1968: Court OK’s “unenforceable” debt without public vote. NJ taxes explode.

In 1947, New Jersey adopted a new State Constitution to replace its old State Constitution of 1844.    However, it continued these three basic reforms of 1844 that brought New Jerseyt out of a six year economic depression, and gave our state 120 years of economic growth.   These were the three key provisions:

  1. “General” state laws gave every citizen an equal right to form a corporation and start a business,  .
  2. State government could not borrow money without the approval of voters in a statewide referendum.
  3. Taxpayer money could not longer finance private business corporations.

Four years later, in 1951,  the Governor and Legislature tried to create a loophole in the State Constitution and borrow money without voter approval.   They created a “New Jersey Building Authority” and gave it power to borrow money to build new state government buildings without voter approval.   The state would then use tax money to repay the loans in the form of  “rent” under long term leases made with the Authority

In 1953, the New Jersey Supreme Court in a 5-2 decision rejected that plan.

For the next 15 years, New Jersey continued to be one of the most prosperous and least taxed states in the nation.   In 1968, New Jersey’s 7,005,000 residents had total personal income of $28.6 billion, or $4,083 per person—among the highest in the nation.   At that time, our state government was virtually debt free.  Its annual budget was $1.06 billion, or 3.7% of state income.   New Jersey state government spent roughly $143 per person each year.   New Jersey had  just adopted its first 3% sales tax in 1963, but it still had no personal income tax.

That quickly changed when the New Jersey Supreme Court decided the case of Clayton vs. Kervick in 1968.   It  approved a state law that created the  “NJ Educational Facilities Authority” and let it borrow money for new  college buildings without voter approval..   The Court said that was because (a) taxpayers had no legal obligation to pay the money back, and (b) the Authority had an independent source of income to pay back the loans–namely tuition and dormitory rent collected from students.

In 1971 , the state Supreme Court approved a state law that provided for state reimbursements to county governments that borrowed money for new community colleges–without voter approval.   In 1973, it approved the lease-purchase gimmick to avoid voter approval it had rejected 20 years earlier.

In 1982, the NJ Supreme Court allowed independent authorities to borrow money without voter approval, even where the authorities had no source of income other than what was paid by state government with money collected in taxes.

In 2000, Republican Governor Christie Whitman and a Republican controlled legislature borrowed a massive $8.6 billion for construction of local public schools without voter approval.     In 2002 and 2003, the NJ Supreme Court approved that borrowing, but made it clear that the debt was not legally binding on the “full faith and credit” of state government because it was not approved by voters.

There is a direct connection between state government borrowing without voter approval, and big increases in state government spending and taxes.

Year NJ Population Total NJ Personal Income NJ State Budget Total NJ State Budget as % of State Income NJ State Budget Per Person
1968 7,005,000 $28.6   billion $1.06 billion 3.7% $143
1973  7,335,240 $44.25 billion $2.4 billion 5.4% $327
1981 7,407,471 $96.48 billion $5.68 billion  5.9% $756
2002 8,558.327 $337.00 billion $23.4 billion 6.9% $2,734
2007 8,685,920 $427.30 billion $33.5 billion 7.8% $3,684

In his January 2008 State of the State Message, Democrat Governor Jon Corzine said:

“With $32 billion in bonded debt, New Jersey’s citizens have a higher debt burden than virtually all other states.   Every man, woman, and child in New Jersey personally owes $3,700 of that debt—about three times higher than the national average. .  .

“For nearly 200 years, our State Constitutions have explicitly barred borrowing without voter approval.   Somewhere along the line, the meaning of that requirement got totally lost.    The State, under both Democratic and Republican leadership, has made an end run around the voter approval requirement by issuing billions in contract debt without that approval.

“Since 1990, approximately $24 billion in contract debt has been issued, while “voter approved” debt has stayed flat at $3 billion—a timeframe that coincides precisely with the sharp deterioration in our State’s finances. . . “

Although Democratic Governor Jon Corzine spoke of the problems caused by unconstitutional debt in 2008, he never suggested that state government “repudiate” or refuse to pay it.   Before becoming Governor, Corzine worked as a top executive for Goldman Sachs, a Wall Street firm that profited enormously from helping states “legally” borrow large sums of money without the voter approvals required by their state constitutions.

Corzine instead proposed putting New Jersey taxpayers even deeper into debt by “monetizing” the New Jersey Turnpike, Garden State Parkway, and Atlantic City Expressway.

In 2009,  Republican Chris Christie became Governor by defeating Corzine’s re-election bid.    Christie not only failed to repudiate unconstitutional debt, his appointees in “independent” state agencies borrowed even more money without voter approval and put the state even deeper in debt.

By coincidence, Chris Christie’s wife Mary Pat was employed until just a few months ago by Cantor Fitzgerald, another Wall Street firm that profits enormously from helping state and local governments borrow money without voter approval as required by state constitutions.

According to the 2/19/2015  report of Mark Lagerkvist for New Jersey Watchdog,  New Jersey state government is now $183 billion in debt.    This is nearly six times higher than the state government yearly operating budget of $32 billion.  See http://watchdog.org/200984/nj-state-debt/

That figure includes roughly $135 billion is unfunded pension promises made to current and retired state, local, and public school employees.    More than 2,000 retired public employees are getting pensions of more than $100,000 per year, and that number increases every month.    There is no connection between how much public employees pay into the pension system and how much they receive when they retire.   Because of that, most current retirees are receiving far more than they paid in.   None of this liability was approved by voters as required by the state Constitution.

Another $17 billion was borrowed by the New Jersey Transportation Trust Fund Authority during the past 30 years.   Although the debt is funded by the gasoline tax, much of this money was spent on expensive failures like the Camden to Trenton railroad and local bikepaths and decorative brick sidewalks in upscale shopping areas that had nothing to do with highways or bridges.   None of this debt was approved by voters. either.

New Jersey’s $183 billion state government debt comes to roughly $45,750 for each of the state’s 4 million households.    However, New Jersey taxpayers are only legally obligated to pay 2% of that debt since only about $3.5 billion of that debt was approved by voters pursuant to our State Constitution.

The entire $183 billion cannot be paid back without massive new taxes that would crush the economy.   Although average household income was a very high $70,000 in 2014, that income has been declining steadily during the past eight years.     As household income declined, New Jersey taxes have increased.

The Tax Foundation reported that in 2011, the average household in New Jersey paid more than $13,000 or roughly 20% of that income for state and local taxes.   Since then, real estate taxes have gone up substantially.  New Jersey households already pay the third highest state and local taxes in the country.   It is difficult to imagine how these same families can afford to pay their $45,750 share of the state debt and pension obligations on top of the taxes they already pay.

The only sensible solution is to repudiate—refuse to pay—any state government debt not approved by voters.

That means the share of state debt to be paid by each household would be less than $1,000 rather than $45,750.

The does not mean retired government employees would not get their pensions.   There is enough money in the pension funds to pay roughly half of what was promised.    If the pension funds are immediately declared insolvent, payments can be restructured so that all pensions are paid out of the pension funds.     However, instead of paying each retiree half of what he or she was promised, pension payments can be capped at roughly $50,000 per year, so that most ordinary workers get most or all of what they were promised, while higher level employees, who often manipulated the system to juice up their pensions in the three years before they retired, will  get the biggest cuts.

2 thoughts on “1968: Court OK’s “unenforceable” debt without public vote. NJ taxes explode.”

  1. This is a very informative history of how NJ became, in defiance of our Constitution, one of the US’ most indebted states.

    I’ve looked at this on my blog too, with a focus on how Abbott bonding played a role in this.

    The 2000 $8.6 billion bonding was allowed by the NJ Supreme Court because they decided that (their reading of) the Education Clause superseded the plain reading of the Debt Limitation Clause.


    1. This critical Steve Lonegan decision was as convoluted as it was despicable and dishonest. Without precedent, the case was bifurcated into two separate hearings and decisions. First, NJ Supreme Court said $8.6 billion bond for new schools was OK because (a) State taxpayers were not legally obligated to pay as money was borrowed by NJ EDA (Economic Development Authority), and (b) NJ had State Constitutional obligation to fund “thorough and efficient education”. (The court was dishonest because it did not explore ways to provide education without borrowing money, and it never established a nexus between spending more money and better educational outcomes). The NJ Supreme Court was then expected to have a second decision saying that no such future borrowing would be permitted. However, Chief Justice Poritz, a Christie Todd Whitman Republican appointee, delayed decision on second portion of this case until Justice Gary Stein, who was against the borrowing, reached mandatory retirement age, and was forced out and replaced by a liberal Democrat justice appointed by newly elected Democrat Governor McGreevey. Seth Grossman

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