By Bill Wichert

Law360 (August 5, 2020, 7:49 PM EDT ) The New Jersey Supreme Court questioned Wednesday how up to $9.9 billion in borrowed funds may be spent under a state law meant to address financial problems arising from the COVID-19 pandemic, challenging whether it could go as far afield as funding a new sports arena.

In the Garden State Republicans' lawsuit against Democratic Gov. Phil Murphy, the state's highest court grilled the governor's counsel, Assistant Attorney General Jean Reilly, about the reach of that spending as the justices weighed the constitutionality of the New Jersey COVID-19 Emergency Bond Act, which authorizes the borrowing without voter approval.

Given the health and fiscal emergencies created by the pandemic, Reilly claimed the borrowing is permitted under an exception within the debt limitation clause of the state constitution, which says voter approval and related restrictions do not apply to "the creation of any debts or liabilities ... to meet an emergency caused by disaster or act of God."

The legislature is entitled to "extreme deference" with respect to spending money during an emergency, Reilly said.

Chief Justice Stuart Rabner, however, wondered about the limits of borrowing under the emergency provision and questioned whether the state could use part of the $9.9 billion to subsidize a hypothetical new sports arena.

Reilly initially said no, arguing that "what we're talking about here" is "making up for revenue deficits." She changed her answer when the justice presented a scenario in which the legislation said spending money on a sports arena would generate thousands of jobs that will help people who are unemployed as a result of the pandemic.

"Is that an appropriate spending of the $9.9 billion from the state's perspective?" Justice Rabner asked Reilly.

Reilly said, "I think that if the legislature, who has a wider view than I of the economic need in the state and the best means to remediate that, if they were to be able to come up with an explanation of why this sports arena were necessary to meet the fiscal emergency that the pandemic had caused, then, yes, I think that would be acceptable."

"What may seem ridiculous to us may actually have a valid, rational basis," Reilly added.

Justice Rabner told her that "you've advanced a very broad standard of what meets an emergency."

Reilly said such a standard is "keeping with historical practice," citing how the state spent borrowed funds during the Civil War and the Great Depression. The framers of the state constitution "purposely left it broad and undefined ... to allow the legislature to sort of have this flexibility," she said.

But Justice Jaynee LaVecchia noted that "there was some general purpose that was articulated" in legislation related to borrowing during the Great Depression. The present bond act is "rather nebulous," the justice said.

"It says address the state's financial problems that have arisen as a consequence of COVID-19," said Justice LaVecchia, referring to language in the act. "The best and most precise thing I can glean from that language is that the problem has to have arisen directly as a consequence to COVID ... Is that the best limitation that we can glean from it?"

The justices pressed Reilly for a "limiting principle" in connection with borrowing during an emergency, but she did not propose a bright-line rule.

"I'm searching for a limiting principle and I'm hopeful you might be able to present one," Justice Rabner said to Reilly. "Can you give us examples of borrowing and spending that would not meet 'an emergency caused by disaster,' by the COVID-19 disaster?"

"There probably are some on the margins that do not ... fall within there," Reilly said. She also did not provide specific examples when Justice Anne M. Patterson posed a nearly identical question.

"Where is the limiting principle as to what constitutes an emergency and what is it?" Justice Patterson asked.

Reilly said she could not "draw the bright line" but argued that "wherever the line is drawn, this event definitely falls on the side of emergency."

"It's of a scope and magnitude like the Civil War and the Great Depression, something that comes along every 80 years or so," Reilly said.

In a matter of hours on July 16, the Democrat-controlled legislature approved the bond act, Murphy signed it into law and the Republicans filed their initial suit in Mercer County Superior Court. The next day, the New Jersey Supreme Court took control of the litigation.

The law permits the issuance of $2.7 billion in general obligation bonds for the current fiscal year that ends Sept. 30 and another $7.2 billion for the next fiscal year.

Michael L. Testa Jr., a Republican state senator and an attorney representing the plaintiffs, argued in part during Wednesday's hearing that the bond act violates the appropriations clause of the state constitution, which requires a balanced state budget via an annual appropriations law. The act unlawfully allows the state to use debt to cover its general expenses, Testa said.

That clause "must be given full and complete effect in accord with its clear and obvious intent," Testa told the Supreme Court.

"Bonding $9.9 billion to supplement anticipated revenue loss is completely inconsistent with the purpose of the appropriations clause," he added.

The justices challenged Testa about the logic of the state being able to borrow money in the event of an emergency that it then cannot spend.

"Explain, if you can, how it makes sense that the framers provided an emergency ... clause that would allow for the borrowing of money in certain circumstances, yet not allow that money to be spent," Justice Rabner told Testa.

The appropriations clause "mandates that the borrowing to meet an emergency has to be fiscally sane and in accordance with the appropriations clause," Testa replied.

"We can't just negate it and forget that it exists," Testa said.

The plaintiffs are represented by Michael L. Testa Jr. of Testa Heck Testa & White PA.

Murphy is represented by Assistant Attorney General Jean Reilly.

Amicus curiae Jack Ciattarelli and James Webber are represented by Mark D. Sheridan of Squire Patton Boggs LLP.

The case is New Jersey Republican State Committee et al. v. Philip D. Murphy, case number 084731, in the New Jersey Supreme Court.

--Editing by Haylee Pearl.

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