Double-Barreled Obligations Still Pack a Big Bang in NJ by Jason P. Capizzi, Esq. When a county or municipality (local unit) issues a bond or other obligation, that obligation is secured by its taxing power. Specifically, the local unit promises to levy ad valorem taxes upon all the taxable real property within the local unit to pay the obligation and the interest thereon, without limitation as to rate or amount (general obligation pledge). Traditionally, the public finance market has regarded the general obligation pledge as the strongest type of security available. However, given recent municipal bankruptcies throughout the nation, the strength of the general obligation pledge is uncertain. This uncertainty raises the question nation-wide whether obligations secured by revenues, such as those issued by sewerage and municipal utilities authorities (local authority), are more secure than obligations secured by the general obligation pledge. New Jersey’s public finance laws were designed to prevent local units and local authorities from finding themselves in financial stress, which makes federal bankruptcy unlikely to occur in New Jersey. New Jersey’s public finance laws preserve the general obligation pledge in New Jersey as the strongest type of security available and the increased marketability afforded to local authority obligations that are backed with a service contract. Such obligations are dubbed “double-barreled” obligations since they are secured not only with the revenues of the issuing Local Authority, but by the General Obligation Pledge of a Local unit as well. History of the Service Contract A service contract is defined in the Local Authorities Fiscal Control Law, N.J.S.A. 40a:5A-1, et seq. (the “Law”) as an agreement of a local unit intended to provide additional security for the obligations of a local authority. Specifically, the local authority agrees to provide service to the residents of its district, and in return the local unit agrees that, if the local authority experiences a revenue shortfall, it will advance funds to the local authority to meet all of its obligations on a timely basis. A service contract requires a local unit to support the obligations of a local authority, which in turn makes the local authority’s obligations more marketable. The use of service contracts by New Jersey issuers is well-established and was first authorized in the Sewerage Authorities Law, N.J.S.A. 40:14A-1 et seq. (the “SA Law”), which was enacted in 1946. Specifically, section 23 of the SA Law authorizes a local authority to enter into a contract with a local unit to carry out its purposes, including the provision of amounts necessary to provide for the expenses and operation and maintenance of the sewerage system, including principal of and interest on any bonds. Section 23 further authorizes and directs a local unit to “do and perform any and all acts or things necessary, convenient or desirable to carry out and perform every such [service] contract and to provide for the payment or discharge of any obligation thereunder in the same manner as other obligations of such [local unit].” Jason P. Capizzi, Esq. The use of a service contract is also authorized in the Municipal and County Utilities Authorities Law, N.J.S.A. 40:14B-1 et seq. (the “MUA Law”), which restates in section 49 that which is authorized in section 23 of the SA law. Public Finance Oversight: Jersey Strong Federal law does not permit states to file for bankruptcy protection. However, federal law does permit municipalities, if authorized by their state, to seek protection from their creditors by filing for bankruptcy under chapter 9. See, 11 U.S.C. 109(c). New Jersey law prohibits any local unit, school district, or other political subdivision of the State, which includes local authorities, from filing a petition with any United States court or court in bankruptcy for the purpose of effecting a plan of readjustment of its debts or for the composition of its debts without first obtaining the approval of the Local Finance Board (LFB). See, N.J.S.A. 52:27-40; N.J.S.A. 52:27-1. The LFB has not approved any such application in over 80 years and regularly restates its intention to maintain this longstanding policy of non-approval. (See Thomas H. Neff, Municipal Bankruptcy Advocates: California Dreaming, New Jersey Municipalities, February 2013, at 44; Local Finance Notice 2013-06.) Continued on page 22 The Authority View • 21 Double-Barreled Obligations Still Pack a Big Bang in NJ Continued from page 21 The power the LFB has to assist financially stressed Local units under the Local Government Supervision Act (1947), N.J.S.A. 52:27BB-1 et seq., and Local Authorities under the Local Authorities Fiscal Control Law, N.J.S.A. 40A:5A-1 et seq., also make it unlikely that federal bankruptcy protection is more than a theoretical option in New Jersey. The Local Government Supervision Act (1947) permits local units to submit, either voluntarily or by court order if necessary, to additional oversight of its local finances by the LFB. In turn, the LFB is granted the authority to ease certain regulations in order to reestablish fiscal integrity to the supervised Local unit, which may otherwise be in jeopardy. As for local authorities with financial difficulties as determined by the LFB pursuant to the Local Authorities Fiscal Control Law, the LFB may order the implementation of a financial plan to assure the payment of debt service on obligations of the local authority or provide relief from undue financial burden. See, N.J.S.A. 40A:5A-19. The LFB order, which all persons are estopped from contesting, is deemed conclusive and final; making it unlikely that federal bankruptcy protection will be sought by a local authority. In sum, the investing community should have no reservation when considering the purchase of obligations issued by New Jersey’s local units and local authorities, especially double-barreled obligations, given New Jersey’s public finance laws which ensure that all local unit and local authority obligations will be paid timely and in accordance with their terms. About the writer: Jason Capizzi, Esq. is a member of Kraft & Capizzi, LLC. He previously served as Deputy Attorney General for the NJ Department of Community Affairs, Division of Local Government Services/ Local Finance Board, and as Assistant Counsel to two NJ Governors. AEA Committees: Great Forums for Members The following are among the committees active in AEA. For a complete list, see the Member Content section of the AEA website. Coastal Committee Chair: Charlie Norkis, Cape May County MUA Provides structure by which AEA coastal dischargers can share information and services. Develops strategies for shared concerns. Discusses matters of mutual interest. Appeals discharge permit conditions common to all in a consolidated manner. Energy Committee Chairs: Richard Kunze, Ocean County UA Katie Vesey, Atlantic County UA Identifies energy issues, programs and policies—including CHP, efficiency, micro-grid, emergency energy sources, solar and energy purchasing—that concern members. Advise AEA on energy matters and input to DEP, BPU and other agencies. Keep membership informed about important developments in this area. KR RAFT & CAPIIZZI, L LLC ── ─── ATTO ORNEYS aat LAW ── ─── NEW JERSSEY’S FIRSST BOND COUNSELL PRACTIICE 505 THORN NALL STREE ET, SUITE 2006 EDISON N, NEW JERS SEY 08837 T: (732) 902-6808 | F: (7732) 902-68122 KRA AFTBONDS .COM 22 • Spring/Summer 2014 Ethics Committee Chair: Joe Maraziti, Esq., Maraziti, Falcon & Healey Developing ethics information, education and policy for AEA. Make recommendations to Board and membership on ethics matters. HR Committee Chair: Patricia Skrocki, OCUA Educates committee members about matters related to human resources, such as pension, employee management, benefits, and hiring/firing. Provide a forum where members can discuss common concerns and seek advice from colleagues. Assists general membership by identifying HR related topics and development. IT Committee Chair: Dave Stupar, OCUA Exploring IT issues of concern; understanding needs related to IT; providing feedback and info to AEA about IT matters.
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