>Just over five years ago, the New Jersey Supreme Court decided on two of the most important cases in the state’s fiscal history– Lonegan vs. State I 174 NJ 435 (2002) and Lonegan vs. State II 176 NJ 2 (2003).
A disappointing loss in Lonegan I allowed Republican Governor Whitman’s plan to borrow $8.6 billion without voter approval to construct schools in 28 urban districts as ordered by the Supreme Court in Abbot vs. Burke. The Supreme Court would not allow voters to reject something it had mandated, no matter how costly or destructive.
But the court claimed it was troubled by the method used to borrow money without voter approval as required by Article VIII of the NJ Constitution. A “shell entity,” also known as a straw man, the NJ Economic Development Authority, issued bonds to borrow the money—even though it had no income. Then the state made contracts to pay all obligations on those bonds with tax revenues for the next 30 years. The problem is that there is no guarantee that future payments will be made. These annual payments are subject to approval by the legislature and conceivably can be voted down. Most purchasers of this contract debt are not aware of this risk, but investment firms continue to sell these bonds as if they are risk free.
Supreme Court Justice Stein, writing in 2002, was alarmed that this gimmick had been used to borrow $10.8 billion, 75 percent of the state’s bonded debt, without voter approval. He urged the Court to agree with my assertion and end the practice.
But the Supreme Court delayed that part of the decision until after Justice Stein, clearly sympathetic to my case, had reached the mandatory retirement age, and was replaced by Justice Albin, appointed by Governor McGreevey.
In Lonegan II, the Supreme Court in a heart breaking 4-3 decision approved all state borrowing for any purpose without voter approval—as long as a shell entity did the borrowing without pledging the full faith and credit of the state. In essence, the State Supreme Court is complicit in what could be the largest consumer fraud scheme by any state in the country-selling bonds as if they have been approved by voters.
The result has been an absolute financial catastrophe for New Jersey. In his 2008 State of the State Address, Corzine blamed Supreme Court decisions for “the sharp deterioration of our State’s finances,” which included $32 billion in bonded debt, only $3 billion of which was approved by voters. I agree with the Governor’s statements. But Governor Corzine’s actions do not follow his words. Six months after criticizing New Jersey’s “credit card culture” that ignored our Constitution, Governor Corzine approved using the old gimmicks to borrow $3.9 billion more without voter approval.
There are other reasons to reconsider and overrule the previous Lonegan decisions. First, Lonegan II relied on bad history. It claimed that New Jersey’s 1844 Constitution, which first required voter approval of new state debt, was framed to prevent states from defaulting on debts backed by the “full faith and credit” of taxpayers.
However, many scholars today, like University of Maryland Professor of Economic History John Joseph Wallis, take a different view. They suggest that the 1844 framers wanted to end “systematic corruption” where politicians had too many opportunities to get bribes and political support by favoring some businesses at the expense of others. The framers of 1844 reduced those opportunities by requiring voter approval of new state debt. Other reforms in that 1844 Constitution time included uniform laws that took the politics out of forming new corporations and local governments.
Second, Lonegan II put way too much faith in Wall Street.
“(T)he state has responded to changes in the financial markets that reflect modern economic realities. .
yesterday’s speculation has become ‘sound and economical current business practice. . . “ Lonegan,
supra, 176 NJ at 14.
In his October 23, 2008 testimony to Congress, Federal Reserve Chairman Alan Greenspan showed the framers of New Jersey’s Constitution to be far more reliable than today’s Wall Street “geniuses.”
“In recent decades, a vast risk management and pricing system has evolved, combining the best
insights of mathematicians and finance experts. . . The whole intellectual edifice, however, collapsed
in the summer of last year because the data inputted into the risk management models generally
covered only the past two decades, a period of euphoria. . .”
Finally, last November 4, 2008, New Jersey voters approved amendments to Article VIII of New Jersey’s Constitution which prohibits this type of borrowing without voter approval. But this case is far from moot. The Amendment only applies to future borrowing.
Also, the new Amendment has this troublesome language, which did not appear in the ballot question:
“No voter approval shall be required for. . . refinancing of all or a portion of any outstanding debts or
liabilities of. . . an autonomous public corporate entity…”
Does that mean the state can refinance NJ’s $29 billion of old “contract debt” with new debt backed by the full faith and credit of the state—without voter approval? Future litigation may be needed to decide that issue. But in the meantime, there are many reasons to reconsider and reverse Lonegan I and Lonegan II, and the future fiscal health of New Jersey will rest on this decision.
Steve Lonegan
State Director
Americans For Prosperity