New Jersey voters could end the state's ability to borrow money through government authorities if the Legislature passes a constitutional amendment to restrict state-backed bonding, thereby moving the issue onto the ballot in November.

Currently, general obligation borrowing and dedication of revenue streams to secure long-term debt must be put to a referendum. Yet state agencies, corporations, and authorities can issue debt, called state contract bonds, that is backed by the New Jersey's pledge of repayment. That type of appropriation-backed borrowing is what Sen. Leonard Lance, R-Warren and Hunterdon, is trying to stop. Sen. Raymond Lesniak, D-Union, is co-sponsor.

Voter-approved debt accounts for roughly $12 billion of New Jersey's total outstanding debt of $32 billion, with GOs and revenue bonds taking up only $2.8 billion and $9.1 billion, respectively. That leaves $20 billion that New Jersey and its citizens are responsible for, yet was sold without referendum.

Supporters of Lance's constitutional amendment bill say that New Jersey cannot afford to sell additional appropriation debt. In fiscal 2009, which begins July 1, the state will pay $2.8 billion in debt service costs, taking up 8% of the $33 billion fiscal plan.

"New Jersey has abused its ability to bond without voter approval to the extent now that most bonding is now done outside of that process," said Gregg Edwards, president of the Center For Policy Research of New Jersey, a nonprofit think tank that favors free markets. "It's become the rule rather than the exception."

The initiative has made its way through various committees and legislators, who are now free to vote on the measure on both chamber floors, although the issue has yet to appear on this week's voting dockets. The Lance-Lesniak bill has strong support as lawmakers from both parties have expressed their approval of the constitutional amendment and Gov. Jon Corzine has endorsed the initiative as well.

In addition, New Jersey residents last year expressed their dissatisfaction with state borrowing when voters rejected a $450 million bond referendum for stem cell research while a $200 million open space borrowing proposal historically a very popular program passed with a tight 54% to 46% margin. During a public hearing on the constitutional amendment at a Senate Budget and Appropriations Committee, Lance expressed his belief that the initiative will become law.

"It will take a super-majority 60% of the members in the Senate, that is 24 votes, and 60% of the members in the General Assembly, that is 48 votes for this constitutional amendment to reach the ballot this year," Lance said. "I'm convinced that when it reaches the floor of both houses it will be overwhelmingly approved by members of the Legislature and when it reaches the people and I hope that occurs this November it will pass by a plurality I would imagine of 80% 85% of those voting."

While curbing borrowing in New Jersey and taking control over its high debt service costs is a popular issue, there are some that criticize the Lance-Lesniak bill and point to the state's need to support school infrastructure. As the constitutional amendment has been making its way through committees, Corzine has also been pushing a $2.5 billion, state-backed bonding initiative that would help New Jersey meet its court-mandated obligation to finance school construction in 31 special districts known as Abbott districts.

While the governor has said he favors the Lance-Lesniak bill, he has also stated that he does not want the $2.5 billion measure to go on the November ballot. The school construction borrowing plan currently resides in committee.

Lesniak also agrees with the Corzine administration's plan to borrow $2.5 billion now, without voter approval, to finance school construction projects. At the same time, he is co-sponsoring the constitutional amendment to restrict future state bonding.

"We've certainly gotten ourselves in a mess without such a prohibition," Lesniak said before the Senate Budget and Appropriations Committee. "At the same time, we have to recognize that we have a constitutional obligation and indeed a moral obligation to provide school facilities to our children that are conducive to an appropriate education environment. I don't know how we're going to do that, quite frankly, if we were to put something on the ballot and the voters rejected it."

Lance said he realizes that the $2.5 billion of state-appropriation debt will probably pass before lawmakers are able to change the constitution, but indicated that the large borrowing only exemplifies how New Jersey created its high debt burden in the first place.

"The way we've gotten in the situation where we find ourselves is that type of argument of 'we should begin to ask the voters for their approval, but not quite yet,' " Lance said in a phone interview.

Yet education advocates also point out that even with Corzine's proposed $2.5 billion of borrowing, the Lance-Lensiak bill will restrict New Jersey's ability to finance school construction projects down the road, according to David Sciarra, executive director for the Education Law Center, which advocates equal and adequate public education for all children.

"It will effectively foreclose the school construction program for poor communities in our state," Sciarra said before the Senate committee. "There's simply no way, no way that the voters of this state are going to approve a $2.5 billion bond issue focused on poor districts in the state. We can put this bond issue up. We can put it up again, and again, and again, and in the meantime thousands of children in our poorest districts with projects that have been stalled for two years are not going to move forward."

In response to Sciarra's doubts, Lance expressed his belief in voters' support of issuing bonds for school infrastructure.

"I am not quite as convinced that a ballot question appropriately worded and judiciously funded for urban schools could not pass state-wide," Lance said before the committee.

But school construction projects are not the only public projects that could feel the restrictions of the Lance-Lesniak amendment. Critics of the initiative say officials could have a difficult time putting bonding initiatives on a ballot that would finance state office buildings or prisons, projects that typically are not as popular as borrowing for open-space preservation. That could potentially open the door for more long-term lease contracts where the state pays a private developer rental payments for the use of certain facilities as opposed to building those facilities itself. Yet Edwards said those infrastructure needs could still gain enough voter support, if they are projects that are truly needed.

"I believe that if there was a question on the ballot to bond for the construction of prisons, that would probably pass," he said. "I think people understand government's core obligations."

Lance agreed that referendums on worthwhile debt initiatives have a good chance of passing.

"We have in the past asked the people for their approval when we've built prisons and we should do so in the future," he said. "There is always an excuse why it shouldn't apply in a particular case, but that's how we've gotten into this situation."

Critics also point out that the Lance-Lesniak amendment would exempt state-appropriation borrowing under existing state-contract laws with agencies such as New Jersey's Hospital Asset Transformation Program. Under that law, the state will back hospital revenue bonds that will facilitate the consolidation of two or more health care facilities and close an acute-care center. The initiative is aimed at helping New Jersey address its abundance of unused hospital beds.

John L. Kraft of Lomurro, Davison, Eastman & Munoz PA, said exempting current state-contract debt laws from a referendum could allow state officials to work around the Lance-Lesniak amendment restriction.

"What they mean is that an existing law can be used for new state-appropriation debt, but I think that that ought to be clarified so that we don't have to worry as citizens of New Jersey whether this is yet another opportunity for the state to ignore the provisions of the constitution," Kraft said.

Subscribe Now

Independent and authoritative analysis and perspective for the bond buying industry.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.