The New Jersey Supreme Court unanimously ruled that Gov. Phil Murphy’s plan to issue bonds to offset massive COVID-19-related revenue losses meets the state’s constitutional debt requirements.
The state’s high court
The New Jersey COVID-19 Emergency Bond Act authorizes as much as $9.9 billion of state borrowing either through the issuance of general obligation bonds with up to 35-year maturities or short-term debt through the U.S. Federal Reserve’s
The New Jersey Republican State Committee filed a lawsuit challenging the measure, arguing that GO bonds cannot be issued without voter approval under the state’s constitution.
“The Court concludes that the Act is valid under the Debt Limitation Clause and that the Appropriations Clause does not bar the new law,” Chief Justice Stuart Rabner wrote in the court’s opinion.
Assistant Attorney General Jean Reilly, who argued on behalf of the Murphy administration, said in her oral arguments that New Jersey’s constitution provides exceptions for GO borrowing to sustain operating costs without voter authorization during a major emergency such as COVID-19.
The Murphy administration pursued bonding options because the state faces severe economic headwinds following lengthy closures of non-essential businesses after the state’s COVID-19 pandemic began in March.
State Treasurer Elizabeth Maher Muoio projected in May an estimated $10 billion revenue drop through June 2021 compared to Murphy’s previous budget proposal unveiled on Feb. 25.
"I am grateful for this decision," said Murphy in his daily COVID-19 media briefing Wednesday. "The alternative would have been something that no one up here or anywhere would have wanted to experience."
The Supreme Court’s decision imposed some restrictions on the state’s borrowing capabilities saying bonding cannot exceed $9.9 billion under the legislation. The ruling also stated that the borrowing cap would be lowered if revenue projections improve.
“Revenue estimating will now become a very important element,” said Marc Pfeiffer, assistant director of Rutgers University’s Bloustein Local Government Research Center. "The governor and legislature should come to some agreement on a process that would ensure legislative input or consideration of the debt structure (length, maturity schedule, principal and interest payments), as those costs will have an impact on future budget decision making.”
The bill permits the state to borrow up to $2.7 billion by the end of the extended 2020 fiscal year on Sept. 30, and $7.2 billion for the shortened 2021 budget cycle from Oct. 1 through June 30. Murphy is scheduled to release an updated 2021 budget by Aug. 25.
All debt issuances will be subject to approval of a four-member legislative commission. The state’s 6.625% state sales tax and local property taxes collected by municipalities would be increased if general budget revenues are insufficient to meet debt service requirements.
“The court’s decision provided reasonable measures to guide borrowing,” Assembly Speaker Craig Coughlin, D-Fords, said in a statement. “We will work within those parameters and ensure proper Legislative oversight is included.”
Fitch Ratings downgraded New Jersey's GO bonds to A-minus from A in April citing the state’s low reserve levels. The Garden State is rated A3 by Moody's Investors Service, A-minus by S&P Global Ratings and A by Kroll Bond Rating Agency. Only Illinois has lower rated state debt.
New Jersey had $44.4 billion of outstanding bonded debt as of June 30, 2019, according to the state's latest annual debt report.
“This is going to be 35 years of borrowing and debt that is going to be paid off by generations to come,” Michal Testa Jr., attorney for the New Jersey Republican State Committee, who is also a GOP state senator, said during a press video teleconference briefing Wednesday. “This is going to place a heavy tax burden on the taxpayers of New Jersey.”
