Lonegan v. State

The opinion of the Court was delivered by

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 *5 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.

I

A

The procedural posture of this case has been set forth in Lonegan v. State, 174 N.J. 435, 809 A.2d 91 (2002) (Lonegan I), and will not be repeated here except by way of a brief summary. We note only that plaintiffs filed their complaint in December 2000, when they sought a declaration “that [the Education Facilities Construction and Financing Act] and other statutes authorizing contract bond financing 1 are unconstitutional” under the Debt Limitation Clause. Lonegan I, 174 N.J. at 441, 809 A.2d 91. The trial court rejected plaintiffs’ challenge by grant of summary judgment to defendants, and a majority in the Appellate Division *6 concurred. Lonegan v. State, 341 N.J.Super. 465, 481, 775 A.2d 586 (App.Div.2001). The matter came before us as of right because of a dissent in our intermediate appellate court. N.J. Const. art. VI, § 5, ¶ 1; R. 2:2-1(a).

B

Lonegan I was .decided on August 21, 2002. In its initial opinion, the Court held that the issuance of appropriations-backed debt authorized by the Educational Facilities Construction and Financing Act (EFCFA) was not violative of the Debt Limitation Clause. 174 N.J. at 441, 809 A.2d 91. Our holding recognized that the Legislature had enacted EFCFA to fulfill its constitutional obligation to fund new school construction mandated by this Court in Abbott v. Burke, 153 N.J. 480, 710 A.2d 450 (1998) (Abbott V). Lonegan I, supra, 174 N.J. at 441, 457-62, 809 A.2d 91 (discussing the State’s obligations under N.J. Const, art. VIII, § 4, ¶ 1 (the Education Provision)). We observed that the “debt authorized by EFCFA is sui generis” because of its constitutional underpinnings in the Education Provision of our Constitution, as reinforced by Article VIII, Section IV, paragraph 2 (the School Fund Provision), which “separately authorizes state-backed school bonds without reference to the Debt Limitation Clause.” Id. at 461, 809 A.2d 91. In light of the State’s reliance on the Court’s general approval of a similar financing scheme in Abbott V, and on “our long line of precedents validating similar debt issued by an independent authority,” we sustained the state’s school construction financing scheme. Id. at 462, 809 A.2d 91.

Although the EFCFA challenge was at the core of Lonegan I, the plaintiffs attempted a broad attack on all legislative programs financed through appropriations-backed debt. Id. at 439-41, 809 A.2d 91. Nonetheless, the Court chose to limit its holding to EFCFA because plaintiffs failed to provide argument sufficiently anchored in the specific financing schemes authorized by the statutes they found objectionable. Id. at 440A11, 464-65, 809 A.2d 91. Unwilling to resolve issues of constitutional import without *7 legal and factual context, we sought a more focused discussion from the parties and “direct[ed] the Clerk of the Court to establish a schedule for additional briefing and reargument” to take place in the next court term. Id. at 464, 809 A.2d 91. More specifically, we asked

[plaintiffs [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 ease law of this and other states. We [also] ask[ed] the parties to assume in then- 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.

[Id. at 464-65, 809 A.2d 91.]

We explained:

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 terns 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?

[Id. at 465, 809 A.2d 91.]

This opinion follows briefing and oral argument on those questions.

II

To place the Court’s inquiry in context, we recount in condensed form the substantive background provided in Lonegan I. We begin, as we must, with the language of the Clause:

The Legislature shall not, in any manner, create in any fiscal year a debt or debts, ... 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____[S]uch law shall provide the ways and means, exclusive of loans, to pay the interest of such debt or liability as it falls *8 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. 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.

[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, 809 A.2d 91 (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.

[Id. at 439, 809 A.2d 91.]

Those conclusions directly followed from our review of that case law under the framework found in In re Loans of the Property Liability Insurance Guaranty Association, 124 N.J. 69, 75-76, 590 A.2d 210 (1991). There, Justice Handler analyzed the two dominant strains in the Court’s Debt Limitation Clause jurisprudence: “ ‘decisions holding] that the constitutional provision does not apply to the creation of debt by independent public corporate entities, ... [and] decisions generally finding] that legislative expressions of intent to provide future funding do not create present debts of the State subject to the ... [C]lause.’ ” Lonegan I, supra, 174 N.J. at 445, 809 A.2d 91 (quoting In re Loans, supra, 124 N.J. at 75-76, 590 A.2d 210). We observed that decisions in the first category “rely on the legal autonomy of the issuing authority[,] ... on specific language disclaiming any enforceable obligation on the part' of the State,” and, in some instances, on the availability of a special revenue source, id. at 450, 809 A.2d 91, whereas decisions in the second category “hold[ ] ... *9 that the Legislature’s expression of intent to provide future funding does not create debt subject to the Debt Limitation Clause.” Ibid, (discussing In re Loans, supra, 124 N.J. at 76, 590 A.2d 210). See Enourato v. N.J. Bldg. Auth., 90 N.J. 396, 448 A.2d 449 (1982) (holding that bonds issued by New Jersey Building Authority for construction of facilities to be leased by State did not violate the Clause because payments were “subject to legislative appropriations” and State did not pledge full faith and credit to guarantee bonds); N.J. Sports and Exposition Auth. v. McCrane, 61 N.J. 1, 292 A.2d 545 (explaining that “the debt clause applies only to obligations which are legally enforceable against the State” and that debts of corporate agency created by Legislature neither bind State nor fall under Debt Limitation Clause), appeal dismissed sub. nom. Borough of E. Rutherford v. N.J. Sports and Exposition Auth., 409 U.S. 943, 93 S.Ct. 270, 34 L.Ed.2d 215 (1972); N.J. Tpk. Auth. v. Parsons, 3 N.J. 235, 69 A.2d 875 (1949) (same). See also City of Camden v. Byrne, 82 N.J. 133, 152, 411 A.2d 462 (1980) (affirming Legislature’s right not to fund various programs, deeming such programs suspended until adequate appropriations are made); Bulman v. McCrane, 64 N.J. 105, 312 A.2d 857 (1973) (holding that twenty-five year lease arrangement under which State would eventually assume ownership of leased building did not create present debt subject to Debt Limitation Clause even though future rent installments would be paid out of current revenues annually appropriated); City of Passaic v. Consolidated Police & Firemen’s Pension Fund Comm’n, 18 N.J. 137, 113 A.2d 22 (1955) (holding that statute requiring State to contribute annually to Police and Firemen’s Pension Fund was not violative of Clause because no present debt was created). Most important, despite the differences among the individual bonding mechanisms under consideration, we found that a unifying thread linked both groups of cases, to wit, that “the Debt Limitation Clause applies only when the State is legally obligated to make payments authorized by the Legislature.” Lonegan I, supra, 174 N.J. at 446, 809 A.2d 91.

*10 III

As we directed in Lonegan I, the plaintiffs have presented argument regarding specific state statutes authorizing the issuance of appropriations-backed debt through independent state agencies and designed to fund diverse programs serving various short- and long-term objectives. See, e.g., New Jersey Economic Development Authority Act, N.J.S.A 34:1B-1 to -21.15 (funding initiatives to promote economy of New Jersey, increase employment opportunities, assist in development or redevelopment of political subdivisions of State, reduce industrial and commercial environmental pollution and promote commercial enterprise within State); New Jersey Transportation Trust Fund Authority Act of 1984, N.J.SA 27:1B-1 to -31 (authorizing initiatives to further State’s transportation infrastructure, including public highways, public transportation projects and mass transit passenger service); New Jersey Sports and Exposition Authority Law, N.J.SA. 5:10-1 to -38 (providing stadiums and other buildings and facilities in the Hackensack meadowlands for athletic contests and other expositions); New Jersey Educational Facilities Authority Law, N.J.S.A. 18A:72A-1 to -71 (financing construction of dormitories and educational facilities for public and private institutions of higher education); County College Capital Projects Fund Act, N.J.S.A. 18A:72A-12.1 to -12.8 (authorizing financing of county college capital projects); Tobacco Settlement Financing Corporation Act, N.J.SA 52:18B-1 to -14 (providing for acquisition and management'of State’s national tobacco settlement receipts). Plaintiffs assert that the financing mechanisms employed by those statutes generally have “common features” that, together, render them unconstitutional: a state authority that is authorized to “issue bonds for a [sjtate purpose;” language permitting the State Treasurer to enter into an agreement with the authority to pay the debt service on the authority’s bonds; and language requiring “payments under the [sjtate contract [to be] ‘subject to annual appropriations.’ ” In plaintiffs’ view, the “subject to appropriation” qualification is meaningless because, as a practical matter, the State cannot default on such bonds without substantial nega *11 tive impact on its credit rating and, therefore, on its access to financial markets. As a result, “subject to appropriation bonds” are effectively “full faith and credit bonds.” Because both types of debt are supported by the State’s general taxing power, both require voter approval under the Debt Limitation Clause.

Despite that broad claim of invalidity, however, in response to our initial inquiry requesting argument in respect of the “different categories of contract debt,” with particular emphasis on debts “backed by a revenue stream” and on structured lease payments, the plaintiffs have narrowed the scope of their challenge by redefining contract or appropriations debt. They now describe this type of debt as a

liability of the State, or any independent authority created by the State, which is unsupported by an adequate and independent revenue source, and which is to be amortized exclusively or primarily by funds derived from annual appropriations, or by tax-based revenue that is properly payable into the State’s General Fund, absent a constitutional dedication of revenue.

So circumscribed, plaintiffs’ challenge now distinguishes certain revenue bonds from most other contract debt. Debt that finances a toll road or bridge, a college, or a sports and entertainment facility, and that is retired from a “special fund” comprised of revenues generated by the financed facility or project (e.g., from toll collections, tuition payments, or ticket sales), is exempt from the requirements of the Clause because general tax revenues are not tapped for repayment. N.J. Sports & Exposition Auth., supra, 61 N.J. at 10, 292 A.2d 545; N.J. Tpk. Auth, supra, 3 N.J. at 238, 69 A.2d 875; accord Tuscon Transit Auth. v. Nelson, 107 Ariz. 246, 485 P.2d 816, 821 (Ariz.1971); California Toll Bridge Auth. v. Kelly, 218 Cal. 7, 21 P.2d 425, 427 (1933); Grossman v. Public Water Supply Dist. No. 1 of Clay County, 339 Mo. 344, 96 S.W.2d 701, 706 (1936); Laverents v. City of Cheyenne, 67 Wyo. 187, 217 P.2d 877, 880-82 (1950).

Further, although plaintiffs’ definition of contract debt does not on its face exempt bonds issued to finance the construction of facilities that are subsequently leased back to the State, a practice sustained by this Court in Enourato, supra, 90 N.J. at 409-11, 448 *12 A.2d 449, plaintiffs do not challenge this type of contract debt. In such cases, the lease proceeds used to retire the bonds, like contract or appropriations-backed debt, are paid from general appropriations pursuant to contractual arrangements; however, plaintiffs consider those transactions distinct legal obligations that do not offend the Debt Limitation Clause so long as they are “bona fide leases” reflecting the fair market rental of the facility and containing terms typically found in commercial leases. See Lonegan I, supra, 174 N.J. at 492-93, 809 A.2d 91 (Stein, J., concurring in part and dissenting in part) (discussing scope of Court’s holding in Enourato, supra, 90 N.J. at 410, 448 A.2d 449, and suggesting that bona fide leases might not come within strictures of Clause).

In its response to our inquiries, the State argues that the new rule advanced by plaintiffs is unsupported by the language of the Clause, and if adopted by this Court, would severely unsettle the State’s financial operations. In the State’s view, fifty years of this Court’s jurisprudence have provided the Legislature with an objective and workable legal benchmark around which to craft fiscal policy without having to guess whether a particular borrowing scheme will offend the Debt Limitation Clause. To break with our past decisions and extend the Debt Limitation Clause to those debts that the State has no legal obligation to repay would inject uncertainty into State borrowing practices by “mir[ing] the Court in[to] drawing arbitrary and artificial distinctions among legally indistinguishable funding arrangements in complex commercial transactions!.]”

The State also claims that a number of state financing mechanisms that are “far removed from bond financing,” such as “multiyear contracts] subject to appropriations],” would be rendered constitutionally suspect, causing additional disruption to the state’s finances. Those concerns led the State to move, in September 2002, for clarification of that portion of Lonegan I setting this matter down for reargument and stating that the Court’s final disposition would not be applied retroactively. 174 N.J. 354, 807 *13 A.2d 189 (2002). There, the Attorney General represented that residual uncertainty remained in respect of the validity of appropriations-backed bonds issued prior to the final disposition of this matter. In its supplemental brief, the State sets forth in detail the number and types of programs financed through appropriations-backed debt, ranging from the authority bonds specifically challenged by plaintiffs to lease-purchase agreements for real property, equipment, and services, and tax and revenue anticipation notes. In reliance on our past decisions, the State has made repayment subject to future appropriations and expressly disclaimed any enforceable legal obligation, thereby structuring those programs to comport with the bright line rule previously enunciated by this Court. See Enourato, supra, 90 N.J. at 410, 448 A.2d 449.

In response to plaintiffs’ charge that there is no substantive difference between appropriations-backed debt and general obligation debt, the State points out that the former provides the State with the flexibility to renegotiate more favorable repayment terms as the need arises, a benefit not available with general obligation debt. See Reuven Mark Bisk, Note, State and Municipal Lease — Purchase Agreements: A Reassessment, 7 Harv. J.L. & Pub. Pol’y, 521, 523-24 (1984) (discussing “attractive financial benefits” of appropriations-backed leases). 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 prevailing rule, grounded in the plain language of the Clause and in those differences, provides the Legislature with the legal certainty it needs to develop fiscal policy.

IV

We agree with the State. Under our 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 *14 economic realities. The variety of financing mechanisms employed in both the private and the public sectors today were unheard of when the Debt Limitation Clause was made a part of our Constitution in 1844. Had the framers been prescient, they might have written the Clause differently. By its terms, however, the Clause as written requires voter approval only when the State is legally required to make payment on the debt it has incurred.

The Debt Limitation Clause was adopted in 1844 because of concerns about binding obligations imposed on future generations of taxpayers and because of unchecked speculation by the state. In Lonegan I, we observed that New Jersey’s constitutional debt restriction was enacted originally to “protect against the type of financial debacle experienced” by other states that had borrowed without restraint during the 1830s. 174 N.J. at 443-44, 809 A.2d 91 (citations omitted). Those states financed public projects and speculated in western lands or banking schemes only to default on their obligations during the economic downturn that followed. Ibid. Today, states are routinely involved in activities such as road and railway construction and expansion, as well as other public works projects, that in the past were considered speculative but now are seen as essential and appropriate governmental functions. See, e.g., Bisk, supra, 7 Harv. J.L. & Pub. Pol’y at 521-24 (discussing importance of lease-purchase agreements in enabling state governments to construct and upgrade schools, transportation systems, and other public infrastructure); Jerome Shestack, The Public Authority, 105 U. Pa. L.Rev. 553, 557 (1957) (noting that increased demand for public improvements in postwar era led to widespread creation of independent public authorities with power to incur debt). To paraphrase Justice Jacobs, yesterday’s speculation has become “sound and economical current business practicet ] — ” McCutcheon v. State Bldg. Auth., 13 N.J. 46, 78, 97 A.2d 663 (1953) (Jacobs, J., dissenting), overruled by Enourato, supra, 90 N.J. at 410, 448 A.2d 449. When contract or appropriations-backed debt is issued, however, the State does not pledge its full faith and credit and is not legally bound to make *15 payment on that debt. Enourato, supra, 90 N.J. at 410, 448 A.2d 449; N.J. Sports and Exposition Auth., supra, 61 N.J. at 14, 292 A.2d 545. See Wilson v. Ky. Transp. Cabinet, 884 S.W.2d 641, 644 (Ky.1994) (holding that unconstitutional state debts do not arise when state does not pledge its full faith and credit); Dep’t of Ecology v. State Fin. Comm., 116 Wash.2d 246, 804 P.2d 1241, 1245-47 (1991) (same). See also Black’s Law Dictionary 417 (6th ed.1990) (defining “default” as “the omission or failure to perform a legal or contractual duty”).

In sum, the variety of functions assumed by the government since the 1800s, and the sophisticated means now used to finance those functions, make it difficult if not impossible to differentiate among acceptable and unacceptable types of twenty-first century appropriations-baeked debt under a nineteenth-century paradigm. See Book v. State Office Bldg. Comm’n, 238 Ind. 120, 149 N.E.2d 273, 281 (1958) (opining that interpretation of debt limitation provision “constantly [must] be adapted to new questions and conditions which arise because of an ever-expanding economy and the progress of society”); In re Okla. Capitol Improvement Auth., 958 P.2d 759, 771 (Okla.) (observing that “the framers of Oklahoma’s debt limitation provisions cannot be presumed to have anticipated a financially sophisticated society in which goods and services are purchased ... without a pledge of the full faith and credit of the state”), cert. denied, Fent v. Okla. Capitol Improvement Auth., 525 U.S. 874, 119 S.Ct. 174, 142 L.Ed.2d 142 (1998). Even the plaintiffs concede that the Clause does not require the State to obtain voter approval each time appropriations-baeked bonds are issued. They fail, however, to draw principled distinctions between structured lease payments and revenue bonds, and the types of appropriations-baeked debt they find objectionable.

In Lonegan I, we adverted to the case law in other states, noting the various state appellate courts that followed the New Jersey approach. 174 N.J. at 452-53, 809 A.2d 91. 2 In contrast, *16 we discussed those cases that treated appropriations-baeked debt “as legislative decisions to circumvent debt limitation restrictions.” Id. at 453-54, 809 A.2d 91 (citing Montano v. Gabaldon, 108 N.M. 94, 766 P.2d 1328, 1330 (1989); State ex rel. Ohio Funds Mgt. Bd. v. Walker, 55 Ohio St. 3d 1, 561 N.E.2d 927, 932, reh’g denied, 55 Ohio St.3d 722, 564 N.E.2d 502 (1990)). Those cases “rely ... on practical considerations relating to the source of debt payments or the category of expenses funded by the debt.” Id. at 455, 809 A.2d 91. Thus, in Winkler v. State of West Virginia School