The New Jersey Supreme Court: State Debt In the 1844 New Jersey State Constitution, the framers

included a Debt Limitation Clause, which read:

The Legislature shall not, in any manner, create in any fiscal year a debt or debts, liability or liabilities of the State, which together with any previous debts or liabilities shall exceed at any time one per centum of the total amount appropriated by the general appropriation law for that fiscal year, unless the same shall be authorized by a law for some single object or work distinctly specified therein. Regardless of any limitation relating to taxation in this Constitution, such law shall provide the ways and means, exclusive of loans, to pay the interest of such debt or liability as it falls due, and also to pay and discharge the principal thereof within thirty-five years from the time it is contracted; and the law shall not be repealed until such debt or liability and the interest thereon are fully paid and discharged. Except as hereinafter provided, no such law shall take effect until it shall have been submitted to the people at a general election and approved by a majority of the legally qualified voters of the State voting thereon.

It was intended to limit the spending authority of the government to indebt future generations of citizens and legislators. This was important at the time because land speculation had caused the Panic of 1837 and the authors of the New Jersey Constitution were determined to prevent the State from defaulting due to overextending itself. Unfortunately, in recent years, the unaccountable New Jersey Supreme Court has disregarded these wise restrictions on spending authority and has been an accessory to the Legislatures actions, which have put political expediency above what is constitutional. For instance, in Lonegan v. State I, taxpayers challenged the Educational Facilities Construction Act, which funded the construction of schools unconstitutionally ordered by the New Jersey Supreme Court in Abbott V. In the Lonegan I decision, the New Jersey Supreme Court approved the State paying off the bonds of the Educational Facilities Authority without voter approval because the State was fulfilling the constitutional mandate of providing a thorough and efficient education. It was the Supreme Court who ordered $8.6 billion in school construction, mostly in the Abbott districts, and so the Supreme Court, who is supposed to be a check on other branches of government, allowed the unconstitutional legislation in the Lonegan I decision. In 2003, the New Jersey Supreme Court ruled in Lonegan II that the Debt Limitation Clause of the Constitution only applies under general obligation debt, which is when the State is legally obligated to repay funds because it puts the full faith and credit of the State on the line. It permitted the State to pay off the bonds of independent state agencies without voter approval through appropriations-backed, or contract bond, debt because the State was not legally obligated to pay. Each year the Legislature could choose to fund or not fund the obligation and not be held legally liable. Almost all of the States debt liability at the time was appropriations-backed debt that was not approved by the voters, which meant that the legislative and executive branches went on a spending spree that hammered the State deep into debt. The Court held in Lonegan II that the Debt Limitation Clause only applied when bonds are backed by the full faith and credit of the state, that is, when the State is legally obligated to pay back the debt. It allowed the politicians to skirt around the law by creating independent state authorities, such as the Building Authority or the Educational Facilities Authority, who would issue bonds to fund projects, and have the State pay off the bonds through annual appropriations. The authority explicitly stated on the bond that the State is not liable for payment of the debt; the state authority was solely responsible. But

since some of these independent authorities had no other source of revenue than state appropriations, everyone knew that the Legislature would pay the debt even if they werent legally required to. Justice Stein mentioned in his Lonegan I (2002) opinion that ratings agencies such as Moodys and Standard and Poor treated general obligation debt and appropriations-backed debt as virtually indistinguishable. This fact is significant because most of the States liabilities and almost all of the states recent borrowing at the time of litigation were appropriations-backed debt. The Court had previously ruled that the Debt Limitation Clause was not violated when a state authority issues bonds so long as it has an independent source of revenue to fund its bond debt and is not dependent on annual appropriations from the Legislature. The New Jersey Turnpike Authority (N.J. Tpk. Auth. v. Parsons (1949)), the New Jersey Sports and Exposition Authority (N.J. Sports & Exposition Auth. v. McCrane (1972)), and the Educational Facilities Authority (Clayton v. Kervick (1968)) have independent sources of revenue to fund their operations and debt. Clayton differs from Lonegan I because in Clayton the EFA was constructing facilities at colleges that brought in revenue to pay off the bonds and did not rely on appropriations. In other cases where the Court found no violation of the Debt Limitation Clause, the entities the state promised to pay were not state authorities. In State v. Lanza (1958), the entity was a municipality and in Holster v. Board of Trustees of Passaic County College (1971), the entity was a county. In Lanza the state promised to reimburse a municipality for lost property tax revenue due to the state acquiring land for a water supply system. In Holster, the entity was a county to whom the State pledged under the County College Bond Act to contribute to the cost of capital projects. The Court reiterated in both cases that the debt was not general obligation debt, but contract bond debt which is not the States legal responsibility. Therefore, the Debt Limitation Clause was not applied in either case. Justice Stein, in his Lonegan I opinion, in which he concurred in part and dissented in part with the majority, describes the two times a statute was struck down under the Debt Limitation Clause. The first was by the Court of Errors and Appeals in Wilson v. State Water Supply Commission (1915), when the Legislature was to annually appropriate funds for a mortgage taken out by the State Water Supply Commission. The state entity in this case was not going to use another source of revenue to pay off the mortgage other than annual appropriations from the Legislature. The second case, which would be later reversed by the New Jersey Supreme Court, involved the State Building Authority issuing bonds to purchase buildings to be used by State agencies. The bonds would be paid off by rents from the State (McCutcheon v. State Building Authority (1953)). The authorizing statute was struck down under the Debt Limitation Clause by a 5-2 vote. The Court noted that the Authority did not raise revenue and was wholly dependent on future legislative appropriations. The Court saw the State was trying to subvert the Debt Limitation Clause, and said It is an obvious truism that constitutional limitations may not be set at naught by indirection. McCutcheon was unfortunately reversed by Enourato v. N.J. Building Authority (1982). The situation was similar: the State would pay rent on buildings which it leased from the Building Authority, who would issue bonds to finance the acquisition and construction of the buildings. The Authority relied solely on appropriations from the Legislature to pay off the bonds. The majority adopted the position of the dissent in McCutcheon and cited Clayton and Holster despite the clear differences noted above. The majority also cited Bulman v. McCrane (1973), in which the State paid to lease a building it had a private

developer construct. An important point in Bulman, which distinguishes it from other cases, is that no bonds were issued by the State or a state agency. The Court, in Spadoro v. Whitman (1997), dismissed a challenge to the Pension Bond Financing Act of 1997 because the bonds that were challenged under the Debt Limitation Clause were already sold and the point was thus moot. Under the Bond Act, the Economic Development Authority (EDA) would sell bonds in an attempt to diminish the States employee pension fund liability, with the principal and interest of the bonds to be paid by the Legislature as it chooses. Once again it was assured that the EDA, not the State, was liable for the debt. However, the Legislature was solely relied upon to provide revenue; the EDA had no independent source of revenue. Justice Handler, who concurred in part and dissented in part, used a three part legal standard to apply the Debt Limitation Clause, whereby he determined through analysis of case precedent that debts are non-state debts if they are issued by an independent authority, the debt is dependent on an independent source of revenue, and there is no pledge on the part of the State to repay the debt. Moreover, in City of Passaic v. Consolidated Police and Firemen's Pension Fund Comm'n (1955), the Court ruled that the Debt Limitation Clause was not violated because the State entered an agreement to make an annual contribution to the pension fund which was subject to appropriation by future legislatures. The pension fund also had revenue from employee and municipality contributions. The difference between City of Passaic and Spadoro is that the State, in Spadoro, created an independent authority to issue the bonds for itself. It was not simply an agreement to contribute to a pension fund, but sales of bonds that were to be paid solely by the State, even though the EDA was legally responsible. As Justice Handler astutely noted in Spadoro, [i]f the State is permitted to incur debt in order to meet current operating expenses, payable only from the State's general revenues, it is hard to imagine any debt issuance by a state agency that would run afoul of the Debt Limitation Clause. Fortunately, the people voiced their disapproval with the spending and debt that the State was incurring in violation of the Debt Limitation Clause, with the Supreme Court as its accessory, when they approved a constitutional amendment at the ballot box in 2008 that prohibited most of the appropriationsbacked debt that the State was heavily engaged in. Article VIII, Section 2, paragraph 3, subparagraph b states: On and after the date on which this subparagraph b. becomes part of the Constitution, the Legislature shall not enact any law that, in any manner, creates or authorizes the creation of a debt or liability of an autonomous public corporate entity, established either as an instrumentality of the State or otherwise exercising public and essential governmental functions, which debt or liability has a pledge of an annual appropriation as the ways and means to pay the interest of such debt or liability as it falls due and pay and discharge the principal of such debt, unless a law authorizing the creation of that debt for some single object or work distinctly specified therein shall have been submitted to the people at a general election and approved by a majority of the legally qualified voters of the State voting thereon. Voter approval shall not be required for any such law providing that the ways and means to pay the interest of and to pay and discharge the principal of such debt or liability shall be subject to appropriations of an independent non-State source of

revenue paid by third persons for the use of the single object or work thereof, or from a source of State revenue otherwise required to be appropriated pursuant to another provision of this Constitution. The constitutional amendment set forth two exceptions to the Debt Limitation Clause. First, debt incurred by authorities that have a separate source of revenue, two examples being the New Jersey Turnpike Authority and Sports and Exposition Authority. The second is debt issued by a constitutionally dedicated State revenue source, such as the Transportation Trust Fund Authority, which has the gas tax as a source of revenue. John Draikiwicz of Gibbons P.C. wrote a good summary of the amendment, which could be accessed at this web address: http://www.gibbonslaw.com/news_publications/articles.php? action=display_publication&publication_id=2582 The Debt Limitation Clause is a crucial part of our Constitution because it involves the people directly in the political system to restrain our elected leaders. The amount of State liability, binding or non-binding, skyrocketed during the 1990s and 2000s when the Debt Limitation Clause was violated by the Legislature and permitted by the Court, who plays a key role as a check on the other branches of government. The fears of the framers came to fruition: one government was able to, without voter approval, de facto indebt future governments and reach enormous levels of debt.