X

Thank you for sharing!

Your article was successfully shared with the contacts you provided.
For all the debate over New Jersey’s plan to float $12 million in bonds to fund school construction, which stalled out Thursday in the closing session of the Legislature, about the only objection that hasn’t been raised is that voters won’t see it on the election ballot. That is, until now. Opponents of the proposed bond deal, including a veteran bond counsel who appears friendly to a court challenge, are calling the proposed issue unconstitutional because the 1947 constitution’s debt limitation clause (Article VIII, � II, 3) requires voter approval for the state to create debt. To be sure, the Supreme Court has interpolated exceptions over the years, when, for example, there is a specific revenue stream or a dedicated tax pledged to back the bonds. And not all bonds get voter approval: For example, “appropriation bonds,” which do not carry the full faith and credit of the state but only a moral commitment that future legislatures will annually appropriate funds to pay the interest and, ultimately, the principal, are not ballot items. But critics of this year’s bond issue note that like the $2.8 billion state pension fund appropriation bond deal of 1997, the school construction bond will have no revenues or dedicated taxes to service the debt, just the annual appropriations from future legislatures. When the pension bond deal was challenged, two New Jersey Supreme Court justices said in dissent that the bond issue was unconstitutional because it bypassed the voters. The only reason the Court majority didn’t address the constitutional issue is that they found it moot, because the state had rushed the bonds to market before the Court decided whether to hear the appeal. Spadoro v. Whitman, 150 N.J. 2 (1997). Justice Alan Handler, joined by Justice Gary Stein, criticized the state for its use of a “mere shell” of a state authority to “sidestep” the requirement to seek voter approval. He argued that notwithstanding the bond sale, the Court should have taken the case because of its importance and because the issue would come up again. “Why would any future Legislature or Governor be inclined to comply with the constitutional limitation on debt?” he wrote. Bond counsel John Kraft, a partner with Roseland, N.J.’s Lowenstein Sandler, is using Handler’s dissent as a rallying cry for revolution. Last month, he published a newsletter tracing the case law on the subject — from a 1953 ruling up to the suit by Edison Mayor George Spadoro — concluding that the Supreme Court “ducked the issue of whether the State’s promise to make future appropriations for debt service on the Pension Bonds is ‘debt.’” The newsletter, which Kraft sent to all 120 legislators and to hundreds of public finance professionals around the state, suggests that the Supreme Court may be faced with the issue again if the school construction funding bill is enacted. “The issue here is not why bondholders have accepted this risk, but rather whether the citizens of New Jersey have a right to rely on constitutional protection from being burdened with billions of bonded debt issued without their approval,” Kraft wrote. WILL THERE BE A CONSTITUTIONAL CHALLENGE? Several New Jersey lawmakers have spoken out against a nonreferendum bond deal. In particular, a trio of Republicans — Sen. Leonard Connors of Ocean County and Assemblymen Michael Patrick Carroll of Morris County and Leonard Lance of Hunterdon County — say the anticipated deal is illegal. And they have an unusual ally, Jersey City GOP Mayor Bret Schundler, who has also called the proposal unconstitutional even though his city could get about $1 billion in aid. “It’s appalling that we may vote at least $8.5 billion in bonds without going to the people for approval,” said Assemblyman Lance, a nonpracticing lawyer and the son of former Hunterdon state Sen. Wesley Lance, the sole surviving delegate to the 1947 convention that wrote the state constitution. Lance, who voted against the 1997 pension bond act, said the debt limitation clause “has been completely eviscerated by the Supreme Court.” He adds that he was surprised when the Supreme Court decided not to hear the Spadoro case. Asemblyman Carroll, a Morristown, N.J., sole practitioner, also calls the high court’s vote not to hear Spadoro “a real copout.” He notes that the state Economic Development Authority, which issued the pension bonds three years ago, is set to issue the school construction bonds this year. It was the EDA that Handler called “a mere shell” in his dissent. He drew a distinction between two critical cases — Enourto v. N.J. Building Auth., 90 N.J. 396 (1982) and N.J. Sports & Exposition Auth v. McCrane, 61 N.J. 1, 292 (1972). In Enourto,, the Court allowed the authority to sell bonds without a referendum to fund the building of state facilities, backed by lease revenue. In McCrane, the Court approved the creation of the authority to build and run the sports complex and issue bonds backed by racetrack revenues. Then Handler wrote: “Here, the EDA is functioning solely as a conduit to sell bonds. It is, in this context, a mere shell that serves no governmental function other than to issue the bonds for the State itself, becoming, in effect, a shield to insulate the State from being labeled a debtor.” Lance said he won’t sue, primarily because he thinks it’s inappropriate for a member of the majority leadership to sue his own legislative chamber. Jersey City Mayor Schundler has of late also backpeddled from bringing an action against the governor. His spokesman, Darren Boch, cites the awkwardness of fighting a law that will pump $1 billion into the city to renovate and replace rundown schools. Boch also notes the obvious. Schundler is planning to run for governor next year, “and suing the governor may not be the best way to get your campaign off on the right foot.” But Carroll said he’s willing to be a plaintiff, though he and Schundler admit to hunting about for a plaintiff who could carry the expense of litigation. To that end, both men say they have contacted the New York-based Atlantic Legal Foundation, a conservative public interest organization backed by large corporations. Martin Kaufman, the foundation’s general counsel, said the organization has been approached and is researching the issue but has made no decision. The Indianapolis-based Hudson Institute is another possibility, said Carroll. MARKET DECIDES What might the Court might do if asked to rule on the proposed school construction bond deal? Many bond experts believe that appropriation bonds are constitutional and that the bonds would withstand scrutiny. John Scally, a partner with Newark, N.J.’s McCarter & English, said he sees no constitutional problem with the 1997 or the proposed bond issue. “If they are appropriations bonds, they are not subject to referendum,” he said. “They are not general obligation bonds. The state is not behind them. There is no tax pledge behind them. The only thing behind them is the Legislature’s moral pledge to pay the debt service.” He said the market understands that and investors buy them anyway, though the state must pay a higher interest rate. The bond issue should withstand any challenge, said Scally. “There’s nothing new here,” said Scally, “and this has been going on all over the country, not just New Jersey.” One lawyer who thinks any challenge will be fruitless is David Sciarra, executive director of the Education Law Center, the Newark-based organization that has long represented the plaintiff school children in Abbott v. Burke and its predecessor, Robinson v. Cahill. The most recent incarnation of that litigation, Abbott V, calls for the start of construction of new facilities in New Jersey’s 30 poorest districts by spring 2000. Sciarra points out that after Abbott IV, in 1997, in which Handler ordered the state’s education commissioner to devise a plan to meet the construction needs of New Jersey’s so-called needy districts, Commissioner Leo Klagholz presented a plan based on the sale of appropriation bonds. “That plan, presented to Judge [and special master Michael Patrick] King, specifically laid out that it would be the Educational Facilities Authority, the EFA, that would issue the bonds, and that those bonds would not be general obligation bonds but appropriation bonds that do not require statewide voter approval,” Sciarra said. Lawmakers ultimately decided on the EDA as the issuing authority this time around as well. Sciarra said he believes that implicit in the Court’s acceptance of the state’s plan — later embellished to include billions more for every district in the state — is an acceptance of the bonding mechanism outlined by the education commissioner. But he said further that if a challenge had any merit, it would likely succeed only to undo the “non-Abbott” portion that is to fund 40 percent of the cost of construction in those districts. “The state has to fund the Abbott districts under the Court’s constitutional mandate, which places that funding in a whole different context of the other funding,” said Sciarra. Asked whether Attorney General John Farmer Jr. has a legal opinion on the question, spokesman Chuck Davis declines to comment, citing the attorney-client privilege. Bond counsel Kraft disagrees with Sciarra, saying that nothing in the Abbott order permits the state to violate its constitution to carry out the Court’s mandate, no matter how worthy the goal. And Carroll, Lance, Schundler and others point out that the state can fund the construction out of the annual budget, now bulging with an $800 million surplus. Kraft acknowledges being bond counsel in 1995 for $220 million in higher education trust fund bonds. Those were issued through the EFA and were appropriation bonds not subject to a referendum. Said Kraft today of that deal, in light of his present stance: “I came to recognize that I was wrong. I was persuaded by Justice Handler in 1997, and now, to be doubling the state’s debt without voter approval, it’s gone too far.” State debt is now about $14.5 billion, up from $8.6 billion in mid-1996 and $4.1 billion in June 1990. The state’s debt service, in turn, has steadily risen, roughly tripling during the 1990s to $1.5 billion. The debt load per person now stands at more than $1,700. Kraft and the other opponents also recognize that of the $14.5 billion in current state debt, only $4.2 billion was submitted to the voters for approval.

This content has been archived. It is available exclusively through our partner LexisNexis®.

To view this content, please continue to Lexis Advance®.

Not a Lexis Advance® Subscriber? Subscribe Now

Why am I seeing this?

LexisNexis® is now the exclusive third party online distributor of the broad collection of current and archived versions of ALM's legal news publications. LexisNexis® customers will be able to access and use ALM's content by subscribing to the LexisNexis® services via Lexis Advance®. This includes content from the National Law Journal®, The American Lawyer®, Law Technology News®, The New York Law Journal® and Corporate Counsel®, as well as ALM's other newspapers, directories, legal treatises, published and unpublished court opinions, and other sources of legal information.

ALM's content plays a significant role in your work and research, and now through this alliance LexisNexis® will bring you access to an even more comprehensive collection of legal content.

For questions call 1-877-256-2472 or contact us at [email protected]

 
 

ALM Legal Publication Newsletters

Sign Up Today and Never Miss Another Story.

As part of your digital membership, you can sign up for an unlimited number of a wide range of complimentary newsletters. Visit your My Account page to make your selections. Get the timely legal news and critical analysis you cannot afford to miss. Tailored just for you. In your inbox. Every day.

Copyright © 2020 ALM Media Properties, LLC. All Rights Reserved.