PETRELLA, P.J.A.D.
Plaintiffs Steven Lonegan, who is the Mayor of Bogota, and Stop the Debt.Com, LLC (collectively Lonegan) appeal from the entry of summary judgment in the Law Division declaring that the Educational Facilities Construction and Financing Act (EFCFA), N.J.S.A. 18A:7G-1 et seq., and other statutes authorizing contract bond financing do not violate the State Constitution's Debt Limitation Clause, N.J. Const., Art. VIII, § 2, ¶ 3.
On December 28, 2000, plaintiffs filed a verified complaint and obtained an order to show cause in an action in lieu of prerogative writs seeking declaratory and other relief in the Law Division to prevent the sale of contract bonds without voter approval. Plaintiffs alleged that the EFCFA and various other statutes authorizing contract bond financing have in effect unconstitutionally increased the State's debt without voter approval in violation of the cited Debt Limitation Clause. Plaintiffs sought a judgment declaring that all statutes authorizing the sale of contract bonds to be paid out of the State's General Fund without voter approval were unconstitutional. In addition, they sought an order permanently enjoining the Legislature from enacting such statutes without voter approval and preliminarily enjoining defendants from issuing contract bonds without voter approval during the pendency of the action. Defendants cross-moved for summary judgment.
When the matter was heard on January 24, 2001, the judge denied plaintiffs' application for preliminary injunctive relief on the basis that Lonegan could not demonstrate a reasonable likelihood of success on the merits. The judge then held that contract bond financing does not violate the Debt Limitation Clause and granted summary judgment in favor of defendants and dismissed plaintiffs' complaint.
Plaintiffs filed a timely notice of appeal and defendants filed a motion for direct certification to the Supreme Court. On February 22, 2001, the Supreme Court denied the motion. We denied plaintiffs' motion to stay the sale of bonds under the challenged statutes pending determination of this appeal.
We were advised at oral argument that approximately $500 million worth of bonds were issued in April 2001 out of the approximate $8.6 billion authorized.
On appeal, Lonegan argues the Law Division Judge erroneously concluded that the Debt Limitation Clause does not bar contract bond financing without voter approval. Essentially, Lonegan claims that so-called contract bond financing by the State and its agencies is a subterfuge employed solely to avoid and contravene the Debt Limitation Clause of our Constitution. Additionally, Lonegan contends that the judge erred in finding that plaintiffs were not entitled to a preliminary injunction enjoining the issuance of contract bonds pending resolution of the matter and in hearing defendants' cross-motion for summary judgment on less than twenty-eight days notice.
I.
On July 18, 2000, the Governor signed into law the Educational Facilities Construction and Financing Act (EFCFA), N.J.S.A. 18A:7G-1 et seq. Enacted in response to Abbott by Abbott v. Burke, 153 N.J. 480 (1998) (Abbott V), the EFCFA was intended by the Legislature to meet the constitutional responsibility imposed on it by the Supreme Court to provide adequate educational facilities. N.J.S.A. 18A:7G-2b. Specifically, the EFCFA provides State funding and allows the Economic Development Authority (EDA), created by L. 1974, c. 80, effective August 7, 1974 (N.J.S.A. 34:1B-1 et seq.), to act as a general construction manager for the maintenance, construction and renovation of school facilities, predominantly in the Abbott districts. N.J.S.A. 18A:7G-2c.
This was the fifth in a series of Abbott decisions applying the abstract phrase "thorough and efficient" in the education context. See Bd. of Educ. of Deptford v. Deptford Township, 225 N.J. Super. 76, 84, n. 4 (App.Div. 1988), aff'd as modified, 116 N.J. 305 (1989). Justice Handler in Abbott V seemed to approve the Department of Education's recommendation that the Legislature empower the Educational Facilities Authority (EFA) "to finance construction and renovation of elementary and secondary schools in the Abbott districts." Abbott by Abbott v. Burke,supra ( 153 N.J. at 523-524). However, the Court did not discuss the method of funding and did not rule on whether the proposal would violate the Debt Limitation Clause, N.J. Const., Art. VIII, § 2, ¶ 3. Instead of the EFA, the Legislature here used the EDA as the designated conduit agency.
An Abbott district is defined as "one of the 28 urban districts in district factor groups A and B" as included in the appendix to Abbott v. Burke 119 N.J. 287, 394 (1990) (Abbott II). N.J.S.A. 18A:7F-3.
To that end, the EDA is authorized to issue bonds, incur indebtedness and borrow money to fund these projects. N.J.S.A. 18A:7G-14a. Payment arrangements for debt service on the bonds issued by the EDA are made through a procedure referred to as contract bond financing.N.J.S.A. 18A:7G-17 and 18. The EDA and the State Treasurer are authorized to enter into a contract under which the Treasurer agrees to pay from the General Fund to the EDA "an amount equal to the debt service amount due to be paid in the State fiscal year on the bonds or refunding bonds. . . ." N.J.S.A. 18A:7G-17. A sinking fund is also contemplated for the eventual retirement of the bonds at maturity, or any call date, again out of general treasury funds.
The EFCFA authorizes the issuance of $8.6 billion in bonds by the EDA. N.J.S.A. 18A:7G-14a. The Legislative Fiscal Estimate reports that the "[c]osts in the early years will increase about $75 million per year until a level of about $770 Million is reached in years 10-20, after which costs may decline."
This appears to be the case based upon the sample contract provided in the record, but those documents refer to contract debt authorized for the Sports Exposition Authority, not the EDA.
However, bonds issued by the EDA are the limited obligations of the EDA and shall not be a debt or liability of the State or any agency or instrumentality thereof . . . either legal, moral or otherwise, and nothing contained in this act shall be construed to authorize the authority to incur any indebtedness on behalf of or in any way obligate the State or any political subdivision thereof, and all bonds and refunding bonds issued by the authority shall contain a statement to that effect on their face.
[N.J.S.A. 18A:7G-14f.]
Any obligations incurred by the State as a result of the contract and all payments from the General Fund are declared to be "subject to and dependent upon" annual appropriation of such funds by the Legislature.N.J.S.A. 18A:7G-17 and 18. The contract between the State Treasurer and the authority expressly states that it shall not constitute a debt of the State and disclaims any obligation on the part of future Legislatures. The sale documents provided to contract bond purchasers similarly state that there is no legal obligation on the Legislature to appropriate money to repay the bonds and no remedy should the Legislature fail to do so. Thus, contract bonds would appear to provide no legal right to compel payment by the State should the Legislature fail to make the necessary appropriations (see N.J.S.A. 18A:7G-14g), as opposed to general obligation bonds, wherein the State pledges its faith and credit, and its taxing power, towards their repayment.
Plaintiffs point out that the lack of a pledge on behalf of the State raises questions as to why an investor would purchase bonds from a non-revenue generating facility if there is no guaranteed source of funding for the repayment of principal, let alone interest. Abbott V points out that such bonds, even though not backed by the State's faith and credit, are viewed in the market as only "one notch less than a general obligation of the State, [because] there would be significant repercussions to the State and its credit rating were the Legislature not to make an annual appropriation." 153 N.J. at 523.
Contract bond financing similar to that provided in the EFCFA has become a common method of funding utilized by the Legislature to bypass or circumvent the voter approval requirement of the Debt Limitation Clause. In all such statutes, neither the bond nor the contract between the State Treasurer and the authority places a direct obligation upon the State to appropriate money to pay bondholders. Although some of the authorities involved generate revenue, no independent revenue is generated to support the bonds issued under the EFCFA. The State Treasurer uses solely taxpayer generated funds from the general treasury to pay interest and principal on EFCFA bonds.
See discussion infra at pages 11-12. Although plaintiffs have challenged all statutes authorizing contract bond financing, our review is primarily directed at the provisions of the EFCFA. The contract bond financing provisions of the EFCFA are substantially similar to those of the following statutes which are also challenged by Lonegan:
(1) The EDA is authorized to issue contract bonds by
N.J.S.A. 34:1B-7.50 (the Pension Bond Financing Act of 1997).
(2) The Transportation Trust Fund Authority Act of 1984,
N.J.S.A. 27:1B-20, authorizes the Transportation Trust Fund Authority (TTFA) to issue contract bonds.
(3) The New Jersey Sports and Exposition Authority (NJSEA) may engage in contract bond financing pursuant to
N.J.S.A. 5:10-14.3 (the New Jersey Sports and Exposition Authority Law).
(4) The EFA is authorized to issue contract bonds by
N.J.S.A. 18A:72A-42 (the Higher Education Equipment Leasing Fund Act),
N.J.S.A. 18A:72A-65a (the Higher Education Technology Infrastructure Fund Act), and
N.J.S.A. 18A:74-28 (Public Library Project Fund).
Lonegan incorrectly claims that N.J.S.A. 18A:72A-57 (the Higher Education Facilities Trust Fund Act) authorizes the EFA to issue contract bonds. Additional statutes authorize the issuance of contract bonds, but are not directly challenged by Lonegan. See e.g., N.J.S.A. 34:1B-7.16 (Economic Recovery Fund Act); N.J.S.A. 18A:72A-12.4a (the County College Capital Projects Fund Act); N.J.S.A. 18A:72A-78b (Higher Education Capital Improvement Fund Act
II.
Lonegan asserts that contract bond financing, as authorized by the EFCFA and other statutes, constitutes a debt incurred without voter approval in violation of the Debt Limitation Clause, N.J. Const. Art. VIII, § 2, ¶ 3.
A recent discussion of the right of voters to be heard, although in a different context, is contained in Schundler v. Paulsen, 340 N.J. Super. 319, 774 A.2d 585, 590-591 (App.Div. 2001), aff'd o.b., 168 N.J. 446, 775 A.2d 1261 (2001)
Summary judgment was based on undisputed facts. We now consider whether the Law Division properly applied the law construing the Debt Limitation Clause. Prudential Property Ins. v. Boylan, 307 N.J. Super. 162, 167 (App.Div. 1998).
The adjudication of a statute's constitutionality is described as "[o]ne of the most delicate tasks a court has to perform" which should be exercised "with extreme self restraint, and with a deep awareness that the challenged enactment represents the considered action of a body composed of popularly elected representatives." N.J. Sports Exposition Authority v. McCrane, 61 N.J. 1, 8, appeal dismissed, 409 U.S. 943, 93S.Ct. 270, 34 L.Ed. 2d 215 (1972). Thus, statutory enactments are entitled to a presumption of validity that is only overcome by a showing that the act "is clearly repugnant to the Constitution." Newark Superior Officers Ass'n v. City of Newark, 98 N.J. 212, 222 (1985). "Where alternative interpretations of a statute are equally plausible, the view sustaining the statute's constitutionality is favored." Secaucus v. Hudson County Bd. of Taxation, 133 N.J. 482, 492 (1993), cert. denied, 510 U.S. 1110, 114 S.Ct. 1050, 127 L.Ed. 2d 372 (1994); accord N.J. Sports Exposition Authority v. McCrane, supra ( 61 N.J. at 8). It is axiomatic, however, that "[w]herever a statute and the constitution come into conflict, the statute must give way." Secaucus v. Hudson County Bd. of Taxation, supra ( 133 N.J. at 493).
The Debt Limitation Clause, provides, in pertinent part:
The Legislature shall not, in any manner, create in any fiscal year a debt or debts, liability or liabilities of the State, 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. Regardless of any limitation relating to taxation in this Constitution, such law shall provide the ways and means, exclusive of loans, to pay the interest of such debt or liability as it falls 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.
Except as hereinafter provided, 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.]
Generally, the Debt Limitation Clause prohibits "one Legislature from incurring debts which subsequent Legislatures would be obliged to pay, without prior approval by public referendum." City of Camden v. Byrne, 82 N.J. 133, 152 (1980) (quoting N.J. Sports Exposition Authority v. McCrane, supra ( 61 N.J. at 13-14)).
The history of the Debt Limitation Clause sheds light on its purpose and places the instant dispute in context. The issuance of bonds by states began in earnest in the early 19th century when states borrowed heavily for the development of internal improvements such as banks, canals and railroads. See New Jersey Sports Exposition Auth. v. McCrane, supra ( 61 N.J. at 40-41) (Weintraub, C.J., concurring and dissenting); Amos Tilton, Constitutional Limitations on the Creation of State Debt, in 2 Constitutional Convention of 1947 1708 (1951). Because many of these projects were initially profitable, borrowing increased until the country was struck by the panic of 1837, which was followed by the banking collapse of 1839. Tilton, supra, 2 Constitutional Convention at 1709. By 1842, nine states had defaulted on their obligations. Ibid. Although New Jersey had not incurred such debt up to that point, the experiences of its sister states lead it to adopt the predecessor to the present Debt Limitation Clause in Article IV, Section 6, Paragraph 4 of the Constitution of 1844. Its central provisions are substantially similar to our current Debt Limitation Clause. The delegates to the 1844 Constitutional Convention obviously intended to impose fiscal responsibility upon the Legislature that would provide a safeguard against extensive borrowing, and specifically, the defaults experienced by other states. However, in more recent times the State has utilized authorities, many of which raise their own revenue, to engage in large capital projects, without, and perhaps in some cases to avoid, voter consideration of those projects. New Jersey Sports Exposition Auth. v. McCrane, supra ( 61 N.J. at 25); see, e.g., N.J.S.A. 27:23-1 et seq. (Turnpike Authority); N.J.S.A. 27:12B-1 et seq. (Highway Authority);N.J.S.A. 27:25A-1 et seq. (South Jersey Transportation Authority);N.J.S.A. 5:10-1 et seq. (Sports and Exposition Authority).
That approach is essentially challenged in this case. The issue is whether contract bond financing constitutes "state debt" which was intended to be subject to the requirements of the Debt Limitation Clause. See New Jersey Turnpike Auth. v. Parsons, 3 N.J. 235, 242 (1949). After adoption of the 1947 Constitution our Supreme Court has on various occasions considered whether different forms of bond financing constitute a state debt subject to the Debt Limitation Clause, thereby requiring voter approval, and generally determined:
[T]he prevailing rule in this State and elsewhere is that if under the enabling statute there is an express declaration that the bonds or notes are obligations of the authority alone, that the faith and credit of the State are not pledged for that satisfaction, and that the holders must look solely to the authority for payment, then the debt limitation clause is satisfied.
[N.J. Sports Exposition Authority v. McCrane, supra ( 61 N.J. at 14).]
In New Jersey Turnpike Auth. v. Parsons, supra ( 3 N.J. 235), the Court considered a challenge to the Turnpike Authority Act, which created the Turnpike Authority and empowered it to issue bonds payable from toll revenues, while expressly withholding any pledge of the faith and credit of the State. The Court held that the statute's explicit and unambiguous language "entirely negatives any possibility of the proposed bonds being in any manner debts or liabilities of the State by providing . . . that the bonds of the Turnpike Authority `shall not be deemed to constitute a debt or liability of . . . or a pledge of the faith and credit of the State.'" Id. at 242; accord Clayton v. Kervick, 52 N.J. 138 (1997) (holding that statute authorizing the issuance of bonds by the EFA to construct facilities for participating higher educational institutions which were then leased by the authority to the institutions to pay the cost of the project, including the principal and interest on the bonds, does not violate the Debt Limitation Clause). In a later rejection of a similar challenge to the issuance of bonds by the New Jersey Sports Exposition Authority, the Court held:
[I]f any debts that come into existence through the operation of a statute are not and cannot become debts of the State, and if the faith and credit of the State are not pledged to guarantee their payment, and future Legislatures are under no obligation to appropriate money to satisfy them in case of default, then there has been no trespass upon Article 8, § II, ¶ 3 of the Constitution.
[N.J. Sports Exposition Authority v. McCrane, supra ( 61 N.J. at 13).]
This approach has been utilized even where independent authorities have no separate source of income and are in fact dependent upon annual legislative appropriations to pay the amount due on the bonds. In Holster v. Bd. of Trustees of Passaic County College, 59 N.J. 60 (1971), the Court reviewed the constitutionality of the County College Bond Act,N.J.S.A. 18A:64A-22.1 et seq. By way of supplement to a prior statute, the County College Bond Act provided State support for the cost of particular capital projects initially funded through bonds issued by the county. Id. at 63. "The scheme contemplates that a county will issue its bonds; proceeds from the sale will then be devoted to making up the State's share of the cost. . . . Thereafter recurrent interest payments will be met by State appropriations as will the principal of the bonds at their maturity." Id. at 64. The Court said that "[a]lthough there is doubtless a strong likelihood that payment of bonds will in fact be met by legislative appropriations, we find nothing in the statute compelling the State to make such payments as a matter of law." Id. at 67. Thus, the Court reasoned, the Debt Limitation Clause was not violated because successive Legislatures were not bound to make the appropriations. Ibid.
Similarly, Enourato v. N.J. Building Auth., 90 N.J. 396, 399 (1982), upheld the New Jersey Building Authority Act, N.J.S.A. 52:18A-78.1 et seq., which established the New Jersey Building Authority to construct and operate state office facilities. To fund construction, the act authorized the Building Authority to issue up to $250,000,000 in bonds. However, the act expressly provided, and the bonds state on their face, that the debt is that of the Building Authority and disclaims any State liability. Ibid. To repay the bonds the Building Authority leases the constructed facilities to the State for amounts specifically calculated to satisfy the Building Authority's bond obligations. Id. at 402. In other words, the State pays the bonded indebtedness of the Building Authority, however, such payment is subject to appropriation by the Legislature which is not legally obligated by the lease. Ibid. Relying upon Clayton v. Kervick, supra ( 52 N.J. 138) and Holster v. Bd. of Trustees of Passaic County College, supra ( 59 N.J. 60, 279 A.2d 798) the Enourato Court held that the financing scheme did not create a debt of the State, noting that "[a]lthough the Act not only contemplates that the State will make the necessary appropriations but also seeks to ensure this result . . . the State is under no legal obligation to do so." Id. at 410; accord In re Loans of the New Jersey Property Liability Ins. Guaranty Ass'n., 124 N.J. 69, 76 (1991) (endorsing the line of decisions "finding that legislative expressions of intent to provide future funding do not create present debts of the State subject to the debt limitation clause . . .").
The constitutionality of contract bond financing at issue here has not been specifically addressed by our Supreme Court. Nevertheless, the rationale of the cited decisions, while not identical, inform our decision. The cases we have alluded to reveal a consistently narrow construction of the Debt Limitation Clause by the Court, so that as long as future Legislatures are not legally bound to make future appropriations to pay the indebtedness the clause is satisfied.
This approach is consistent with the purpose of the Debt Limitation Clause. As stated, the first Debt Limitation Clause was enacted amidst the default of several state governments. Considering the historical context, it is likely that the central purpose of the clause was to prevent default on the State's obligations and be a restriction on incurring State debt by requiring voter approval as a way to enforce fiscal restraint. Thus, the strictures of the Debt Limitation Clause have been met if the State is not obligated on the bonds and cannot default.
Applying these principles to contract bond financing, it appears the Debt Limitation Clause has been satisfied. As stated, payments of principal and interest on bonds issued under the EFCFA are made through a contract between the State Treasurer and the EDA in which the Treasurer agrees to pay from the General Fund to the EDA "an amount equal to the debt service amount due to be paid in the State fiscal year on the bonds or refunding bonds. . . ." N.J.S.A. 18A:7G-17. However, N.J.S.A. 18A:7G-17 and 18 expressly provide that all payments from the General Fund are subject to and dependent upon annual appropriation of such funds by the Legislature. N.J.S.A. 18A:7G-14a. N.J.S.A. 18A:7G-14f provides that bonds issued by the EDA are the limited obligation of the EDA and "shall not be a debt or liability of the State or any agency or instrumentality thereof. . . ." Thus, contract bond financing, although perhaps imposing a moral obligation, does not legally obligate the Legislature to make the necessary appropriations to make principal and interest payments on the bonds or pay the principal at maturity. See N.J.S.A. 18A:7G-14f and g.
Lonegan argues that it is irrelevant that the Legislature is not legally obligated to pay the debt service on the bonds, referring to such provisions as a "legal fiction", because it is inconceivable that the Legislature would fail to appropriate the funds. That the Legislature will likely appropriate funds to repay the bonds is undisputed. As stated above, however, regardless of the likelihood that the Legislature will in fact make the payment, if a future Legislature is not legally bound to make the appropriations, then there is no present debt offending the Debt Limitation Clause. Enourato v. N.J. Building Auth., supra ( 90 N.J. at 410); Holster v. Bd. of Trustees of Passaic County College, supra ( 59 N.J. at 71); Clayton v. Kervick, supra ( 52 N.J. at 144). Our case law has not considered it significant that the Legislature will almost certainly have to authorize payments in the event of an authority's default. The point is that should nonpayment occur, the State would not be in default as it has no legal obligation on the bonds.
This increased risk in contract bonds is reflected by the bond market in the lower rating they receive from bond rating agencies than general obligation bonds. However, this increased risk is accompanied by increased overall costs due to a higher interest rate on the bonds.
Lonegan also argues that the instant matter is distinguishable from the Court's prior decisions and instead, asserts that we should follow former Justice Handler's dissent in Spadoro v. Whitman, 150 N.J. 2 (1997). InSpadoro, the issue of the constitutionality of the Pension Bond Financing Act of 1997, N.J.S.A. 34:1B-7.45 et seq. (PBFA), and contract bond financing was raised. However, the matter was dismissed as moot when the bonds were sold before the Court decided whether to hear the case on the merits. Spadoro v. Whitman, supra ( 150 N.J. at 13-14). The PBFA utilized contract bond financing in authorizing the issuance of bonds by the EDA to pay the State's unfunded accrued liability on various pension funds. It provided for the repayment of the bonds by a contract between the EDA and the State Treasurer. Id. at 5-7.
In his dissenting opinion, joined by Justice Stein, Justice Handler concurred in the finding of mootness, but opined that the PBFA violated the Debt Limitation Clause. Id. at 2-14. Justice Handler distinguishedSpadoro from prior decisions because (1) the EDA had no governmental function requiring funding and acted as a mere conduit to enable the State to issue bonds; (2) there was no separate source of income for the EDA to repay the bonds; and (3) the PBFA provided for the issuance of bonds merely to defray the ordinary operating expenses of government rather than for capital improvement, capital construction or the provision of special services. Id. at 9-11.
Initially, we note that while such a requirement might well be imposed, the Court's earlier decisions have not required that an authority have a separate source of income to satisfy the Debt Limitation Clause. See Enourato v. N.J. Building Auth., supra ( 90 N.J. 396); Holster v. Bd. of Trustees of Passaic County College, supra ( 59 N.J. 60). Also, the EFCFA provides for massive construction projects and repairs of school facilities, obviously capital improvements, as opposed to ordinary operating expenses of government. Thus, while the dissenting justices inSpadoro raised significant questions regarding the boundaries of the Debt Limitation Clause, particularly where an authority is acting as a mere conduit of the State, a majority of the Court has not yet endorsed those factors as a reason to depart from the established rule that future Legislatures must be legally obligated to make future appropriations to constitute a present debt running afoul of the Debt Limitation Clause. Accordingly, whether we agree with it or not, we are bound by the reasoning in the line of cases prior to Spadoro, and are constrained to conclude that in accord therewith the EFCFA, and the contract bond thereby authorized, does not violate the Debt Limitation Clause in Article VIII, Section 2, Paragraph 3 of our State Constitution.
Were we not barred by that precedent we might join in our colleague's thoughtful dissenting opinion.
III.
The Law Division Judge denied plaintiffs' request for preliminary restraints on substantive grounds, holding that they had failed to demonstrate a reasonable probability of success on the merits that would warrant the imposition of restraints. Plaintiffs maintain that the judge erred in failing to relax the requirement that litigants demonstrate a probability of success and requests us to enter preliminary restraints on appeal.
In light of our decision on the merits this claim is dismissed as moot.
IV.
Plaintiffs' procedural arguments are without merit and do not warrant discussion in a written opinion. R. 2:11-3(e)(1)(E).
The Rules of Court are to be read to provide a just result. The time limits in the rules and the procedures for orders to show cause applications and motions are not inflexible. See R. 1:1-2. In view of the public interest involved and the time sensitive nature of the matter, there was no error in the judge hearing the cross-motion and doing so on somewhat shortened notice.
Affirmed.