Questioning the authority

The Supreme Court takes up the Murphy administration’s borrowing plan in a case with wide-ranging fiscal and political implications

Daniel J. Munoz//August 10, 2020

Questioning the authority

The Supreme Court takes up the Murphy administration’s borrowing plan in a case with wide-ranging fiscal and political implications

Daniel J. Munoz//August 10, 2020

The case could be the most consequential to go before the state Supreme Court this year. At stake is the Murphy administration’s plans to borrow $9.9 billion to make up for revenues lost during the COVID-19 economic downturn. The justices heard two and a half hours of oral argument Aug. 5 over the constitutionality of the governor’s scheme.

The suit, filed by the state’s Republican Party and GOP lawmakers, was fast-tracked to the high Court. The plaintiffs are relying on the Court’s 2004 Lance v. McGreevey decision, which ruled prospectively that bond proceeds could not cover the state government’s operating expenses. Then-Gov. Jim McGreevey, a Democrat, wanted to use bond money for much the same purpose.

The Lance decision effectively handed victory to both sides. The justices found that the plaintiffs were correct in that the plan did not meet the legal definition of “revenue” but they stipulated that the ruling was prospective only, allowing the borrowing to proceed.

Gov. Phil Murphy and leadership at the Democratic-controlled state Legislature argue that the money from the borrowing plan is vital to make up for nearly $10 billion in tax revenue that could evaporate through June 30, 2021, due to the economic calamity.

While several justices seemed open to the idea that the pandemic constituted an emergency to which the borrowing was an appropriate response, their questions also evinced some concern over whether some limits are necessary to curb similar actions in the future.

If not COVID-19, then what?

The Murphy administration’s plan to borrow rests on a provision in the current version of the state constitution, which was adopted in 1947, that allows the state to take on debt – without voter approval – “for purposes of war, or to repel invasion, or to suppress insurrection or to meet an emergency caused by disaster or act of God.”

“Why do you think that was put in the constitution, if not to address the economic consequences of the 1930s, the Great Depression?” Justice Barry Albin asked Michael Testa Jr., the lawyer for the GOP and a Republican state senator representing the 1st District.

“The people who were debating the constitution were talking about the flexibility that should be given to the Legislature,” Albin added. “If it wasn’t for something like a pandemic, tell me why they put in the words ‘act of god’ or disaster’ if it wasn’t to address the historical memory, the Great Depression.”
Justice Anne Patterson expressed similar sentiments, noting that the framers of those clauses in the 1947 constitution “would want the Legislature to have the flexibility that it needed to try to dig out from under in a massive crisis.

“They were from their own experience, thinking about the Depression, and should we be considering that in interpreting these clauses?”

Mark Sheridan, who successfully argued the 2004 case, contended that borrowing “to deal with the loss of revenue in anticipated expenses is simply not allowed.”

Mark Sheridan, partner, Squire Patton Boggs

“You raise revenue or you cut spending,” he told the justices. Sheridan is representing Republican gubernatorial candidate Jack Ciattarelli, who filed a friend of the court brief supporting the GOP side.

The “act of god” provision was put into the constitution to “give the Legislature the flexibility to deal with unanticipated costs,” Sheridan argued – expenses associated with health care workers, personal protective equipment, contact tracing, ventilators and other medical equipment.

For the Republican Party, the outcome of the suit has political implications. In November, Testa scored an upset against the Democrat incumbent, then-state Sen. Bob Andrzejczak, in what was otherwise a quiet election.

Doug Steinhardt, a lawyer by trade and chair of the GOP, is also weighing a bid for the 2021 Republican gubernatorial nomination.

Ciattarelli, a former Republican Assemblyman from Somerset County, and another contender for the GOP nomination,had sought to join the case as a plaintiff but his bid was rejected.

‘COVID-19 sports arena’

The justices also focused on what constitutes a COVID-related expense and how the administration might try to spend money it borrows.

New Jersey Supreme Court Chief Justice Stuart Rabner

“Are there any limits the state would have to abide by, could the state use the $9.9 billion to subsidize a new sports arena to the cost of $1 billion?” Chief Justice Stuart Rabner asked Assistant Attorney General Jean Reilly, who is handling the case for the administration.

Murphy would not be able to go forward with any borrowing until a four-person committee within the state Legislature signs off on the plans. But any actual spending would be handled by the appropriations committees in both the Assembly and Senate, which control the state’s purse strings.

“To say $9 billion that essentially goes into the general fund, to be spent however the government thinks should be spent, review it after the fact, isn’t that exactly what the debt limitation cause was supposed to prevent?” Justice Lee Solomon asked.

Solomon was referring to another clause in the constitution providing that debt can only equal up to 1 percent of the state budget before it has to go to the voters for approval.

Murphy has argued against waiting until the general election on Nov. 3, warning that “we’ll be broke” by then.

More specifically, Justice Jaynee LaVecchia said she wanted to know whether the bonds would go toward debt service – basically paying off debt with more debt.

Reilly assured the Court that the administration would not do that. Debt service for other state borrowing and its unfunded pension obligations, accounts for 20 percent of the budget.

The governor’s three-month extension of the current budget calls for pushing off several hundred million dollars in pension payments, though the state Treasury has said it would make all four pension payments for the shortened nine-month budget.

But Reilly attempted to parry several inquiries by justices into just how the money would be spent and

what wouldn’t constitute an eligible expense, arguing that the question would be up to the Murphy administration and state Legislature during budget negotiations.

“It will just have an amount and a general statement to meet the financial needs … caused by COVID, and then the details don’t come until the appropriations of the monies are being made,” LaVecchia lamented. “Typically we would review the authorization of the bonds at the same time it’s going to be sold. “

She added: “Once the bonds are out, and sold and the money is in, the horse is out of the stall.”

Reilly countered that a wide variety of costs could be financed with the bond proceeds.

“Here, the emergency precisely is not only a fiscal one, it’s a fiscal one that is defined by the loss of revenues, because it’s a direct consequence,” she said.

“It’s caused directly by the pandemic. The fiscal emergency is the revenue deficit that is directly tied to the efforts to mitigate the pandemic.”

Economy in tatters

Although business closures ordered by the governor apparently helped contain the outbreak, the restrictions have led to one of the worst recessions in history, along with some of the highest unemployment rates. And the state could take another financial hit from a widely expected second wave of COVID-19 that coincides with the fall flu season, on top of another $20 billion in shelled out expenses to prepare for and try to contain the pandemic.

Murphy has argued that without the bond money and federal relief from a new iteration of the congressional COVID-relief package, the state would have to make steep cuts to pension payments, teachers, police and fire, social services, food stamps, and a health care infrastructure already overburdened by the global pandemic.

State Republicans have questioned whether the budget impact will be as severe as state officials are cautioning.

The plan calls for borrowing roughly half of that through a Federal Reserve program to be paid back in three to five years, and the other half through bonds in the private market to be paid back over the course of several decades.

Murphy, and legislative leadership, have implored GOP opponents on what they would propose in place of borrowing.

“[W]hat’s your plan B, folks out there? What else do you think we should be doing? It’s just ridiculous the absence of viable alternative public policy from folks who are whining about this,” the governor said in July.