Legal Brief Explains Gov. Murphy’s Plan to Borrow $9 Billion Without Voter Approval. Create A Fake “Emergency”!

Our lawsuit against Governor Murphy, State Treasurer Elizabeth Muoio, and the State of New Jersey was filed on June 17.  The State responded by filing a motion to dismiss.  The motion will be heard by NJ Superior Court Judge Mary Jacobson in Trenton on July 11.  These the brief we filed in opposition to that motion:

STATEMENT OF FACTS:

Between 1837 and 1839, New Jersey and most of America suffered from a massive economic collapse that began with a series of bank failures known as “The Panic of 1837”.  Economic History Professor John J. Wallis of the University of Maryland blamed this on enormous, unsustainable debts incurred by state governments.  By 1841, the aggregate, unpaid debt of state governments were $198 million, far larger than the federal government debt had ever been.

Shortly afterwards, New Jersey and most states adopted new state constitutions designed to prevent this from happening again.

In 1844, New Jersey adopted a new state constitution.  It included a provision requiring the state to have a balanced budget each year.  It also provided that state government could not create “debts” or “liabilities” of the state unless they were approved by voters in a general election.  Those two provisions were included in the New Jersey Constitution of 1947 and are part of New Jersey’s state constitution today.

On March 9, 2020, Defendant GOVERNOR issued Executive Order No. 103 declaring both a “Public Health Emergency” and a “State of Emergency” pertaining to the COVID-19 pandemic.  Between March 16, 2020 and March 25, 2020, Defendant GOVERNOR issued other executive orders which effectively closed all private businesses in New Jersey deemed to be “non-essential”.

On March 23, 2020, Defendant STATE TREASURER published a two page “Voluntary Disclosure” which included the following statements on Page 2:

          “The State expects precipitous declines in revenues in Fiscal Year 2020 and Fiscal Year 2021 which include significant reductions in gross income tax revenues, corporate business tax revenues, and sales tax revenues due to required business shutdowns, motor fuels taxes due to Executive Order No. 107 (i.e. stay-at-home orders), casino related taxes due to casino closures, and lottery sales, which have already started to decline. . .

            “It is possible that the State may encounter future increases in the State’s actuarially recommended contributions to the State’s pension plans to the extent that the valuation of pension plans is affected by the deterioration in value in the investment markets. . .”

During this time, Defendant STATE also closed many, if not most government offices.  However, Defendant STATE did NOT lay off, furlough, or otherwise reduce salaries, benefits, or pension paid to any of its employees—even those who were not reporting to work.

As a result, the “precipitous declines in revenues” received by Defendant STATE since March 9, 2020 were not matched by comparable decreases in its expenses.

On or about April 9, 2020, Defendant GOVERNOR said he had “a good discussion” with “legislative leaders” of Defendant STATE about his plan to have the state borrow $9 billion to fund state government at normal levels.  That discussion included whether Defendant STATE would repay the borrowing without raising taxes, and how Defendant STATE could void the “constitutional ban on general obligation borrowing without voters’ consent”.  Defendant GOVERNOR replied that he “may have a workaround under emergency or act of God provisions”. (Bloomberg.com/news “Murphy Says He Wants to Borrow Up to $9 Billion from Fed, 4/16/2020).

On April 14, 2020, Defendant STATE adopted the “COVID-19 Fiscal Mitigation Act” (hereinafter referred to as “Mitigation Act”) as P.L. 2020, c19.  Said statute provided, inter alia, that “the State fiscal year scheduled to end on June 30, 2020 shall end on September 30, 2020, and the subsequent State fiscal year shall begin on October 1, 2020”.

The Mitigation Act further directed the State Treasurer to “prepare a report on the financial condition of the State Budget for State Fiscal Years 2020 and 2021, as altered (by the act).”  It also directed Defendant STATE TREASURER include in that report “a detailed plan of spending from State, federal, and all other government funds for the continuation of essential government operations (emphasis added) during the remainder of State Fiscal Year 2020. . . “

On April 15, 2020, Bloomberg.com reported that it had reviewed details of Defendant Governor’s borrowing plan in “draft legislation”.  (Bloomberg.com/news “Murphy Says He Wants to Borrow Up to $9 Billion from Fed, 4/16/2020).

On April 16, 2020, Defendant Governor publicly stated that he wanted Defendant STATE to borrow “as much as $9 billion from the U.S. Federal Reserve’s first-ever move into the municipal bond market” and that he didn’t “see any way around it”. (Bloomberg.com/news “Murphy Says He Wants to Borrow Up to $9 Billion from Fed, 4/16/2020).

On May 22, 2020, Defendant New Jersey Treasurer Elizabeth Muoio provided the New Jersey Legislature with the report and spending plan required by the April 14, 2020 “Mitigation Act”.  It is hereinafter referred to as “Treasurer’s Report and Spending Plan”.  It is posted online at:  https://state.nj.us/treasury/omb/publications/NJ-Financial-Condition.pdf

The first paragraph of Page 8 of the Treasurer’s Report and Spending Plan estimated “budget revenue shortfalls” of  $2.732 billion for the “traditional” 12 month Fiscal Year 2020 (July 1, 2019 to June 30, 2020) and $7.207 billion for the 12 months of “traditional” Fiscal Year 2021  (July 1, 2020 to June 30, 2021).  It observed that they  “equal approximately $9.939 billion combined”.

The Treasurer’s Report and Spending Plan reported that part of the $2.732 billion shortfall for FY 2020 ending June 30, 2020 would be covered by a $1.5 billion surplus, which included $732 million from STATE’S “Rainy Day Fund”, leaving a net shortfall of approximately $1.232 billion remaining.  (Page 14, Paragraph 2)

Defendants GOVERNOR and STATE TREASURER proposed several measures to make up for that $1.232 billion remaining shortfall.  They included:

“Cancelling and reserving of pre-encumbrances will result in deferral or elimination of planned department spending. . . Deferral of other planned FY 2020 spending, including the pension contribution related to offset certain lottery shortfalls; the proposed lead infrastructure program in DEP ($80 million) and the deferral of Economic Redevelopment & Growth (ERG) grants ($49 million)”.  (Page 15)

However, much of this “planned department spending” for Fiscal Year 2020 to be “deferred” to Fiscal Year 2021 appears to be the deferral of payments for mandatory statutory and contractual obligations which must be paid.  Deferring such obligations past the end of the fiscal year would “create. . . a liability or liabilities of the State”.  That is not permitted by Article VIII, Section II of the New Jersey Constitution unless approved by voters at a general election.

The Treasurer’s Report and Spending Plan for the three month extension of Fiscal Year 2020 after June 30, 2020 (July, August, and September, 2020) is even more problematic. The “shortfall” for those three months comes to approximately $1.81 billion per quarter (one fourth of $7.207 billion).

The Treasurers Report and Spending Plan purports to offer the Legislature a “supplemental budget for July 1 to September 30 (2020) that “defers and cuts essential spending in order to fulfill the constitutional obligation to maintain a balanced budget.  The supplemental budget includes its allocable share of solutions totaling $4.0 billion. . .” (Treasurers Report and Spending Plan at Pages 18 and 19) roughly $4 billion of

However, most of those “cuts” are really deferrals of roughly $3  billion of mandatory statutory and contractual obligations which must be paid.  By deferring payment past the end of the extended Fiscal Year 2020 on September 30, 2020, Defendant State is creating more “debts. . . or liabilities of the State” without voter approval.  That is not permitted by Article VIII, Section 2 of the New Jersey State Constitution.

Even worse, these “deferred” obligations of $3 billion dollars are added to a shortened nine month Fiscal Year 2021 budget period which already has a structural deficit of $5.43 billion. Those “deferred” obligations include the following:

Year 3 of K-12 School Aid Formula:                                                 $336,496,000

NJ Transit:  Increase over FY20 General Fund Subsidy:                   $132,000,000

Lead Infrastructure:                                                                            $   80,000,000

Special Education and Transportation Collaboration:                       $   26,000,000

Repayment of Municipal Contribution to Mass Transit Fac:             $     3,000,000

Defer September Pension Payment to October:                                 $950,860,000

Defer September 22 School Aid Payment to October:                      $467,000,000

Defer September CMPTRA/ETR Payments to October:                   $354,883,000

Defer Extraordinary Special Education Aid Payment to October:            $250,000,000

Senior Freeze:                                                                                     $219,700,000

Homestead Benefit Program:                                                             $138,100,000

Defer NJ Transit Base Subsidy to October:                                       $114,367,000

Clean Energy Fund Uncommitted Balances:                                     $  86,000,000

Affordable Housing Trust Fund Uncommitted Balances:                 $  60,000,000

Defer Transitional Aid Based on Timing of Payments:                     $  28,641,000

Defer Nonpublic Security Aid Payment to October:                         $  22,600,000

Other Miscellaneous Deferrals Based on Spending Programs:            $260,350,000

TOTAL APPARENT DEFERRALS:  $3,507,393

TOTAL APPARENT BUDGET CUTS:  $521,808

So far, Defendants GOVERNOR, STATE TREASURER and STATE OF NEW JERSEY have offered no plan for funding the nine month structural deficit from September 1, 2020 to June 30, 2021 other than borrowing “up to $9 billion” without voter approval as publicly stated by Defendant GOVERNOR on April 16, 2020.

The Communications Workers of America (CWA) is a national labor union that represents 700,000 workers in the United States, Canada, and Puerto Rico.  This includes 300,000 telephone and cable TV services workers, 140,000 public, health care, and education workers, 50,000 flight attendants, 45,000 manufacturing and industrial workers, and “over 34,000 media workers at wire services, newspapers, magazines, labor information services, broadcast news, public service, and dot com companies. (www.cwa-union.org/about/cwa-overview)

CWA describes itself as a highly political “progressive” organization that “is working to build a movement of progressive organizations to win progressive changes”.  It also describes itself as a founder of “The Democracy Initiative” of 75 “progressive” organizations.

During the 2020 election cycle so far,  CWA dues paid for $2,472,822 of political contributions, $934,000 of lobbying (2019), and $128,755 for “outside spending”.    OpenSecrets.org reported of $686,181 of CWA political contributions to political campaigns for federal office in 2020, $666,181, or 97.65% went to Democrats.  These contributions were not paid directly by CWA but through its locals and affiliates.

At all times relevant to this complaint, Defendant CWA was the collective bargaining agent for approximately half of some 40,000 employees of Defendant STATE.

On or about June 2, 2020, Defendant CWA and STATE engaged in negotiations “to reduce STATE’s salary costs during this economic crisis”.

On or about June 23, 2020, Defendant STATE reached an agreement with Defendant CWA to modify terms of the 2019-2023 collective bargaining agreement made by said parties.   The terms of that agreement were reduced to a written eight page Memorandum of Agreement (hereinafter referred to as “MOA”) and made subject to ratification by the members of CWA.

The MOA included the following terms:

  1. The 2% across-the-board increase to annual base salaries scheduled to begin on July 1, 2020 will be deferred and paid the first full pay period after December 1, 2021.
  2. The 2% across-the-board increase to annual base salaries scheduled to begin after April 1, 2022 and June 1, 2022 is deferred to July 1, 2022.
  3. Approximately 25,000 employees will take ten unpaid furlough days between June 29, 2020 and July 31, 2020 for a total of 250,000 unpaid furlough days.
  4. The State would pay all pension and retirement pension benefits for unpaid furlough days.
  5. “In consideration for the substantial personnel savings achieved through the raise deferral and furlough programs. . . the State agrees that there shall be no layoffs of bargaining unit employees through December 31, 2021.”

On June 25, 2020, CWA posted on its official website and E-newsletter that this “No Layoff Agreement” is the “best in the country”.  It also reminded members that workers could collect “enhanced unemployment benefits under the CARES Act” during their furloughs.

This “No Layoff Agreement” MOA is part of Defendant GOVERNOR’s plan to make sure Defendant STATE cannot cover the $9 billion budget shortfall between September 30, 2020 and June 30, 2021 by renegotiating salaries or using layoffs to cut expenses. That would give Defendant STATE no options other than to impose immediate massive new tax increases, or borrow approximately $9 billion without voter approval, in violation of Article VIII, Section II of the New Jersey State Constitution.

On May 28, 2020,  just four business days after STATE TREASURER gave her Treasurer’s Report and Spending Plan,  Assembly Bill 4175 (hereinafter referred to as the “BOND BILL” was introduced in the Assembly.  It was reported out of committee two business days later.  It passed by the full Assembly three days after that.

The BOND BILL authorizes Defendant STATE to borrow $5 billion by issuing bonds, and an additional unspecified and unlimited amount through “stimulus” loans from the Federal government.

The Senate has not yet taken up the bill.  Assembly Bill 4175 does not provide for voter approval as required by Article VIII, Section II.

The provisions of Article VIII, Section II requiring voter approval do NOT “apply to the creation of any debts or liabilities. . . to meet an emergency caused by disaster or act of God.

LEGAL ARGUMENT

  1. THE BOND BILL, ALTHOUGH NOT LAW, IS URGENTLY RIPE FOR ADJUDICATION.

The Bond Bill is not a random, isolated act of the General Assembly.  It is an integral part of a three month plan by Defendant GOVERNOR create an “emergency” to constitutionally justify the creation of a $9 billion debt without voter approval.

Defendant STATE publicly disclosed it expected “precipitous declines” in revenues on March 23, 2020.  However, Defendant GOVERNOR did nothing to cut state expenses to match those declines in revenues.  This was because Defendant GOVERNOR was willing deprive many thousands of owners and employees of  “non-essential” privately owned businesses of their incomes, but not willing to make “non-essential” state government employees make similar sacrifices.  Instead, virtually all “non-essential” state government employees were paid every dollar of their salaries, benefits, and pension credits even when they did not appear for work or perform any duties.

Defendant GOVERNOR instead informed both the public and New Jersey legislative leaders since early April that he intended to borrow “up to $9 billion” to substantially fund all government salaries, pensions, and benefits at pre-crisis levels even though the tax base was decimated.  This would inflict a second level of punishment on private sector taxpayers.  First, they were deprived of their incomes during months of the COVID-19 crisis while government employees were paid in full.  Second, when and if they do return to work at reduced pay, they will be punished again with higher taxes, while government employees get the pay increases they were promised before the crisis.

The court also needs to urgently force Defendant STATE government to immediately either raise taxes or cut spending so that it does not continue to “create. . . debts. . . and obligations” in violation of the New Jersey State Constitution” by deferring roughly $3 billion of mandatory obligations and expenses to the next shortened, nine month 2021 Fiscal Year, which is already $5.4 billion underfunded.

The final blatant disregard and insult to New Jersey’s State Constitution by Defendant GOVERNOR his “No Layoff Agreement” for most of New Jersey’s 40,000 state employees.   It is clearly designed to make it legally impossible for New Jersey to make any significant spending cuts during the eleven months between August 1, 2020 and June 30, 2021, when New Jersey government will be underfunded by approximately $8 billion.

This is all part of an obvious plan by Defendant GOVERNOR  to leave the borrowing of up to $9 billion as the only viable option in September.

It is also significant that the Bond Bill contains a provision for an additional state property tax to be imposed in any year when existing state taxes are not sufficient to fund the bond payments.

This is not merely “boiler plate” language.  Last year, New Jersey budgeted $2.9 billion for repayment of existing debt.  Another $554 million was budgeted to prop up its insolvent pension funds.  Another $3.1 billion budgeted for “State Employee Benefits, Rent & Utilities” included much additional debt in the form of long term leases that are more like mortgages, and unfunded retiree medical benefits which are more like unfunded pensions.   Together, these debt payments constitute roughly 10% of the yearly budget already.

It is also significant that roughly half of New Jersey’s revenue comes from the state’s income tax, which is constitutionally dedicated to property tax relief, usually in the form of payments to school districts.  As a result, the possibility of inadequate state tax revenue, and a mandatory new state tax on real estate is very real.

Every day Defendant STATE operates without a balanced budget and creates additional debts and liabilities causes more irreparable damage to every citizen in New Jersey.  This matter is fully ripe for judicial review and intervention.

Dated:  June 20, 2020

SETH GROSSMAN

Attorney for Plaintiffs

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