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The New Jersey Supreme Court has paved the way for public and quasi-public agencies to use contract debt to fund their operations without going to the polls and without loading up their investment vehicles with cautionary language. Last Wednesday, the divided court narrowly construed the New Jersey Constitution’s Debt Limitation Clause — so narrowly that, for all practical purposes, it no longer exists. By excluding contract debt from the Article VIII, � 2, �3 prohibition on issuing state bonds without voter approval, the court restricted the clause’s ambit to general obligation bonds, which have become a rarity. Standard & Poor’s estimates the state’s current debt at $16.7 billion, of which $13.2 billion — or 79 percent — is contract debt. “We are unwilling to disrupt the State’s financing mechanisms in the circumstances presented to us, and agree with the majority of state courts interpreting their own constitutions that the restrictions of the Debt Limitation Clause do not apply to appropriations-backed debt,” Chief Justice Deborah Poritz wrote for the 4-3 majority in Lonegan v. State of New Jersey, A-15-02. To rule otherwise, she said, would impair the state’s ability to pay for major projects, ignore half a century of prior case law and buck the trend followed by at least 32 other states that uphold some form of appropriations-backed debt. Justices Virginia Long, Peter Verniero and James Zazzali dissented, saying the majority was running roughshod over the clause’s explicit mandate, namely 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 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.” The dissenters noted that contract or appropriations debt amounted to $10.8 billion, or 75 percent of the state’s $14.3 billion debt, as of June 30, 2002. “The sheer volume … makes it virtually impossible for the State to default on such obligations without severe and unacceptable harm to New Jersey’s credit rating. Thus, for all practical purposes, the State ultimately is responsible for that indebtedness within the meaning of the Debt Limitation Clause,” they wrote. Poritz said the dissenters’ concerns would be best addressed by the governor and the Legislature. “We leave it 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,” wrote Poritz, joined by Justices James Coleman Jr., Barry Albin and Jaynee LaVecchia. In reaction to the ruling, Sen. Leonard Lance, R-Hunterdon, said he would push for a vote on a proposed constitutional amendment, SCR-20, that would put to the voters the question of whether to ban the use of contract debt. Contract debt refers to independent and quasi-independent agencies selling project-funding bonds based on a legislative promise to pay them off through revenues from the general fund in future years. The bonds are not backed by the state’s full faith and credit, and the obligation to repay is not a legal one. Still, repayment is virtually assured, since the state’s bond rating would otherwise suffer. State Treasurer John McCormac said the ruling simply recognized realities. “The Court makes it clear that the state must be given some flexibility with its borrowing policies,” he said in a prepared statement. “There are many programs like open space acquisition and transportation improvements where debt management allows us to maximize purchases and projects in the short term … “ John Scally Jr., head of the bond department at Newark’s McCarter & English, also approves. “It was the right decision,” he says, adding that it could result in saving the state money in the long term since contract debt bond issues will no longer have to carry a warning that there is no guarantee the Legislature would honor the debt. Political reality, he says, dictates that legislatures will not default on their fiscal obligations. The court’s ruling was greeted with dismay by Bogota Mayor Steven Lonegan, who initiated the suit on behalf of a taxpayer organization, StopTheDebt.com. Lonegan says the court has given this and future legislatures and administrations “carte blanche” to incur further debt without having to get voter approval. The suit was in response to the legislature’s decision to finance $8.6 billion in Abbott v. Burke school construction projects through contract debt. The court rejected that challenge last year in Lonegan v. State of New Jersey ( Lonegan I), 174 N.J. 435 (2002), on the grounds it had ordered the state to build those facilities, but said it would consider banning further contract debt after additional arguments.

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