Thursday, September 1, 2016

The NJ Supreme Court and the Evisceration of the Debt Limitation Clause


Is there any subject in school which American kids are lied to as much as civics?

The "Three Ring Circus":
Real Government Ain't Schoolhouse Rock
Back in many iterations of civics I took in school, I was told that a myth that the legislative branch wrote the law, the executive branch implemented the law, and the judicial branch stepped in to settle disputes over what the law meant.

I remember my 4th grade teacher, Mrs. Eisenberg, telling us the legislature had the "power of the purse" and then jangling coins in front of the class.  With a vivid memory like that, it never occurred to me that judges might control taxes after all.

I was told a constitution could only be changed by an (often cumbersome) amendment process and that a court itself didn't have the power to amend a constitution.

Oh innocent me!

When it comes to lawmaking, few state Supreme courts can match the NJ Supreme Court, who has seized the "power of the purse" and whose judicial "independence" ought to be considered judicial supremacy.

Anyway, I thought I'd provide this handy guide to how the NJ Supreme Court has rewritten the NJ Constitution without the hassle of the legislature or voters having to get involved. (see here for the official text that the NJ Supreme Court cites in its lawmaking.)

The Education Clause 
(Article VIII, Section IV, Paragraph 1)

Original Text:
The Legislature shall provide for the maintenance and support of a thorough and efficient system of free public schools for the instruction of all the children in the State between the ages of five and eighteen years.

Note: The language "thorough and efficient system of schools" appears in several other states' constitutions, including Pennsylvania's, Minnesota's, Maryland's, and Illinois'. This language has not be interpreted in other states as extravagantly as it has been interpreted in New Jersey.

The "thorough and efficient" clause first appeared in NJ's third Constitution, which was approved in 1875.

From those three words "thorough and efficient" the NJ Supreme Court has constructed 21 Abbott decisions, hundreds of pages of legal verbiage, required school spending tens of billions in excess of what NJ's legislature would have given, and helped make NJ the country's third most indebted state.

The Education Clause has never been officially changed, but I think this is a fair reading of what it really means nowadays.

Abbottized Text:
1. The Legislature shall provide for the maintenance and support of a thorough and efficient system of free public schools  [funded in excess of DFG I and J districts]
for the instruction of all the children in the State [districts that were classified as DFG A or B and Urban in the 1980s] between the ages of five three and eighteen years.

My term of art "districts classified as DFG A or B and Urban in the 1980s" means "Abbott districts."

There is a myth that the Abbott districts are NJ's poorest.  Instead, the Abbott list is the overlap of districts who were classified as DFG A or B in the 1980s with districts who were also "urban municipalities" according to a (politicized) Department of Community Affairs listing.  Scores of poor districts were excluded and a handful of non-poor districts, like Pemberton and Hoboken, were included.

I'm being tongue in cheek here about the NJ Supreme Court requiring that the Abbott list be permanently based on 1980s economic conditions.  It is the fault of NJ legislature and governors that the Abbott list has never been updated.

Although many people might contend that two years of Pre-K is educationally justified and worth the cost, it is a long constitutional stretch for the NJ Supreme Court to mandate Pre-K since the plain wording of the NJ Constitution says that the state is only obligated to provide a "thorough and efficient system of schools" for children age five to eighteen.

Anyway, the Supreme Court's changes to the Education Clause were additions.  The Supreme Court's changes to the Debt Limitation Clause is a deletion.

The Debt Limitation Clause 
(Article VIII, Section 2, Paragraph 3a)

3. a. 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. [my emphasis]

Note: The simple version of this is that NJ's voters must approve debt issuance greater than 1% of NJ's budget. Another way of putting it is "one  Legislature may not incur debts [that] subsequent Legislatures would be obligated to pay, without prior approval by public referendum."

A version of this clause first appeared in the NJ Constitution of 1844, after the depression caused by Panic of 1837, during which nine of NJ's "sister states" had defaulted. The idea behind the Debt Limitation Clause if that voters had to approve the debt and a method of paying the debt off, NJ would stay responsible.

Shorter Justice Alan Handler:
"An Abbott district's unwillingness to tax itself is
the same as its inability."
The Debt Limitation clause was respected strictly until after WWII, when it began to be eroded by debt for public authorities and one round of unapproved bonding for colleges, however, public authorities (like the Turnpike Authority) and colleges have their own revenue sources, so the repayment was not from tax dollars.

The most egregious violation of the Debt Limitation Clause has been through the bonding for (mostly Abbott) construction in the wake of 1997 and 1998's Abbott IV and Abbott V decisions, which ordered 100% state funded construction for the Abbotts.

In the Abbott IV decision, Justice Alan B. Handler considered the truly bad facilities conditions of the Abbotts, but ignored their spectrum of tax base strength and tax stress, ignored non-Abbotts, ignored the massive operating aid the Abbotts were already receiving and then ordered state taxpayers to pay for every cent of Abbott construction, without a sliding scale of local responsibility.  
The State must, as part of its obligation under the education clause, provide facilities for children in the special needs districts that will be sufficient to enable those students to achieve the substantive standards that now define a thorough and efficient education. The quality of the facilities cannot depend on the district's willingness or ability to raise taxes or to incur debt.
Again, notice that Handler doesn't distinguish between willingness and ability to pay; from Handler's opinions, if an Abbott district is unwilling to pay, it is the same as if it were unable to pay.

Handlerism:
"Unwillingness=inability."

My problem with the NJ Supreme Court's argument is that the same deplorable conditions existed in non-Abbotts, not all Abbott schools were in this kind of terrible state, and the Abbotts are disparate and 100% state funding without a cent of copay is unfair to poor districts who are not Abbotts.  By not requiring the Abbotts to make any kind of copay, there is an incentive towards great waste, since the Abbotts are not spending their own money.

Over the two years after Abbott V came out the DOE did a more comprehensive survey of Abbott facilities, the cost of Abbott construction had grown to $6 billion, with another $2.6 billion thrown in for non-Abbotts to make legislative passage possible.  ($8.6 billion = $12 billion in 2016 dollars.)

Obeying the Supreme Court's dictate, in 2000 the Whitman Administration and legislature approved the "Education Facilities Construction Financing Act."  The $8.6 billion bond was NJ's largest single debt offering ever.

As the Star-Ledger reported:

The cost of rebuilding New Jersey's aging and overcrowded public schools could reach $11.5 billion - twice Gov. Christie Whitman's original projection - over the next seven years, state Treasurer Roland Machold estimated yesterday as lawmakers held their first public hearing on the plan. 
Machold said the program to rebuild hundreds of schools will cost taxpayers at least $500 million a year, but the Senate sponsor of the construction legislation, Sen. William Gormley (R-Atlantic), said he thinks the cost is likely to be even higher. He wants lawmakers to plan on spending up to $750 million a year on school construction. 
Either estimate would make school construction a dominant element in state budgets for years to come. It would amount to a 10 percent boost in state school aid, which already accounts for one-third of state spending. Even at $500 million per year, it would outstrip the state's annual spending on highway and mass transit construction, state colleges or welfare.

Lawmakers plan to issue billions of dollars in bonds to pay for the work, but there is no clear consensus on how to raise the $500 million to $750 million it will take to make the annual payments on those bonds.  [my emphasis]  (1)
NJ's state aid at the time was only $5 billion, so the Supreme Court had set in motion construction debt that would consume a tenth of NJ's aid distribution.

The bond issuance was highly controversial and many Republicans objected.

As the Star-Ledger reported:

"Abbott vs. Burke is wrongly decided from the beginning," [Assembly Speaker Jack] Collins said. "This just perpetuates that wrongness."
Collins argued that some of the so-called special-needs districts have prospered since the court case began three decades ago, and he says it is unfair to other needy communities to give the 30 districts special state funding treatment.
"This is illogical. It is wrong," Collins said at yesterday's hearing. "Ninety percent is a number that literally would make dollars available for other districts or for other state projects."  (2)
Collins reasonably said that the state should only pay for 90% of the costs of Abbott school construction, but then-Commissioner David Hespe objected, saying a 90% copay would cause the whole of Abbott to be re-litigated.

Despite the fact that the NJ Constitution says that the legislature cannot issue large debt "in any manner" without voter approval, the obsolescence of the Abbott list even in the 1990s, the legislature bowed to the NJ Supreme Court and approved the bond issuance.

The opposition then came from Mayor Steve Lonegan of Bogota, who was incensed by the debt issuance and organized a group "StopTheDebt" to challenge school construction bonding and (other debts issued) that was taking place without voter approval.

In the Lonegan I decision, Chief Justice Deborah Poritz declared for a 5-1 Supreme Court:

  1. School bonding debt was "sui generis" because the Education Clause, supported by the School Funding Clause, of the NJ Constitution superseded the Debt Limitation Clause.  
  2. The school construction bonding was labeled "contract debt" and bond buyers knew repayment was subject to the appropriations process.

    "Although there is doubtless a strong likelihood that payment of the 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."

    I.e., the debt was not backed by the "full faith and credit" of New Jersey, i.e., the debt was not "General Obligation" bonds.  There is no "legal right to compel" repayment.

The legal argument the NJ Supreme Court's decision was rooted not on the NJ Constitution, but the NJ Supreme Court's own case law.

And not in some hoary old precedent that a consensus had crystalized around, but the Abbott V decision of 1998.

we uphold the Act because of reliance by the State on our prior case law, including Abbott v. Burke, 153 N.J. 480, 710 A.2d 450 (1998) (Abbott V), and for the separate and distinct reason that EFCFA was enacted by the Legislature in furtherance of the mandate found in Article VIII, Section IV, paragraph 1 (the Education Provision) of the New Jersey Constitution.

In other words, there's pure self-referential reasoning here.  The NJ Supreme Court decided the Debt Limitation Clause didn't apply because of what the NJ Supreme Court already decided in 1998.

The Supreme Court's Constitutional escape clause was that it was technically legal for NJ to default on school construction debt, and therefore it wasn't really debt.  

Lonegan claimed the "contract debt" concept was "subterfuge employed solely to avoid and contravene the Debt Limitation Clause of our Constitution" but the Supreme Court ignored that.

Post-Lonegan, this was the state of the Debt Limitation Clause:

3. a. 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.
The most extraordinary deletion is "in any manner," since I would think "in any manner" means "no debt without voter approval," no matter what.

Post-Script

The NJ Supreme Court originally thought Abbott construction would cost $1.8 billion, but even the $6 billion for Abbott construction paid for by the 2000 bonds was inadequate due to systematic waste, exposed by the Inspector General.

The NJ Supreme Court thus ordered a second bond issuance in 2008 for $3.9 billion (of which $2.9 was earmarked for the Abbotts.)  ($3.9 bil = $4.3 bil in 2016 dollars)

As you can see, school construction debt is now nearly $1 billion a year.

Source, 2015 Debt Report
http://www.nj.gov/treasury/public_finance/pdf/DebtReportFY2015.pdf

And NJ is one of the US' most indebted states by any measure.


Of course all this bonding has created splendid facilities in Abbott districts:




And poor non-Abbotts were left behind.

East Newark's elementary school is from the 1890s and East Newark is a very poor DFG A town, but the state has ignored East Newark since East Newark is a non-Abbott.

East Newark's School is from the 1890s


The 2008 Constitutional Amendment on Debt Was a Joke


By 2008 NJ was one of the country's most indebted states. Of the state's $32 billion in debt, only $2.8 billion had been approved by the voters as the Constitution required. (The $32 bil doesn't count pension and retiree health care debt.)

In that year the legislature let the voters vote on a amendment that would superficially prohibit the future issuance of Contract Debt. The amendment was primarily authored by Leonard Lance, who promoted it as a way to rein in debt:

"Over the past couple of decades Trenton politicians have used a loophole to avoid the constitutional provision that all state borrowing must be approved by the voters. The Trenton politicians set up what amounts to dummy corporations (state authorities) to do the borrowing for them. Under this system total state debt has ballooned to nearly $40 million. This debt load is unsustainable."


Lance was right about the debt load being unsustainable, but it wasn't "Trenton politicians" who exclusively loaded up NJ on debt.  It was "Trenton Judges," like Alan Handler who forced this massive debt on the taxpayers, plus Abbott district and Department of Education bureaucrats.

But the Democrats only allowed the amendment to go to the voters after they had subtly gutted it.

Yes, the 2008 amendment reads as follows and would seemingly prohibit Contract Debt even for Abbott construction.

b. On and after the date on which this subparagraph b. becomes part of the Constitution, the Legislature shall not enact any law that, in any manner, creates or authorizes the creation of a debt or liability of an autonomous public corporate entity, established either as an instrumentality of the State or otherwise exercising public and essential governmental functions, which debt or liability has a pledge of an annual appropriation as the ways and means to pay the interest of such debt or liability as it falls due and pay and discharge the principal of such debt, unless a law authorizing the creation of that debt for some single object or work distinctly specified therein 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. Voter approval shall not be required for any such law providing that the ways and means to pay the interest of and to pay and discharge the principal of such debt or liability shall be subject to appropriations of an independent non-State source of revenue paid by third persons for the use of the single object or work thereof, or from a source of State revenue otherwise required to be appropriated pursuant to another provision of this Constitution. [my emphasis]

Since the legislature's approval of this amendment was simultaneous with its approval of the $3.9 billion round of Abbott Contract Debt, and the NJ Supreme Court would reason that since the legislature passed Contract Debt for school construction at the same time it authorized an amendment prohibiting future Contract Debt, that the legislature's intent was to allow Abbott Contract Debt.

This means that the voters in 2008 had no choice but to constitutionalize Abbott Contract Debt: if the voters rejected the amendment, the Lonegan I NJ Supreme Court decision allowing Abbott Contract Debt would stand; if the voters passed the amendment Contract Debt would still be allowed since the amendment was passed at the same time that the legislature authorized other contract debt!

I remember voting for the debt constitutional amendment that year, but it never occurred to me that this amendment wouldn't actually disallow what was one of the biggest issuances of NJ debt.

The 2008 amendment was meaningless. The kind of borrowing for operating expenses that Jim McGreevey had done had already been disallowed by the Supreme Court anyway.
[update, this rationale is why Christie's $300 million bonding for statehouse renovations is legal.]

It's Our Fault

I've criticized the madness and despotism of the NJ Supreme Court repeatedly on this blog, but I have to admit, it's also our fault.

NJ's voters have had many chances to reform Abbott in the last quarter century but we haven't seriously tried to and we've elected politicians who support Abbott.  Steve Lonegan himself has ran for governor, but not even gotten the Republican nomination.

In my opinion, the acceptance of fiscally disastrous policies like Abbott isn't because we support Abbott, but because the true costs of Abbott have been obscured from us.  In the 1990s NJ dramatically cut pension contributions, diverted the pension money into education aid and other spending, and enjoyed a period of moderate taxes despite huge increases in spending.  Highly-informed voters didn't like the borrowing, but there was no urgency to fix anything among most people.

Our politicians and judges deserve a lot of blame for NJ's fiscal calamity, but ultimately, it's our fault. Representative democracy depends on voters understanding the issues and understanding where politicians stand on them.  It's easy to do a Leonard Lance and blame "Trenton politicians" for our mess, but we are the ones who elected and reelected them.

People don't get the laws they want, but they get the democracy they deserve.

---

More Abbott History:

Sources for Star-Ledger Quotes

(1) "Bottom line on schools may double - Hearing told the tab could hit $11.5 billion"

(2) "Help for poor schools draws fire - Assembly Republicans want to limit spending ordered by Supreme Court"

(3) "New Jersey voters to decide on two statewide ballot questions"






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