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The New Jersey Supreme Court in 2016.

Supreme Court hears arguments on bonding bill

Murphy, Republican attorneys face off over state’s ability to borrow up to $10 billion to plug budget holes

By Nikita Biryukov, August 05 2020 1:42 pm

The New Jersey Supreme Court held oral arguments in a Republican suit seeking to strike a law allowing the state to borrow up to $10 billion to plug budget holes created by the COVID-19 crisis Wednesday.

The roughly two-and-a-half-hour-long affair saw oral arguments presented by attorneys for the New Jersey Republican State Committee, Gov. Phil Murphy’s administration and GOP gubernatorial candidate Jack Ciattarelli, who is not a party to the suit but was admitted as a friend of the court.

As they have done in the press in the months since Murphy first raised borrowing as a solution to the state’s fiscal tumble, the Republicans argued that borrowing to make up for lost revenue was unconstitutional.

“I agree wholeheartedly that the framers of the constitution of 1947 had been, in fact, thinking very long and hard about the financial disaster that was the great depression, but borrowing to address a fiscal emergency is the way around the appropriations clause,” said State Sen. Michael Testa (R-Vineland), the GOP State Committee’s attorney. “It is nonsensical that such an emergency would have to be a separate triggering event or disaster or act of god.”

The appropriations and debt limitation clauses of the state’s constitution require New Jersey to enact a balanced budget and require voter approval for borrowing worth more than 1% of the appropriations in a given budget, though exceptions exist for emergencies caused by disasters of acts of god.

Testa and Ciattarelli attorney Mark Sheridan argued those exceptions would not allow the state to borrow to plug budget holes because the framers of the 1947 constitution did not explicitly set out parameters for a fiscal emergency.

Deputy Attorney General Jean Reilly, who argued the case for the state, saw it another way.

“I would respectfully disagree. I think the framers explicitly … said that, during times of emergency, the ability to use bonds to create debt to make up for revenue deficiencies would be unlimited because that was the historical experience,” she said.

Reilly pointed to borrowing during the Great Depression and Civil War that greatly exceeded the 1% limit in the current constitution.

In 1939, Reilly said, the state put $21 million of bond proceeds into its $39 million budget.

In some sense, the precedent is on Republicans’ side.

In 2004, Former Rep. Leonard Lance, then a state senator, sued the state in an attempt to block then-Gov. Jim McGreevey from using bond proceeds to balance the budget.

The court sided with Lance but ultimately allowed that borrowing to go through but ruled that borrowed money did not qualify as revenue because the borrowing created debt.

“I just can’t fathom that $9.9 billion of debt can ever constitute revenue under any budgetary gymnastics someone would want to engage in,” Testa said, citing Lance v. McGreevey.

The Republicans further argued that the state could not use the borrowed monies to pay off general obligations in the budget even if the state could bond without voter approval.

“Those are not expenditures necessary to meet an emergency,” Sheridan said. “Expenditures necessary to meet an emergency are those that were unanticipated at the time the budget was put in place.”

A three-month stopgap budget signed into law last month included roughly $2 billion in deferred spending contingent on the bond proceeds.

Republicans argued that the borrowing to shore up those appropriations and others would saddle young New Jerseyans with a burden that would be repaid over years or decades. In response, the state said the alternative was worse.

“This isn’t a burden that the state imposes lightly, but the alternative — not borrowing and imposing ‘devastating cuts,’ as the treasurer called them — is to visit upon future generations a far more grievous legacy, mainly the indelible imprint of a generation or more lost the poverty and unemployment,” Reilly said. “The pandemic exists, and future generations will not escape unscathed. The question is whether they will pay in monetary terms or in far more existential terms.”

Following the hearing, Republican State Chairman Doug Steinhardt and Ciattarelli issued optimistic statements about the hearing.

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