Top takeaways from Supreme Court hearing on Murphy $9.9B borrowing plan

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With the Murphy administration’s plans to borrow $9.9 billion to make up for revenues lost during the COVID-19 economic downturn hanging in the balance, the state Supreme Court 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 several GOP contenders for governor, was fast tracked to the high Court.

The plaintiffs are relying on the Court’s 2004 Lance v. McGreevey case, which ruled prospectively that bond proceeds could not cover the state government’s operating expenses. 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 ability to borrow rests on an “act of god” provision within the current version of the state constitution, which was enacted in 1947. It allows the state to take on debt “for purposes of war, or to repel invasion, or to suppress insurrection or to meet an emergency caused by disaster or act of God,” and without having to get voter approval.

“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?”

‘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.

“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?” 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 appropriation’s 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.

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 absorb another financial hit from a widely expected second wave of COVID-19 that coincides with the fall flu season. and upwards 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 course of several decades.

Read more from the Aug. 10, 2020 issue of NJBIZ:

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