The Authority View – Spring/Summer 2014 Vol. 40, No. 2

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
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ORNEYS aat LAW
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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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