligation decisional our law mindful of to sustain as constitutional

legislative enactment if that can we done, the bonds are reasonably repeat obligations not the but of the counties only that decide issue them. Furthermore a turn to county the State exoneration or may reimbursement. [Holster, 59 N.J. supra, 73, 798.] 279 A.2d Approximately year decision, one after the Court’s Holster a (4-3) sharply divided Court the constitutionality sustained L. Jersey Sports Exposition Authority Law, New c. & against a Jersey Sports challenge. Debt Limitation Clause & Exposition McCrane, v. supra, Auth. 61 That 545. statute was enacted to facilitate the sports construction complex in the Hackensack meadowlands to include a racetrack facilities, racing for horse and other and to that end established as independent authority Jersey Sports Exposition an the New & Authority. Authority empowered That was to issue bonds to project, finance the cost construction of the overall and the fees, solely funds to amortize those bonds were be derived charges Authority’s revenues and other for use of the facilities. A major Authority’s source of the revenues was to be derived from a pari-mutual wagering, horse race track with of which one-half of State, percent paid annually one would be to the and the balance bonds, during Authority’s the life of the to the was be allocated making in payments for use amortization on the bonds. constitutional issue divided the Court arose because the 1939 Amendment the 1844 Constitution authorized horse racing pari-mutual wagering with “from which the State shall support government.” derive a reasonable revenue for the Id. incorporated 292 A.2d 545. That 1939 Amendment was ¶ IV, 7, 2, gam- § the 1947 art. that referred to Constitution “ to, bling by majority ‘heretofore submitted and authorized ” people special the votes cast at a election.’ Id. at (Weintraub, J., concurring part dissenting A.2d 545 view, part). In the dissenter’s Amendment to the Constitution, Constitution, incorporated in that was the 1947 com- State, pari-mutual betting mitted all and the revenues from to the provision Sports Exposition Authority appropriating in the & Act (except percent) those for one-half of one to the Authori- revenues ty a in constituted State debt violation of the Debt Limitation 48, (Weintraub, J., concurring part Clause. Id. at 292 A.2d 545 in dissenting part). majority disagreed, observing purposes that for of the 1939 Sports Authority regarded agency Amendment the be as an must receipt pari-mutual of the and that its of revenues satisfied requirement the the a Amendment’s State “shall derive support government.” reasonable revenue for the of Id. at 292 percent A.2d 545. The Court also noted that the one-half of one pari-mutual wagering generate ap- retained the State could $1,700,000 proximately any annually, remaining and that revenues required by Id. paid the the were State. 545. The Court therefore concluded that the statute did not the violate Debt Limitation Clause reason of the 1939 Ibid. Moreover, Amendment to the 1844 Constitution. the Court rejected financing also the contention that scheme amounted pledge repay bonds, to a of the State’s revenues to Authority’s noting expressly stipulated that the bonds that the State was not Id. liable therefor. 292 A.2d 545. The Court also observed: government avoiding [the The modem science of has a debt] found method clause, and courts have it. It is create an autonomous approved public to undertake the task and to borrow for corporate entity on its money purpose bonds____ own Funds to meet interest the bonds are principal derived generated agency’s from revenues solely which remain a operation, special for fund until the bonds are purpose fully paid. (footnote omitted).] [Ibid Hall, joined Justice who with Justice Proctor Chief Justice separate opinion, Weintraub’s opinion filed his own in which he effectively concluded that the Court had nullified Debt Limita- tions He Clause. wrote: Whether statutory enactments of this fall within four comers of type judicial is a for provision certainly question determination. That has question nothing bring do with wisdom of the statute nor does it into validly play judicial legislative rubrics about deference to action, of constitutional- presumptions majority’s and the like. The ity stress thereon misses inappropriate wrong And I think it point. for a court to aid quite evasion a constitutional ago, last

provision, adopted only because it believes years that provision judiciary outmoded. The function of the is to enforce all constitutional provisions government all branches of and not to act as an upon Ad hoc constitutional nugatory disagree. convention render summarily with which it provisions may (Hall, concurring [Id. at dissenting part).] J. part McCrane, Bulman v. (1973), 312 A.2d 857 did not There, involve the issuance of taxpayer bonds. sued to enjoin the entering twenty-five year State from into a lease on a building private developer to be erected on state-owned land storage use as a record printing facility. center and Under the lease, proposed the State option purchasing would have the building tenth, during the years fifteenth and twentieth and, building option, if not exercise its title to the lease it did term. to the at the end of the lease would revert was, in plaintiff purported that the lease transaction contended aggregate reality, purchase agreement and that the an installment incurred payments amount of lease constituted State indebtedness in violation of the debt Limitation Clause. transaction, Chancery enjoining the

Reversing the Division decision McCrane, 213, 240, N.J.Super. lman v. 302 A.2d 163 Bu (1973), generally observed that “the lease terms are Court theory opposed harmonious with the of a lease as sale.” 64 required N.J. at 312 A.2d 857. noted that the lessor We was repairs, and that the rent pay property taxes and make exterior building it unusa suspended damage if to the rendered would Moreover, complete repairs within six ble. the lessor’s failure to of the lease. months constituted a basis for the State’s termination building Ibid. Primarily, the stressed the fact that the was Court have property and therefore would to be erected on state-owned lease, developer a circum minimal value to the at the end justified permit the builder to a rental sufficient stance Id. capital during the lease term. recoup his entire investment factors, 116-17, those the Court deter 312 A.2d 857. Based on purchase, a lease rather than a mined that the transaction was debt, only and that the State’s it involved no issuance of obligation was “for future installments of rent.” Id.

A.2d 857. construing the Limitation opinions all the Court’s Debt

Of Clause, Enourato, supra, 90 perhaps prior precedents. difficult to reconcile with the Court’s most constitutionality of the New Enourato involved challenge to the 1981, 120, Act, L. c. that established the Jersey Building Authority Jersey Building Authority purpose acquiring land for the agencies. buildings operating office facilities for state in amounts not The Act authorized the to issue bonds $250,000,000 building acquisition, finance land con- exceeding costs, the debt of such bonds to constitute struction and related only Authority Buildings the and not of the State. constructed Authority the would the be leased to State at rental suffi rates Authority provide cient to pay the with funds to the amortization bonds, payments all subject costs its rental to to legislative appropriations. sample The lease in included the record revealed during that the pay term the lease the State would all expenses insurance, buildings, including related to the that and at the expiration of the to buildings lease title the conveyed would be During the State. the term of the lease acquire the State could a specific building by discharging Authority’s obligation on the related bonds. Building Authority, Enourato v. N.J. 182 N.J.Su 58, per. (App.Div.1981). 440 A .2d42 rejected The Enourato Court plaintiffs contention that financing Act’s Clause, mechanism violated Debt Limitation process, 410, 449, in and 90 N.J. at 448 A.2d overruled McCutcheon, 46, supra, 13 N.J. A 97 .2d 663. The Court relied expressly prior 138, on its Clayton, supra, decisions in 52 N.J. 244 281, Holster, 60, supra, 798, Bulman, A.2d 59 N.J. 279 A.2d supra, 105, 857, 64 N.J. 312 A.2d to support its conclusion. In doing so, acknowledge it did Clayton not a fact critical to paid Court’s decision was that annual rentals colleges support bond payments amortization the Educational Facilities Authority mainly “were intended to come from sources unrelated legislative appropriations,” Clayton, 154, supra, 52 N.J. at 281; A.2d that in Holster the Court relied on the fact “that the obligations bonds are not the only of the State but counties them,” Holster, that decide to supra, issue 59 N.J. at 798; and that the issue in Bulman involved no debt issuance but twenty-five-year rather whether a lease between the State and a private developer was purchase more akin to an installment transaction than analysis a lease. The Court’s was summarized paragraphs: few succinct financing No relevant distinction exists between the schemes in those upheld Holster] Building

cases [Clayton the New Act. Authority The Authority’s bonds notes are not a or liability State. state They pledge on their face that the State not does its faith and credit to their payment. Although State will make the necessary the Act not only contemplates legal this the State is under no result, but also seeks ensure obligation creditors have notice that their only remedy to do so. Authority’s against the lies Authority. agreements with the Nor does the of the State on its lease Authority liability clear that all debt of the State. Both the statute and the lease make create any subject legislative Moreover, rent from the State are appropriations. payments violating for future rentals without the debt limitations the State incur may liability not clause. Plaintiff does contend otherwise. Building not creation of debts by Act does authorize the any Since (1947), § V limitation's N.J. Const. art. VIII does State, clause, the debt obligations of the State its lease to the debts Authority’s apply agreements result with the We have Authority. already disapproved contrary Building divided Court in McCutcheon v. State Authority, reached by sharply (1953), and now overrule that case. expressly (citations omitted).] 90 N.J. at 448 A.2d 449 [Enourato, supra, Liability Jersey Property Insurance Guar In re Loans Newof (1991), Association, 69, although 590 A.2d 210 anty N.J. issues, on the Limitation was decided implicating Debt Clause contingent repayment mechanism to the that basis State’s (PLIGA) Liability Guaranty was Property Association Insurance validity constitute State debt. At issue was too uncertain to Order, pursuant to the promulgated Department of Insurance 8, 1990, 1990, L. c. Reform Act of Fair Automobile Insurance approximately to collect annual assessments requiring PLIGA loan, million paid, as a property-casualty insurers to from $160 (Auto Guaranty Fund Jersey Automobile Insurance into the New Fund). expressly provide repayment for of the loan

The Act did not purpose proceeds the use of except to authorize for that surcharges for certain motor vehicle of Motor Vehicle Division convictions, drunk-driving after termination of violations and (JUA) on certification Underwriting Association Joint surcharges longer were that such no of Insurance Commissioner 74, Relying 210. debt. Id. at 590 A.2d needed to fund the JUA Lanza, 187, 22, Passaic, supra, supra, 113 A.2d City on 18 N.J. 516, 571, Byrne, supra, City v. 143 A.2d and Camden 27 N.J. 462, 133, provi that “[t]he the Court determined repay- [the] [ ] under the Reform Act and Order sions made clearly ment of the loans fall types PLIGA within the of assur- payments traditionally ances of future that this Court has found ” 77, not to be ‘debts.’ Id. at 590 A.2d 210. The Court continued: contingencies— of the PLIGA loans a number of repayment depends upon remaining surcharges will there be funds from motoi’-vehicle violations after discharge of the JUA debt; the Commissioner of Insurance will approve of such funds to the will application vote the repayment; and that the Treasurer will necessary appropriation; release of the funds. approve we conclude that the Thus, State’s of the loans from acceptance PLIGA does not create a debt of the State and therefore does not violate article section VIII, II, paragraph 3 of the New Constitution. [Ibid.] implicated Because the PLIGA case the Debt Limitation Clause only tangentially, minority opinion Whitman, Spadoro v. 2, supra, 654, essentially 150 N.J. 695 A.2d constitutes the most judicial extensive discussion of the Debt Limitation Clause members of this Court since the Enourato decision in 1982. The appeal Spadoro challenged constitutionality of the Pension (Bond Financing Act), Bond 114, Act of 1997 L. c. violative of the Debt Limitation Clause. Because the bonds authorized “apparently the Bond Act were sold before the opportunity Court had an to decide whether appeal to hear the merits,” id. at 695 A.2d the Court dismissed the appeal as moot. Justice separate opinion, Handler’s concurring in part dissenting part, asserted that validity the issue of the adjudicated of the Bond Act should be importance because of its recurrence, likely id. at if even it were too grant injunctive late to sought by plaintiff. relief The Bond Act authorized the New Economic Develop- (EDA) ment approximately to issue billion $2.7 pension systems’ order to fund the aggregate liability unfunded noted, that was estimated at billion. As annually $3.2 the State appropriates defray funds to obligations pension State’s to its funds, including annual pension contributions to fund benefits prior years earned in adjustment and to cost-of-living fund bene- payable by fits pension the various funds. The accrued unfunded primarily related to unfunded liability approximately billion $3.2 Id. at cost-of-living 695 A.2d 654. benefits. L. statute, c. contemporaneously enacted

Because a pension systems’ assets to reflect authorized a revaluation of issuance, appreciation proceeds and the of the bond and market anticipated occur over a amortization of the bonds was to because prior for amortization of period shorter than the State’s schedule liability, anticipated Act that the bond its unfunded Bond sufficient to eliminate the State’s unfunded proceeds would be savings liability significant also result in annual to the State as and 4-8, Id. at 695 A.2d 654. well. provided special were

The statute also the bonds liability EDA and not be a of the obligations limited “shall instrumentality any agency or thereof.” The Bond Act State enter into contracts with the authorized the State Treasurer issue, obligations but EDA to fund its amortization under the bond subject obligation under such contract would be the State’s dependent on annual 6-7, Id. purpose. at 695 A.2d 654. approv- minority opinion prior concluded that without voter Clause. al the EDA bond issue violated the Debt Limitation cases, Justice Handler Referring prior Debt Limitation Clause clearly independent that in those cases “the authorities were noted special and discrete separate governmental entities that served solely functioning EDA governmental purposes____Here, is, context, It in this a mere shell as a conduit sell bonds. governmental function other than to issue the bonds for serves no effect, itself, becoming, in the State shield to insulate being labeled a debtor.” Id. 695 A.2d 654. indepen- EDA had no observed that Justice Handler also funding source for amortization its bonds. dent created source of income had been Furthermore, other cases separate funding their authorities as a basis for separate operations independent 52 N.J. fulfilling their See Clayton, supra, specific public purposes. (rental colleges made various A.2d 281 public private payments income); 3 Auth., Jersey Turnpike supra, constituted source separate 490 (tolls at 69 875 and A.2d other revenues constituted source of separate

income). governmental Act, Under the Bond the EDA has or no function purpose funding of such, as and no is to requires source income created separate enable the EDA to the bonds. repay [Id. 654.] 695A.2d addition, distinguished purpose Justice Handler of the Bond cases, prior noting Act from [ ] unlike other bond issue its and its are directed previous purpose proceeds regular govern to entailed in the of only defray ordinary expenses operation ment. In the debts incurred the State in past, compliance with the Debt governmental generally Limitation Clause have debts been that relate to purposes regularly recurring distinct from the of the State. Previous bond issues operations major government have involved such as purposes, capital improvements, capital of construction and the services. See provision Enourato, 90 N.J. special supra, (State Building 396, 448 A.2d 449 created which issued bonds to Authority, build agencies); facilities for state Bulman v. 64 N.J. 312 operate McCrane, (1973) (State building A .2d 857 contracted to have in return constructed for its agreement building to lease the for for year term use as a records twenty-five storage facility); printing center and v. Holster Board Trustees Passaic Cty. of (1971) College, (County College 59 N.J. 279 60, A.2d 798 Act Bond enabled counties outlays); to issue of which bonds, were to be devoted to proceeds capital (State 52 N.J. created the New Edu Clayton, supra, projects cational Facilities issued bonds to construct for Authority, which partici institutions); pating Auth., educational Jersey Turnpike supra, (State legislature

A.2d 875 created the New Jersey Turnpike which roads). issued bonds construct toll The Bond Act for the issuance of billion in provides approximately $2.7 generate for the moneys accrued unfunded of various pay liability pension The is systems. created order to meet current and future pension contributions. The provision a pensions public simply employees part obligation regular the State’s its and is compensate employees, a function clearly government government operating an ordinary expense. [Id. 654.] at 10-11, 695A.2d minority opinion The by observing concluded if the Bond Act were the Debt constitutional Limitation Clause would be nullity: rendered underlying the Bond Act is that the apparent assumption restrictions of the substituting Debt Limitation Clause avoided may device of an merely though rather than

independent authority, State, debt, as the issuer of the even genuine no has authority source of independence separate revenue of the bonds marketability rests on the exclusively State’s commitment entirely make amortization come due. payments they Moreover, availability insurance, a substantial premium cost, for the compensates substantially pledge credit worthiness that direct of the State’s credit would have If achieved. together the combination of an with bond independent authority issuer, insur- the State to avoid ance, the Debt Limitation permits Clause and market bonds as Obligation Legisla- as if were General readily they Bonds, would future why any ture or Governor be inclined to with the constitutional limitation on debt? comply Our do not and should not the Debt Limitation precedents permit Clause to be so I easily believe that none of our sidestepped. cases previous support conclusion that the Bond Act not, has in fact and in the constitutional sense, created a If State debt. the State is to incur debt in order to meet permitted operating general current from the expenses, payable State’s it is only revenues, imagine agency hard to debt issuance state that run afoul of would Debt Limitation Clause. [Id. 654.] at 12, analysis

A careful juris of this Court’s Debt Limitation Clause prudence reveals that of the six cases in which the issuance of non- State debt has challenge, withstood a Debt Limitation Clause four of those cases involved bond issues that would be amortized primarily by revenue legislative appro sources other than annual Auth., Jersey Turnpike See New priations. 238, supra, 3 N.J. at (noting 69 A.2d 875 payable solely that amortization was to be revenues); Behnke, supra, 13 Turnpike 20, from tolls and N.J. at (sustaining Guaranty Act, voters, 97 A approved by .2d 647 authorizing satisfy obligations State arising from New Highway Authority bonds “in the event the revenue from tolls and otherwise shall be purpose” noting insufficient for the Highway Authority’s pledged tolls and revenues are to secure bonds); Clayton, supra, amortization of at 244 A.2d (noting payments annual rental on leases of facilities to Authority, educational institutions Educational Facilities to be applied payments, to bond amortization “were intended to come mainly legislative from sources appropriations”); unrelated to Auth., Jersey Sports Exposition supra, & 61 N.J. at (noting principal A.2d 545 the “interest and of the fees, State, by legislative appropriations, from the authorized annual as Authority’s payments, the source of the bond amortization is approval sustainable without voter under the Debt Limitation scope holding obviously Clause. in The the Court’s Enourato is opinion part in emphasized debatable. Court’s that “[t]he State,” Authority’s bonds and notes are not a debt of the Enoura to, supra, N.J. at part 90 448 A.2d but also in focused principle liability the State for rent does not constitute debt: may liability “[T]he violating State incur for future rentals without Although the debt limitations clause.” Ibid. the State’s rental payments upheld under the statute in Enourato were calculated satisfy bonds, be sufficient to authority’s obligations the on the portion of the payments equaled State’s rental fair buildings necessarily rental value did occupied cause rents; to increase its appropriation arguably, annual only required the amount payments which rental to amor tize the bonds exceeded such fair rental value caused an increase appropriations directly in Although attributed to the bond issue. Court, not expressly relied on recognition, ex also McCutcheon, pressed supra, dissenters 13 N.J. at (Jacobs Brennan, Jr., JJ., A.2d 663 dissenting), that the State making payments would be rental aas tenant even absent Authority funding undoubtedly underly- mechanism was a factor view, ing my Enourato should not be disposition. the Court’s holding inapplicable read as the Debt Limitations Clause whenev- authority er a its approval state issues own bonds without voter adequate an independent revenue source to be amortized solely annually appropriated by Legislature. funds

Ill A The economic of the capital realities State’s need for access to that, compels markets purposes the conclusion of the terms underlying Clause, appropriations the Debt Limitation virtually indistinguishable general from obligation debt. The clas description “ Limitation purpose sic of the Debt Clause is that prohibits it ‘one debts incurring [that] subse quent Legislatures obliged pay, prior approval would without ” Camden, City supra, by public N.J. referendum.’ Auth., Jersey Sports Exposition & (quoting A.2d 462 supra, 545). Although State has no “legal” liability Authorities, for the debt of its capital rating agencies clearly markets and the understand that unmistakably that, City expressed such debt constitutes debt “ Camden, supra, ‘subsequent Legislatures obliged would be ” pay.’ Poor’s, A recently Report by issued Research Standard & one of explains prominent rating agencies, nation’s most bond general obligation appropriations virtually bond and debt are debt, indistinguishable as credit risks and that as a practical matter, paid by agency must the State whose issued rating the debt in order for that State’s credit to be maintained. Poor’s, Standard Revised Appropriation-Backed & Lease and (June 13,2001). Rating Report Debt Criteria The states: rating Standard & Poor’s has been debt for more than appropriation-backed two greater decades. we Over that have seen a of this form of túne, debt acceptance within the Once number of markets. confined to a limited public municipal governments in this of common in debt issuance is now at least 33 California, type the last 20 of a states. Over the occurrence default on years, appropriation-backed general obligation similar to of debt has been the default rate The default bonds. significant for both risk is low of debt issuance and the in types difference credit rating category longer a risk identified differentiation of one full no accurately minimal reflects the difference in default risk. Standard & Poor’s has also seen contracts a critical state become of both and local appropriation-backed component governments’ programs, making infrastructure some capital instances over up program. government manage- 50% the capital Furthermore, of state and local obligations programs. ments understand markets and these capital under bonds are while not considered debt under a strict Finally, appropriation-backed legal Standard & Poor’s all considers an definition, appropriation-backed of and, obligation issuer an to be that issuer a will result in appropriate failure significant defaulting credit all deterioration debt issued types for government. Eating (emphasis added).] [S & P at 1 Criteria, supra, analysis, Based on that Standard & Poor’s has concluded that appropriation ... precisely “lease and debt tracks with the obli- gor’s term long rating,” result “appropriation with the obli- gations legal meet our criteria will be rated notch off one general obligation ratings, effectively eliminating historic reli- essentiality ance on as a credit factor.” Id. at l.10 rating agency reports Jersey’s Recent standing New credit reveal extent profile to which the State has altered its debt past increasing substantially decade appro- its reliance on priations recently debt. As Standard & Poor’s observed: just Obligation] As 30, 2001, of June [General had billion of GO $3.5 outstanding debt but more that billion debt obli- appropriation-backed $10.8 gations including funding bonds. Over the last pension six state has years, significantly relying altered its debt much more on profile, appropriation-backed growing program. debt to its support Overall, debt rose to capital tax-supported billion fiscal 60% from fiscal 1996. 2001-up nearly Appropriation-backed $14.3 increasing debt accounted for all of that from its nearly increase, billion fiscal $6 1996 level. debt now makes Appropriation-backed 75% state’s tax- up to 56% in fiscal 1996.

supported compared $1,700 Debt ratios increased to ratings general obligation notch” "one difference between the downgrade bonds, recent of New appropriation pursuant Moody’s Jersey’s rating, rating bond at 132-33, translates into Aa2 infra general obligation bonds and Aa3 for most of the State's appropriation ratings bonds. Those an involve interest rate differential of ten ordinarily only general fifteen obligation basis so that if the rate for points, interest bonds were range the rate on 5% bonds would from 5.1 to 5.15%. appropriation and 4.4% and 3.2% of per personal income, compared capita per capita, $978 ago. income six Debt service costs associated with the issue are now years pension budget, general a fixed cost to but the fund contribution to the unfunded operating is eliminated. in Debt service fiscal 2000 was 4.4% of pension liability fund appropriations. Debt likely levels are continue to rise as the state education and addresses the bonding sectors, which will additional transportation require nearly up $11 areas, billion. both the state to use debt as its plans appropriation-backed financing vehicle. primary Obligation

[Standard Research: Poor’s, & New Tax Jersey; Secured, General (Oct. 2001).] Similarly, report Moody’s á December 1999 Investors Ser- vice states: growth outstanding significant- Over the nine New in has years, debt past Jersey’s growth in its and and its ratios have

ly outpaced population income, debt personal negatively been affected both on an basis the 50 absolute and relative to state medians. Between and net debt rose billion to tax-supported from $4.1 highest among its is now billion, current and fourth The ratio of states. $14.7 (5.3%) highest among debt to income is seventh and some 250% states personal highest among of the median. Debt is fifth per capita, $1,810, approximately states. significant during The increase in state debt reflects investments the 1990s made to maintain and the state’s and to renovate improve infrastructure, transportation and construct numerous state a offices, addition, other facilities. In prison, including state debt for a has incurred number of non-traditional deficit purposes, high-risk financing for a auto various facili- insurance pool, sports exposition increasing and to the state’s ties, address unfunded The state’s pension liability. debt trend continue over the next five with the years, transportation expected program, school construction, renovation and public acquisition open space among the more additional debt The size and prominent plans present. among program structure of bond the school the most ambitious potentially — dining to be 2000. announced country expected —is To context of date, Jersey’s has remained affordable its substantial resources. with the tax revenues, economic Even boom in state (including payments) contract however, debt service lease and has been steadily growing percentage budget reaching as a of the about 6.9% of total appropria- — subject obligations tions fiscal 2000. The state’s lease and other payable once modest state’s now over appropriation, debt, represent component lengthening 75% of of this direct debt. The has been maturity component profile for a 20 well, with bonds now issued transportation year term, pension funding for a bonds issued term. year (December 1999) Investors State of New [Moody’s Service, Jersey Analysis — added).]

(emphasis appropri- on reliance increase the State’s unprecedented matter, that, practical as a vividly demonstrates ations is appropriation debt of its to the amortization commitment State’s obligation debt. liability general for legal indistinguishable from its billion, approxi- debt totals $10.8 The fact that total tax- seventy-five percent of the State’s June mately billion, extent to graphically illustrates the supported debt of $14.3 access to the and continued creditworthiness which the State’s and discharge a consistent requires it capital markets appropriation debt as obligation to amortize timely its full manner reliance on obligation debt. The State’s general well as its for is not State debt appropriations debt assertion that theoretical the State Limitation Clause because is of the Debt purposes that, purposes of the legal fiction directly is a liable thereon The State objective, form over substance. exalts constitutional it can appropriations debt than permit default on its more can no go unpaid. utility telephone bills to allow its explicit, the Statements Although is not Official the record appropriations debt included issuances of fully describe various 30, 2001, outstanding on June such debt billion of within $10.8 independent lacks an portion of that debt reveal that a substantial debt, with the result in amortization of revenue source for use legislative dependent on annual entirely bewill that amortization unsupported Examples appropriation debt appropriations. Jersey Econom- include: The New independent revenue source an billion); ($2.8 Authority Pension Fund Bonds Development ic Authority Facilities Jersey Development School Economic New authorized); issued, ($500,000,000 billion Bonds $8.6 Construction Authority Build- Jersey Development State Office Economic New issued); Facili- ($60,700,000 Jersey Educational Projects New ing ($87.3 Program million Authority Equipment Leasing Fund ties authorized; issued, $100,000,000 equipment during term of lease and transfers title equipment colleges, EFA retains title paid). have been when bonds comparison, outstanding amortization of series issued (TTFA), Transportation Trust Fund

subject legislative appropriations, annual supported both statutory and constitutional dedication State revenues in apparently pay amounts sufficient the annual amortization of the TTFA 2001 Bonds Series and the unrefunded Prior Series through year Bonds 2022. The in constitutional dedication (voterr per nine gallon cludes cents motor fuel State’s tax approved yielding approximately per million $400 year), annually gross receipts million from the petrole tax on $200 products um annually, million from the sales $200 (both approved by use tax voters dedications automobiles 2000). in statutory November mil The dedications include $24.5 annually contracts, lion from Toll Road and not less than million annually registra from motor increased vehicle $60 N.J.S.A. 17:33B-63. pursuant tion fees to As of June the outstanding appropriations ap total amount of TTFA debt was proximately billion; A and B bonds additional Series Series $4.3 $1,015 aggregating August January billion were issued in 2001 and year payments ap and amortization in fiscal 2002 totaled Thus, proximately million. to the of $400 extent the existence separate Authority’s “a source of to appropri income” amortize an debt, Spadoro, supra, N.J. ation-backed see 695 (Handler, concurring part dissenting may J. in in part), vulnerability insulate that debt issuance under the Debt Clause, income TTFA Limitation available to amortize the appropriations appears adequate satisfy debt to be to that stand ard.11 independent possibility One foresee could that the revenue source upon support specific determined issuance sufficient to be amortization of a circumstances, appropriations may, changed debt bond issue because of turn out service, support thereby requiring legislative

to be insufficient annual debt us, up Although make the difference. issue is not before I assume that whether such a issue is a Debt determination bond vulnerable to challenge Limitation Clause be made the date of would as of issuance bonds. in the practical reality by the recent increase

Another revealed debt, requirements and the of its aggregate likelihood State’s issuance, Limitation debt is that the Constitution’s Debt future longer most check- provisions relevant no constitute Clause ap- against total State debt point which to determine when year budget Based the fiscal 2001-02 proaching unsafe levels. billion, Debt Limitation Clause would approximately of $22 in excess million require approval of debt of State-issued $220 (one general percent appropriated “the total amount Const, VIII, 2,§ appropriation year,” law for that fiscal art. ¶ B). downgraded

Although Moody’s Investors Service March Aa2, rating general obligation from Aal to the State’s bond favorably on the accompanying report to comment continued outstanding strength notwithstanding that its State’s economic billion: debt amounted $14.8 AND HIGH RESIDENT WEALTH LEVELS SUPPORT STATE’S ECONOMY DEBT ALTHOUGH LEVELS CONTIN- STRENGTH, LONG TERM CREDIT TO INCREASE UE large high rating The new of Aa2 reflects state’s and diverse economy, personal strong producing financial controls sizable income and historic record levels, ending longer-term, strengths fund In the these balances. we credit expect persist. rating outstanding growth has reflects a trend state debt also significantly income decade, over population personal past outpaced negatively affecting To level has date, the state’s ratios. increased debt light remained the state’s substantial economic resources. Howev- affordable spending borrowing extensive, ratio of debt er, future are and the capital plans to service annual revenues continue to increase. For fiscal likely average 7.5%, ratio will close to to other states. be above likely compared (March 2002) Rating [] Service, Investors [Moody’s Update: added).] (emphasis Thus, rating agencies, aggregate perspective from the of the general obligation appropriations of amount State debt —both capacity debt —and the to amortize that debt in relation State’s rating obligations, its other are determinative of the State’s credit ability the capital and its continued to have access to markets. standard, Accordingly, more relevant as confirmed the March a Moody’s report, is “the ratio debt of service to annual revenues,” Moody’s a ratio that approach estimates will per- 7.5 in year cent fiscal 2002-03. Consistent with that more realistic levels, determining Attorney standard for affordable debt has General informed the of Court the introduction December Assembly of proposes Concurrent Resolution No. 173 that by limiting amend Constitution service appropri- debt on State (other appropriations approved ations debt than at general a vote) by majority eight percent election a of the total amount expended year authorized to in the be fiscal in which the appropri- (NJ 2001). Res., Leg. ations debt be is to issued. A.C. 209th Appropriations debt secured State leases excluded from that is. proposed Although expressing limitation. no view on the wisdom proposal, utility of that or other of a more relevant statutory ability or constitutional limitation on the State’s to issue appropriations debt is difficult to contest.

I also of provisions take note the relevant IX Article (a) require: publication Constitution of proposed amendments in each County prior general least once three months (scheduled (b) 5, 2002), election for November submission proposed amendments to the members Senate General Assembly (c) twenty days vote, prior least calendar to first either three-fifths each vote in house for submission to the year, majority voters the current vote each house for two years successive year. submission to the voters in the second ¶ 1, N.J. Const. Art. IX 3.

B my view, inescapable the conclusion is the issuance approval by independent authority, debt without voter an state unsupported by an adequate independent revenue source and to legislative appropriations, amortized annual violates the demonstrated, Debt Limitation I Clause. As have on the reliance “legal” liability lack for such debt exalts form over general substance: the State’s debt dwarfs its ratio, obligation pay any and its failure debt three-to-one damage substantially rating that debt would its credit and its capital purposes For access markets. the Debt Limitation objectives, appropriations legislatures Clause’s debt binds future indistinguishable in a manner and to an extent that general obligations recognize debt. The Court’s choice is either to indisputable reality, that or to subvert the Constitution allow- ing appropriations the State to continue to issue if debt as respect Debt Limitation Clause did not exist. I choose to Constitutional mandate.

Nevertheless, significant equitable practical considerations require interpretation that of the Debt Limitation that Clause adopt applied only I prospectively, affording after the other government adequate branches of time to react to that determina noted, 471-75, supra 112-16, enacting tion. As 809 A.2d at Legislature obviously EFCFA the relied on our decisions in designing Abbott and V in financing IV the statute’s mechanism. Moreover, Legislature undoubtedly and the Executive have law, 475-94, fifty years supra relied on at least of decisional adopting financing A.2d at policy that that assumed the Debt apply appropriations Limitation Clause did not debt by independent issued justify state Authorities.12 Another factor ing prospective application required is the time to conform to the procedures govern constitutional amendments. possibility my primary 12 Inote invalidating the theoretical rationale for inevitability under Debt Limitations Clause —the that the Legislature appropriate pay independent Authority will funds to debt service on irrespective legal liability arguably apply of the State's could be said to — county governmental to debt issued local or entities whose default on bonds previously might indirectly unfavorably issued reflect but on the State's credit. Auth., 270, 306-07, County See In re Passaic Utilities 164 N.J. 753 A.2d 661 (2000) (invalidating utility authority's imposition Impact of Environmental Charge deferring judgment ninety days on non-users but effective date of for view, provide action). opportunity legislative my language of the Debt applies only Limitation Clause that to debt "of the state” that the "createjs] year” clearly precludes expansive interpretation fiscal Const., VIII, 2, my analysis. § art. V3. Glaser, v. 447, 1100, supra, Salorio N.J. 93 461 we Clause, Privileges the U.S. invalidated under and Immunities Const., IV, 2, portion Emergency § art. a of Transportation Transportation Tax Act allocated to Fund and used to alleviate transportation problems ground commuter the Act against discriminated York commuters with New Id. at Salorio was Although income. 461 A.2d 1100. 8,1983, permitted decided on June the Court the State to continue 1, to prior January collect the ETT tax on income earned to 1984. relief, In determining only grant prospective to the Court relied in part v. Supreme on the United States Lemon decision in Court’s (Lemon II), supra, Kurtzman 192, 1463, 411 U.S. 93 S.Ct. 36 151, holding L.Ed. Pennsylvania per 2d a unconstitutional statute mitting private to state reimbursement sectarian schools secu for services, lar permitting prospectively but the State to educational pay prior services rendered to the Court’s decision. We for observed: Burger, writing Chief Justice for the stated that Court, retroactivity depended a consideration of the upon relations between and conduct of the particular parties, rights of of vested, that had of status, determinations deemed have prior finality, and of fact[ ] He stressed law is a “hard on which public policy. statutory making shaping in must decisions and in people rely their conduct.” 411 U.S. at 199, 93 at 1468, S.Ct. 36 L.Ed.2d at 160. He also noted that the before problem relating Court was one of federal “essentially equitable appropriate scope arising during a a remedies, from enforcement of state problem statute the period had Id., before it been declared unconstitutional.” 411 199, 1469, U.S. at 93 S.Ct. 36 L. Ed.2d at 161. remedies, wrote, he “are a blend of what is Equitable special fair, what is and what is workable.” Id. at 93 necessary, 200, 1469, S.Ct. at 36 (footnote omitted). 161

L.Ed.2d at weigh shaping “[R]eliance in heavily interests of an equitable appropriate Id. at 93 S.Ct. at 203, 1471, 36 L.Ed.2d see also Chevron Oil Co. remedy.” 163; (1971). v. 404 92 30 Huson, U.S. S.Ct. L.Ed 2d 296 This is so particularly in this case where invalidation tax ETT blocks a source of revenue holding heretofore available to the state. new Our of a rule today equivalent (1981). of law. Burstein, State v. 85 N.J. A.2d 525 Under these Cf. Judge circumstances, Conford Consumer Discount Co. v. expressed Oxford (App.Div.1969), Stefanelli, 512, 520, aff'd, A.2d 593 N.J.Super. (1970): 262A.2d 874 long There is no but courts in this State and elsewhere have question appellate regarded justified confining themselves as and of a the effect empowered decision of first or of novel or impression unexpected impact prospective justice, if considerations of fairness and related to reasonable application surprise prejudice to those affected, seemed to call for such treatment. among Foremost the factors to be considered is the State of New Jersey’s justifiable reliance of the ETT funds. We have upon availability consistently advised that enacted statute is valid. The frequently duly presumptively legislative officials, executive, were entitled on that rely presumption____ legislative government The and the executive branches have relied on the ETT budgets, with to both income and many years preparation respect for making and in expenditures, expenditures. expenditures cannot undone and reimbursement would have a substantial on the effect existing State’s Public is at issue. requirements. stability financial fiscal We are date because our concern persuaded prospective fix fiscal engendered and administrative that would be the State were problems compelled if to surrender ETT the end The State should be receipts year. before fiscal raising a reasonable time to devise alternative revenue period methods, afforded projects abandon or or consider some postpone other suitable transportation against enforcing-the solutions. We believe that ETT tax with respect relief income earned on and 1, will accommodate these concerns. January 1984 after This date also coordinate with the most individuals and will year fiscal bookkeeping to solve permit employers employees opportunity sufficient 13 or related problems. (footnote omitted) added).] (emphasis

[Id. at 461 1100 464-65, 467-68, Salario, As we noted in practice deferring appropri to an prospective ate potentially disruptive judicial date impli decisions cating significant statutory and holdings constitutional “accords Legislature with relief that we have afforded govern or other ing comparable 468, in bodies cases.” Id. at 461 A.2d 1100. Cahill, 196, 198, (1973) (Robinson Robinson v. 63 N.J. 306 A.2d 65 II), 19, 1973, decided June following this holding Court’s earlier 13 II, to Lemon Court modified its civil Subsequent Supreme retroactivity jurisprudence to that a rule of law, federal once announced require and applied, given adjudicating "must be full retroactive effect all courts federal law.” by Virginia Taxation, 86, 96, 509 U.S. Harper v. 2510, 2517, 113 S.Ct. 125 Dept. of (1993). 74, L.Ed.2d 86 However, as noted the Justices whose view of civil holding in in II retroactivity prevailed Lemon "concerned not the Harper, of a new constitutional application rule, but rather relief that a statutory applying federal court should award when law,” the new and that in remedy might cases Trucking "consideration of reliance be American appropriate." Smith, 167, 223, Assn. v. 496 U.S. 2323, 2355, 110 S.Ct. 148, L.Ed.2d (1990) (Stevens, dissenting). J., invalidating as statutory unconstitutional the State’s scheme for education, funding Cahill, public 473, 520, Robinson v. 62 N.J. (1973) (Robinson I), A.2d 273 the Court determined not to “disturb [existing] statutory Legislature scheme unless the fails to enact, 31, 1974, legislation compatible December with our 1, decision in this July case and effective no later than 1975.” Burke, Similarly, v. Abbott 119 N.J. 575 A.2d 359 (1990) (Abbott II), we required held that Constitution funding parity between the Abbott districts and the I so-called and parity J districts but determined that funding fully “need be implemented immediately, may phased Subsequently but be in.” III, Burke, 444, 447, in Abbott Abbott v. 136 N.J. 643 A.2d 575 (1994), we stated funding that we would not intervene further if parity between the Abbott districts and the wealthier districts was year. achieved the 1997-98 school In the landmark case of (1957), Twp., Switz v. Middletown 23 N.J. 130 A .2d 15 Court determined that compliance achieve with both constitu statutory requirements tional and Township assessment would obligated value, the future land to assess all at true but apply during determined its mandate would not the two ensuing years adequate tax to afford the time to provide for procedures. essential administrative Id. at Salorio, A.2d 15. As noted the deferral of the date effective significant adjudications by sup constitutional this Court is well precedents. ported our effect,

Accordingly, give only I prospective commencing would 1, 2004, January my conclusion appropria- that the issuance of approval by independent tions debt without voter State authori- ties, unsupported by an adequate independent revenue source and legislative to be appropriations, amortized annual violates the Debt Limitation I apply Clause Constitution. elect to prospectively determination in view of the on our reliance legislative decision in Abbott V and executive branches in enacting Act, Financing the Education Facilities Construction and longstanding and because of their reliance on this Court’s Debt jurisprudence past fifty years. Limitation Clause over determination, fixing my the effective date of I also have consid- carefully likely required preparation, ered the time to be legislative adoption, public approval constitutional appropriate. amendment determined to be date, my proposed holding After apply only its effective would proscribed by opinion this the issuance of by legislative which adopted is authorized enactments after Janu- ary Accordingly, validity 2004. pursu- of bonds authorized January ant EFCFA and issued after 2004 would not be by my disposition, apply appropriation affected nor would it prior bonds authorized other statutes enacted to that date but subsequent my anticipate disposition, issued to it. I and its prospective application, ability would not affect the of Bond Coun- authorization, legal opinions execution, sel to issue related to the issuance, delivery constitutionality any appropriation validity disposition. of which is unaffected our

IV The decisions below are a classic illustration of the familiar adage that Understandably, hard cases make bad law. our courts upset are grounds badly disinclined to on constitutional needed school construction bond issue that this Court determined to be mandated, constitutionally at least for the Abbott districts. Nor is likely there invalidating bonding to be enthusiasm for mecha- nism, widely only by used by many but also other borrowers, large sophisticated arguably state has been en- by prior dorsed decisions of this Court.

But the coalescence of legal incontestable facts and sound analysis virtually compels apply the Court to the Debt Limitation authority’s appropriation Clause to a state approved by debt not unsupported by adequate independent voters an revenue the Enowrato including source. Prior to and decision appropriation use of carefully debt had been contained and limit- ed. This Court was so cautious about validity its constitutional that it divided Sports Exposition Authority 4-3 litiga- tion, being of invalidly three members the view that the Act pari-mutual though committed the future use of revenues even the Authority’s to bonds were be amortized the revenues Sports Authority’s operations, an independent revenue source. In however, years, recent increasingly appro- has relied on priations debt to the extent in appropriation that the billion $10.8 outstanding seventy-five bonds now percent constitutes about cat, speak, the State’s debt. The bag. bonded so to is out of the debt, required pay That the State appropriation is its as a matter, practical tenable, indisputable. longer No is it at these debt, appropriation enhanced levels of argue that the State is legally pledged. liable because its credit is not As record demonstrates, most of the appropriation State’s debt has no appropriations, revenue source other than State and so the State’s signs credit is committed whether not it on the dotted line. Thus, reality is that legal debt has become permits through artifice that the State to issue debt State authori- ties, approval, legislatures obligated voter without future are repay. convenient, simpler, Its use is more and more efficient general than obligation eventually debt. Unless the Court inter- venes, I general obligation infer that use State’s debt requiring approval voter will continue to decrease. institutionally responsible recognize is to answer ignored. Constitution can but If be amended it cannot be prefer, legality and the voters of appropriation imposed by can detached from the limits the Debt Clause, Limitation appro- different standard for issuance of priation debt can be written into the Constitution that more accurately capacity carry relates to the State’s fiscal that debt. I am judgment by confident that exercise of other sound government branches can address and resolve limitations opinion may view, impose. my judiciary this has no acknowledge choice but and confront the detour constitutional long. that has Appropriations been tolerated too debt issued independent authority approval, an unsup- state without voter ported by adequate independent an revenue source and amortized legislative appropriations longer annual no can be reconciled view, my with statutorily the Constitution. such debt 1, 2004, January validly authorized after should not be considered issued debt under the Debt Limitation Clause. stated, modify judgment

For the reasons I would affirm but Appellate Division. affirming For Justice PORITZ and Justices —Chief COLEMAN, LONG, VERNIERO, and LaVECCHIA —5. Concurring part/dissenting part STEIN —1. —Justice

809 A.2d 136 GORENBERG, IN THE MATTER M. OF DAVID AN AT ATTORNEY LAW. November 2002. ORDER Disciplinary having Review Board filed with the Court its concluding decision DRB M. DAVID GOREN- MOORESTOWN, BERG of who was admitted to the bar of this (lack reprimanded State in violating should be RPC 1.3 1.4(a) (failure diligence), client), RPC to communicate with 1.16(d) (failure steps RPC reasonably necessary protect take interests); client’s Disciplinary

And the having Review Board further concluded respondent required should proof to submit of his fitness practice law professional as attested to a mental health approved by Ethics; Attorney the Office of good

And appearing; cause notes to be met charges [were] out rents and other admission to or use of the grant facilities and from the therein.”). concessions Enourato, cases, Holster Of the other two unique Holster is in that legisla- the issuer of the bonds to be amortized annual Passaic, tive County was the the State and —not authority entity independent taxing authority anot state with —an Noting and revenue sources. that “the bonds are not obli only gations of but the counties that decide-to issue them,” A 59 N.J. 279 .2d the Court stated: issuing purchasing on Hence, both counties bondholders are notice that pledged faith and not be credit State will of bonds issued respect pursuant to his but that enactment, the State will be payment part dependent upon Lacking time to time. such recourse appropriations provided appropriations, against against can be had which will have no recourse only county over State. [Id. 798.] Thus, only of all the Clause Debt Limitation cases Enourato authority holds that debt issued a state indepen that lacks an contemplates dent revenue source payments use of rental

Case Details

Case Name: Lonegan v. State

Court Name: Supreme Court of New Jersey

Date Published: Aug 21, 2002

Citation: 809 A.2d 91

Court Abbreviation: N.J.