Title: Steven M. Lonegan; Stop the Debt.Com, LLC v. State of New Jersey, et al.

State: new-jersey

Issuer: New Jersey Supreme Court

Document:

(This syllabus is not part of the opinion of the Court. It has been prepared by the Office of the Clerk for the convenience of the reader. It has been neither reviewed nor approved by the Supreme Court. Please note that, in the interests of brevity, portions of any opinion may not have been summarized). 4. The State argues in its response that the new rule advanced by plaintiffs is unsupported by the language of the Debt Limitation Clause, and if adopted by this Court, would severely unsettle the State s financial operations. The State claims that a number of financing mechanisms that are far removed from bond financing, such as multi-year contracts subject to appropriations, would be rendered constitutionally suspect, causing additional disruption to the State s finances. The State argues that there are constitutionally significant differences between the Legislature being highly likely, rather than being legally bound, to repay its debts. The State points out that it has flexibility to renegotiate more favorable repayment terms of appropriations-backed debt, a benefit not available with general obligation debt. (pp. 14-16) 5. Under New Jersey case law, only debt that is legally enforceable against the State is subject to the Debt Limitation Clause. In reliance on that rule, the State has responded to changes in the financial markets that reflect modern economic realities. The Debt Limitation Clause was made a part of the State Constitution in 1844. The variety of functions assumed by the government since that time, and the sophisticated means now used to finance those functions, make it difficult if not impossible to differentiate among acceptable and unacceptable forms of twenty-first century appropriations-backed debt under a nineteenth-century paradigm. Even plaintiffs concede that the Clause does not require voter approval for some forms of appropriations-backed bonds. They fail, however, to articulate principled distinctions between structured lease payments and revenue bonds and the form of appropriations-backed debt they find objectionable. (pp. 16-19) 6. A majority of state courts follow the New Jersey approach and hold that debt limitation restrictions do not apply to appropriations-backed debt. Cases holding otherwise rely on practical considerations relating to the source of debt payments or the category of expenses funded by the debt. Although the dissent argues that the Debt Limitation Clause should apply broadly to any legislative enactment that binds the State to the payment of debt out of general revenues, it would exclude debt supported by adequate and independent revenues, as well as labor agreements and leases. The majority is unable to discover a principled basis for the exclusions accepted by the dissent. The concerns expressed by a minority of jurisdictions and the dissent can be addressed only by the Legislature in our tri-partite system of government. The Court is unwilling to disrupt the State s financing mechanisms in the circumstances presented, and agrees with most state courts interpreting their own constitutions, that the restrictions of the Debt Limitation Clause do not apply to appropriations-backed debt. (pp. 19-27) Judgment of the Appellate Division is AFFIRMED. JUSTICES LONG, VERNIERO, and ZAZZALI have filed a joint dissenting opinion, expressing the view that the Debt Limitation Clause is applicable to any legislative enactment that binds the State, either by design or by indirect result, to the payment of incurred debt out of general revenues. They would hold that the Debt Limitation Clause is violated when the Legislature, without voter approval, enacts legislation authorizing an authority or other State entity to borrow money or otherwise incur indebtedness, in excess of the threshold set forth in the Clause, that is (1) unsupported by adequate revenues that are independent of taxpayer funds, and (2) amortized primarily or completely by annual legislative appropriations. Excluded from that holding would be labor agreements, leases, and any other arrangement or transaction that does not require the State s contractual borrowing of funds. JUSTICES COLEMAN, LaVECCHIA, and ALBIN join in CHIEF JUSTICE PORITZ s opinion. JUSTICES LONG, VERNIERO, and ZAZZALI have filed a separate dissenting opinion. STEVEN M. LONEGAN; STOP THE DEBT.COM, LLC, Plaintiffs-Appellants, v. STATE OF NEW JERSEY; ROLAND M. MACHOLD, TREASURER OF THE STATE OF NEW JERSEY; NEW JERSEY SPORTS AND EXPOSITION AUTHORITY; NEW JERSEY EDUCATIONAL FACILITIES AUTHORITY; NEW JERSEY ECONOMIC DEVELOPMENT AUTHORITY; NEW JERSEY TRANSPORTATION TRUST FUND AUTHORITY, Defendants-Respondents. Argued October 21, 2002 -- Decided April 9, 2003 On appeal from the Superior Court, Appellate Division, whose opinion is reported at 341 N.J. Super. 465 (2001). Andrew T. Fede argued the cause for appellants (Contant, Atkins, Rogers, Fede & Hille, attorneys). Allison E. Accurso, Assistant Attorney General, argued the cause for respondents State of New Jersey, Roland M. Machold, Treasurer of the State of New Jersey, New Jersey Educational Facilities Authority, New Jersey Economic Authority and New Jersey Transportation Trust Fund Authority (David Samson, Attorney General of New Jersey, attorney; Mr. Samson, Ms. Accurso and Patrick DeAlmeida, Deputy Attorney General on the brief). Sandy L. Galacio, Jr. submitted a letter in lieu of brief on behalf of respondent New Jersey Sports and Exposition Authority (Courter, Kobert, Laufer & Cohen, attorneys). The opinion of the Court was delivered by PORITZ, C.J. Today we reject a broad challenge to the validity of fourteen New Jersey statutes authorizing contract or appropriations-backed debt. By our holding, we reaffirm over fifty years of precedent from this Court and align the Court, as before, with the decisions from a majority of our sister states. Our decision is based in the unambiguous and clear language of Article VIII, Section II, paragraph 3, of the New Jersey Constitution (the Debt Limitation Clause or Clause), and in the State s reliance on the Court s precedents when crafting complex financing mechanisms responsive to changing market conditions. We are well aware of the need to maintain stability in respect of the variety of financial instruments authorized by the Legislature, and of the litigation that would result if we attempt to establish classes of debt that are governed by the Clause and classes that are not. To reject, at this late date, traditional legal rules relating to debt could have unintended consequences not anticipated by the Court. We leave to the legislative and executive branches, where it properly resides, the policy decision whether to propose a constitutional amendment redefining or otherwise altering the scope of the Debt Limitation Clause, or whether to restrain the creation of appropriations-backed debt by other means should the other branches deem such measures appropriate. [p]laintiffs [to] center their discussion on the financing mechanisms authorized by the statutes they find objectionable and on [the] different categories of contract debt reviewed in the case law of this and other states. We [also] ask[ed] the parties to assume in their presentations that the Court intends to reconsider its precedents sustaining contract debt (or debt subject to future appropriations), and to present argument related to those other approaches. Thus, for example, the parties should discuss whether the purposes of the Debt Limitation Clause are served when the debt authorized is backed by a revenue stream. Is it sufficient, for purposes of the analysis, that the revenue is realistically anticipated at the time the enabling statute is enacted or should that revenue be considered at the time of debt issuance? And, must that revenue be derived from the project financed (self-liquidating), e.g., turnpike tolls, college tuition, or can it be from another source (the Special Fund Doctrine . . .)? Are lease payments structured to cover the debt service on bonds issued to construct state office buildings a violation of the Debt Limitation Clause? Must the payments reflect fair market value rentals? Would it affect the analysis if the lease is a typical lease containing terms and conditions generally found in commercial leases? Although such payments resemble the ordinary expenses of government . . . can they/should they be differentiated from pension contributions? This opinion follows briefing and oral argument on those questions. [N.J. Const. art. VIII, 2, 3.] In Lonegan I we explained that [t]he scope and meaning of the restrictions imposed on the legislative branch by the [Debt Limitation] Clause have been discussed at length in an extensive body of case law spanning more than fifty years and covering a wide variety of bonding mechanisms adopted by the Legislature to meet the capital funding needs of the State. 174 N.J. at 438-39 (citations omitted). We observed: In those cases the Court has almost universally sustained statutes authorizing the issuance of debt that is not backed by the full faith and credit of the State, generally when the debt is undertaken by an independent authority, most often when that authority has a revenue source available to service the principal and interest on the debt. The Court has reasoned that the Debt Limitation Clause is not implicated when the State is not legally obligated on debt issued subject to future annual appropriations. the Debt Limitation Clause may no longer be the most relevant contemporary standard for determining whether the issuance of additional State debt is economically sound. JUSTICES COLEMAN, LaVECCHIA and ALBIN join in CHIEF JUSTICE PORITZ s opinion. JUSTICES LONG, VERNIERO and ZAZZALI filed a separate dissenting opinion. SUPREME COURT OF NEW JERSEY A- 15 September Term 2002 STEVEN M. LONEGAN; STOP THE DEBT.COM, LLC, Plaintiffs-Appellants, v. STATE OF NEW JERSEY; ROLAND M. MACHOLD, TREASURER OF THE STATE OF NEW JERSEY; NEW JERSEY SPORTS AND EXPOSITION AUTHORITY; NEW JERSEY EDUCATIONAL FACILITIES AUTHORITY; NEW JERSEY ECONOMIC DEVELOPMENT AUTHORITY; NEW JERSEY TRANSPORTATION TRUST FUND AUTHORITY, Defendants-Respondents. LONG, VERNIERO, and ZAZZALI, JJ., dissenting. Todays decision construes the Debt Limitation Clause so narrowly that the Clause no longer applies, except in those increasingly rare instances when the State seeks to incur general-obligation indebtedness. In 1991, legal scholars observed: [T]he New Jersey Supreme Court has, with the exception of . . . McCutcheon [v. State Building Authority, 13 N.J. 46 (1953), overruled by, Enourato v. New Jersey Building Authority, 90 N.J. 396 (1982)], been remarkably willing to sustain any financing scheme the state legislature devises. Given the liberality with which the court has treated these financing schemes, one can reasonably conclude that the constitution provides no limit on the states power to incur debt. [Stewart E. Sterk and Elizabeth S. Goldman, Controlling Legislative Shortsightedness: the Effectiveness of Constitutional Debt Limitations, 1 991 Wis. L. Rev. 1301, 1340. (emphasis added).] When those commentators made that observation there was room for doubt. Now it has become reality. We respectfully dissent. We agree substantially with the opinion expressed by Justice Stein in Lonegan v. State, 174 N.J. 435, 466 (2002) (Lonegan I) (Stein, J., concurring in part, dissenting in part). We add these comments to amplify and supplement that opinion. The aim of the Debt Limitation Clause is to place a constraint on government. It is one of the few clauses intended to empower the people by giving them a direct voice in managing the State. The framers recognized that some transactions might provide immediate funding to fuel governmental projects but disperse the true financial costs to future generations. They enacted the Debt Limitation Clause to reserve to the people the right to decide whether a particular level of debt is essential to satisfy an important public purpose. The Court was correct in Lonegan I, supra, when it stated that [a] literal interpretation of the Debt Limitation Clause that eviscerates the strictures the Clause expressly contains cannot serve the constitutional mandate. 174 N.J. at 440. It is incorrect when it essentially now employs such an interpretation, at the States urging, to hold that so-called contract or appropriations debt is constitutional. We conclude that such debt is not constitutional unless approved by voters. We need not repeat Justice Steins careful analysis of our prior case law. Suffice it to say that we agree with that analysis and Justice Steins conclusion that of all the Debt Limitation Clause cases only Enourato holds that debt issued by a state authority that lacks an independent revenue source and contemplates the use of rental payments from the State, authorized by annual legislative appropriations, as the source of the Authoritys bond amortization payments, is sustainable without voter approval under the Debt Limitation Clause. The scope of the Courts holding in Enourato obviously is debatable. The Courts opinion emphasized in part that [t]he Authoritys bonds and notes are not a debt of the State, Enourato, supra, 90 N.J. at 410, but also focused in part on the principle that State liability for rent does not constitute debt: [T]he State may incur liability for future rentals without violating the debt limitations clause. Ibid. Although the States rental payments under the statute upheld in Enourato were calculated to be sufficient to satisfy the authoritys obligations on the bonds, that portion of the States rental payments that equaled the fair rental value of the buildings occupied did not necessarily cause the State to increase its annual appropriation for rents; arguably, only the amount by which the rental payments required to amortize the bonds exceeded such fair rental value caused an increase in appropriations attributed directly to the bond issue. Although not expressly relied on by the Court, the recognition, also expressed by the dissenters in McCutcheon, supra, 13 N.J. at 75 (Jacobs and Brennan, Jr., JJ., dissenting), that the State would be making rental payments as a tenant even absent the Authority funding mechanism undoubtedly was a factor underlying the Courts disposition. In my view, Enourato should not be read as holding the Debt Limitation[] Clause inapplicable whenever a state authority issues its own bonds without voter approval or an adequate independent revenue source and to be amortized solely by funds annually appropriated by the Legislature. [Lonegan I, supra, 174 N.J. at 492-93 (Stein, J., concurring in part, dissenting in part).] The Debt Limitation Clause provides in relevant part that [t]he Legislature shall not, in any manner, create in any fiscal year a debt or debts, liability or liabilities of the State in excess of a threshold amount described in the Clause, unless certain conditions are satisfied, and unless approved [at a general election] by a majority of the legally qualified voters of the State voting thereon. N.J. Const. art. VIII, 2, 3 (emphasis added). In our view, the phrase in any manner constitutes a broad umbrella that covers any legislative enactment that binds the State, either by design or by indirect result, to the payment of incurred debt out of general revenues. The sheer volume of contract or appropriations debt ($10.8 billion or seventy-five percent of the States June 30, 2002, debt of $14.3 billion) makes it virtually impossible for the State to default on such obligations without severe and unacceptable harm to New Jerseys credit rating. Thus, for all practical purposes, the State ultimately is responsible for that indebtedness within the meaning of the Debt Limitation Clause. [U]ndisputed is that the State never has defaulted and, as a practical matter, cannot default on its appropriations debt, and that the credit markets and bond rating agencies regard appropriations debt as substantially equivalent to general obligation debt because a failure to appropriate will result in a significant credit deterioration for all types of debt issued by the defaulting government. [Lonegan I, supra, 174 N.J. at 466 (Stein, J., concurring in part, dissenting in part) (quoting Standard & Poors, Revised Lease and Appropriation-Backed Debt Rating Criteria (June 13, 2001)).] We would hold that the Debt Limitation Clause is violated when the Legislature, without voter approval, enacts legislation authorizing an authority or other State entity to borrow money or otherwise incur indebtedness, in excess of the threshold set forth in the Clause, that is (1) unsupported by adequate revenues that are independent of taxpayer funds, and (2) amortized primarily or completely by annual legislative appropriations. Excluded from that holding would be labor agreements, leases, and any other arrangement or transaction that does not require the States contractual borrowing of funds. To rule otherwise is to trespass on the right of voters to approve or disapprove the States ever-increasing contract indebtedness. We acknowledge that our intended holding would require the legislative and executive branches to alter significantly the manner in which they approach that form of indebtedness. Accordingly, we would stay our disposition for an appropriate period to afford the other branches the opportunity to address the mandate of the Debt Limitation Clause by the least disruptive methods. We also would grandfather all existing transactions that otherwise might be constitutionally infirm, leaving them undisturbed. See id. at 501-03 (Stein, J., concurring in part, dissenting in part) (articulating standard for prospective application of Court decisions). Lastly, we reject the notion that we should steer clear of our intended remedy because it simply is too difficult to implement or too burdensome to the State. This Court must never avoid its duty on that basis. The Courts choice is either to recognize [the] indisputable reality [that appropriations debt is indistinguishable from general-obligations debt], or to subvert the Constitution by allowing the State to continue to issue appropriations debt as if the Debt Limitation Clause did not exist. Id. at 500 (Stein, J., concurring in part, dissenting in part). Our choice is to respect and enforce the constitutional mandate. STEVEN M. LONEGAN; STOP THE DEBT.COM, LLC, Plaintiffs-Appellants, v. STATE OF NEW JERSEY; ROLAND M. MACHOLD, TREASURER OF THE STATE OF NEW JERSEY; NEW JERSEY SPORTS AND EXPOSITION AUTHORITY; NEW JERSEY EDUCATIONAL FACILITIES AUTHORITY; NEW JERSEY ECONOMIC DEVELOPMENT AUTHORITY; NEW JERSEY TRANSPORTATION TRUST FUND AUTHORITY, Defendants-Respondents. DECIDED April 9, 2003 Chief Justice Poritz PRESIDING OPINION BY Chief Justice Poritz CONCURRING OPINION BY DISSENTING OPINION BY Justices Long, Verniero, and Zazzali