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NJSBA has received numerous inquiries regarding the recently enacted S-1701, the most significant piece of school finance legislation in many years. S-1701, otherwise known as P.L. 2004 c. 73, affects school district budget caps, surplus, administrative spending limits, budget transfers and second ballot questions. While the majority of inquiries have focused upon the technical aspects of the bill and its impact on school districts and their budgets, a significant number of the inquiries have focused upon NJSBA’s response to the bill, particularly the possibility of a litigation response, such as a class action suit. Possible litigation theories have included the retroactive nature of the bill, causing many school districts to undo prior year transfers and recertify their tax levies; overturning the will of the voters, particularly in those school districts that passed their school budgets and certified a voter approved tax levy; and the inability of certain districts to provide a thorough and efficient education, given the impact of S-1701 on school district operations.
The NJSBA Legal Department has researched the issue and believes that a litigation response is not the most effective (and certainly not the most efficient) course of action at this time. Summarizing the research and analysis, retroactive legislation has generally been upheld where the legislation is clear on its face and where there is no “manifest injustice” or unconstitutional interference with a vested right. Rebuttal arguments can be made that the Legislature, which is given deference in these types of cases, did not overturn the will of the voters - it simply provided property tax relief, an overriding public policy goal. Finally, the argument that a school district is unable to provide a thorough and efficient education for its students is fact-specific to each district and is a lengthy process that can take many years. While there is always a remote possibility of litigation success, it appears that the likelihood of success in this matter is limited and the road to that success costly in both time and money. A legislative solution appears to be the better path.
NJSBA has developed an interactive Web page, www.njsba.org/1701 to inform its members and respond to inquiries about the legislation. NJSBA is surveying its membership in an effort to obtain statistical and anecdotal information regarding S-1701’s impact. The information gained from our members on the consequences of this bill will support advocacy efforts at the state and legislative district levels. The ability to provide a state legislator with anecdotal information as to how the law specifically hurts her constituent voters and negatively affects children in her community, perhaps even her own, could be very persuasive. The Legal Department analysis follows.
ANALYSIS
The litigation
arguments break down into two general categories. The first is the retroactive
effect of the law, causing boards of education to bring back money transferred
from surplus into capital or maintenance reserve accounts subsequent to the
April 2004 school election, to reduce their surplus amounts down to three
percent and to funnel the excess into tax relief for the 2004-2005 budgetary
year. Such legislation reaches back into the 2003-2004 budgetary year and, it
can be argued, is contrary to the will of the voters who, in April 2004,
approved the school district’s 2004-2005 budget. The argument is that the
legislation should only apply prospectively and should not be given retroactive
effect. With a prospective application, school districts can properly plan for
and more easily implement the changes imposed by S-1701.
Nelson v. Old
Bridge, 148 N.J.
358 (1997) provides an excellent analysis of the concept of retroactive
application of statutes. The analysis, on pages 369 – 371 of the Supreme Court
opinion, with some minor grammatical and stylistic paraphrasing, states:
Although courts favor the prospective application of statutes, see Phillips v. Curiale, 128 N.J. 608, 615, 608 A.2d 895 (1992), that rule is to aid the court in the search for legislative intent. Twiss v. State, 124 N.J. 461, 466, 591 A.2d 913 (1991) (citing Rothman v. Rothman, 65 N.J. 219, 224, 320 A.2d 496 (1974)).
Courts should not apply the rule mechanistically. Rather, "where . . . supervening considerations clearly compel a contrary determination, this, like all other rules of statutory construction [,] must give way." When the Legislature does not clearly express its intent to give a statute prospective application, a court must determine whether to apply the statute retroactively.
[Ibid. (citations omitted).]
The New Jersey Supreme Court applies a two-part test to determine whether a statute should be applied retroactively. The first question is "whether the Legislature intended to give the statute retroactive application." In re D.C., 146 N.J. 31, 50, 679 A.2d 634 (1996) (citation omitted). The second inquiry is "whether retroactive application of the statute will result in either an unconstitutional interference with 'vested rights' or a 'manifest injustice.'" Ibid.
There are three circumstances that will justify retroactive application of a statute: (1) where the Legislature has declared such an intent, either explicitly or implicitly; (2) where the statute is curative; and (3) where the expectations of those affected by the statute warrant retroactive application. See Id. at 51 (citing Gibbons v. Gibbons, 86 N.J. 515, 522-23, 432 A.2d 80 (1981)).
…
The second part of the analysis involves a determination of whether applying the Amendment retroactively will result in "manifest injustice" or the loss of a "vested right." The New Jersey Supreme Court has defined a "vested right" as "a present fixed interest . . . which should be protected against arbitrary state action." Phillips, supra, 128 N.J. at 620 (citation omitted). Other New Jersey courts have defined the right by stating what a "vested right" is not: "There can be no vested right in the continued existence of a statute or rule of the common law which precludes its change or repeal." Ibid. (citations omitted). Furthermore, the New Jersey Supreme Court has stated "that retroactive application of civil legislation generally does not violate due process unless the consequences are 'particularly harsh and oppressive.'" Id. at 622 (citations omitted).
In Nelson, the New Jersey Supreme Court found that the legislation met all three tests as to retroactivity. The plain language of the statute indicated that the amendment was to apply to all individuals who had acquired tenure pursuant to the statute. Such an enactment could hardly be found to be prospective. Nelson was included in that group of individuals, making the amendment literally applicable to him. The amendment was curative in nature, and curative legislation is to be retroactively applied. See In re D.C., supra, 146 N.J. at 51. Under the curative exception to prospective applicability, an amendment to a statute is given retroactive effect if it is designed merely to carry out or explain the intent of the original statute. See Kendall, supra, 219 N.J. Super. at 287. In essence, an amendment which falls within the curative exception can be retroactively applied consistent with the general rule of prospectivity because its purpose is to remedy a perceived imperfection in or misapplication of a statute and not to alter the intended scope or purposes of the original act. The Amendment was expressly intended to correct a misapplication of the statute. Section 3 of the Amendment stated that the Appellate Division decision below made a clarification of that statute necessary in order to continue the traditional practice of providing that tenure is acquired in one of the specifically enumerated positions only if the individual has served for the requisite statutorily required period of time in that position. This language made it obvious that the Amendment was curative, in that its intent is to clarify, and it should, therefore, be retroactively applied.
In Saunders v. Toms River, the Appellate Division similarly found that the statute in question should be applied retroactively, stating at pages 231-232:
In this case, the legislative intent can be fairly gleaned to require retroactive application of the statute. See Pennsylvania Greyhound Lines, Inc. v. Rosenthal, 14 N.J. 372, 383-84, 102 A.2d 587 (1954). The Governor specifically articulated a desire that the bill revising the school election process should be in place for the upcoming elections in April 1996. She made a specific recommendation concerning the effective date of the legislation and the Legislature followed that suggestion. Unfortunately, the Legislature did not act on the suggestions in the Governor's September 18, 1995 conditional veto message promptly, and the bill was not signed until December 15, 1995. Thus the effective date of the statute, March 15, 1996, fell within the time period between the filing deadline for the nominating petitions and the printing of the ballots.
We do not consider this factor fatal to a retroactive application of the statute. We cannot ignore the fact that the Legislature adopted the Governor's suggestion concerning the effective date of the legislation. This action strongly suggests the Legislature's agreement that the bill should govern the April 1996 school elections. Furthermore, none of the parties have been caught unaware of the requirements of the new statute. Both parties acknowledge that the Commissioner of Education and the New Jersey School Boards Association have undertaken extensive efforts to advise school boards and candidates of the requirements under the new legislation. In that sense no one can argue that they were unprepared to meet the requirements of the new legislation. In fact, the Davis nominating petition was filed on February 26, the fiftieth day before the election, as required by L. 1995 c. 278, § 7, rather than on February 22, the fifty-forth day before the election as would have been required by N.J.S.A. 18A:14-9. Notably, defendant did not reject the nominating petition on the ground that it was filed beyond the filing deadline. In this case, the record reflects that all interested parties have already conformed their conduct to the new requirements.
Applying the retroactivity analysis, S-1701 results in a similar finding that retroactive application is not inappropriate. The first part of the Court’s analysis is easily satisfied as the Legislature has clearly expressed its intent to reach back into the 2003-2004 budgetary year. The amendments explicitly require boards of education to undo transfers legally and properly made from surplus into capital or maintenance reserve accounts subsequent to the April 2004 school election. Boards must reduce their undesignated free balance or surplus amounts, including these monies previously placed in capital or maintenance reserve down to three percent and funnel the excess into tax relief for the 2004-2005 budgetary year. The statutory language is clear; statutory intent is not an issue.
The second part of the analysis is also satisfied. The question is whether applying the statute retroactively will result in "manifest injustice" or the loss of a "vested right." The fact that boards of education may not like the fact that they must undo earlier budgetary transactions, reduce their surplus amounts and direct the reallocations into property tax relief does not preclude retroactivity. As previously stated, New Jersey courts have held that there is no vested right in the continued existence of a statute or rule of the common law that precludes its change or repeal. The legislature decided to change the law. The education groups lobbied hard and long to prevent S-1701’s passage. They were not successful. It is not unlike the fact that the State has not followed CEIFA for the past four years and has established the level of State Aid through each fiscal year’s Appropriations Act. In essence, each fiscal year’s Appropriations Act suspended CEIFA for that fiscal year. Bottom line, if the Legislature wants to do it differently, they can do it differently and they have decided to do it differently here. It is really a political and legislative question.
Furthermore, also as previously stated, the New Jersey Supreme Court has held "that retroactive application of civil legislation generally does not violate due process unless the consequences are 'particularly harsh and oppressive.” While the effect of this law on some school districts may cause them to make some tough decisions, reduce staff and programs, it would not appear to be “harsh and oppressive”. Certainly it is no more harsh and oppressive than what districts have had to deal with throughout CEIFA’s eight-year history with three percent annual spending growth limitations being the rule. Costs in many budgetary areas, particularly personnel, have increased by more than three percent per year, reducing discretionary spending and squeezing budgets tighter and tighter. Add administrative penalties and the like and S-1701 is simply more of the same. Not pleasant but not particularly harsh or oppressive.
All of the above leads to the conclusion that the likelihood of a successful challenge to S1701 on the grounds of improper retroactive application appears to be limited at best.
The second area of possible litigation challenge is the issue of the legislation so negatively impacting school districts that it prevents them from providing a thorough and efficient education (T&E) in their school district. While it is possible that some districts would be so negatively impacted that they could not provide T&E, that determination would be fact-sensitive to each district and would involve litigation that could take several years to complete. Abbott district litigation has been ongoing for decades. Another recent example, the rural districts ongoing lawsuit, Bacon v. NJSDOE, 2003 SLD February 10, previously Keaveney v. NJSDOE, 2001 SLD February 9, has been going on since 1997 and is still before the State Board without resolution. The history of school finance litigation, be it Abbott, Rural or Middle-Income districts, has been one of delay, delay, delay, for many years with limited success. A legislative solution appears to be much more reasonable and practicable. It is our recommendation that NJSBA compile the horror stories that school districts are experiencing and use these anecdotes in our lobbying efforts, particularly with the school district’s local legislators, to seek repeal of S-1701, or at least amendments. This recommended approach appears to make much more sense from both a likelihood of success and a cost and time efficiency perspective.
Recent funding decisions of the Commissioner and others support that position.
In Hammonton Board of Education v. New Jersey Department of Education, Unreported Appellate Division Decision Dkt. No. A-3836-01T5, 2003, the Appellate Division stated:
The current appropriations act at issue in this case, the FY03 Appropriation, L. 2002, c.38 (FY03) has the full effect of law and expresses a “definitive legislative intent”. Citing City of Camden, 82 N.J. at 142. To the extent that the two enactments – CEIFA and FY03- are irreconcilable, they cannot co-exist. Our courts, consistent with federal statutory interpretation, have declined to apply the Doctrine of “Implied Repeal.” Id. See also Friends of Earth v. Armstrong, 485 F.2d 1, 16 (10th Cir. 1973) (holding “The Supreme Court has consistently stated that judicial construction is disfavored as a means of establishing a repeal of legislation”) Because appropriations acts have a life limited to its fiscal year, our courts have been sensitive to the impact of appropriations laws upon existing laws, choosing to characterize the effect appropriations on standing legislation as an implied “suspension rather than an implied repeal.”
The FY03 Appropriations Act and the Legislature’s failure to provide funding in accordance with CEIFA resulted in an implied suspension of CEIFA for the 2002-2003 school year. In essence the Appropriations Act trumped CEIFA. Hammonton’s suit was dismissed.
Citing the Hammonton rationale, the Commissioner similarly held in Board of Education of the City of Woodbury v. NJSDOE, 2004 SLD April 28, that the FY04 Appropriations Act trumped CEIFA for the 2003-2004 school year. The Legislature’s failure to provide additional funding resulted in another implied suspension of CEIFA for the 2003-2004 school year. The Commissioner held that where the Legislature has mandated funding for a particular program, the program may be implicitly suspended where the Legislature fails to fund that program in a subsequent year.
In City of Passaic Board of Education v. NJSDOE, unreported Appellate Division opinion, Dkt. No. A-1484-03T3, March 12, 2004, the Appellate Division held that, given the Commissioner’s broad powers, including Abbott oversight, that the Commissioner’s reallocation of undesignated surplus from 2% to 0.76% in order to fund a preschool program was authorized by the 2003-2004 Appropriations Act and, even if not, was a reasonable exercise of the Commissioner’s authority. The 2003-2004 Appropriations Act specifically gave the Commissioner authority to reallocate undesignated fund balance in excess of 2%. The Appellate Division did not find this provision to be limiting on the Commissioner to reduce surplus below 2% where deemed necessary.
These Commissioner and Appellate Division decisions evidence deference to the Legislature and to the administrative agency, the Department of Education. The Appropriations Act trumping CEIFA in a given year was not surprising. Nor was the expansive reading of the 2% reallocation language contained in the 2003-2004 Appropriations Act. If the courts are willing to give the Commissioner deference in reallocating undesignated fund balance below that which is authorized within a given year’s Appropriations Act, it is unlikely that they will find a problem with an explicitly stated reallocation, even if retroactive, particularly when balanced with the Governor’s overall plan to effectuate property tax relief.
A recent decision by the New Jersey Supreme Court provides some additional insight into the possibility of a litigation remedy, even if a litigation challenge could be successful on the rule of law. In a decision issued July 26, 2004, the New Jersey Supreme Court ruled that the State’s 2004-2005 fiscal year budget could not be balanced through the use of $ 1.9 billion in borrowed monies. In Hon. Leonard Lance, etc., et. al. v. Hon. James E. McGreevey, etc, et. al. the Court held that contract bond proceeds, authorized by the 2004-2005 Appropriations Act to fund general operating expenses of the State, did not constitute “revenue” for purposes of the New Jersey Constitution Appropriations Clause and could not be used to balance the State’s annual budget. Because no previous decision of the Court had ever addressed the issue, the Court made the holding prospective in nature so that it will apply only to the 2005-2006 fiscal year budget and thereafter. The 2004-2005 fiscal year budget was left intact and the State was permitted to proceed with the bond sales as authorized. No aspect of the decision will affect either the currently proposed bond sale or any prior bond authorizations.
In reaching its decision, the Court considered the question of whether the framers of the New Jersey Constitution would have considered the 2004-2005 Appropriations Act, relying as it does on $1.9 billion in borrowed monies to fund general expenses, to be consistent with the constitutional mandate of having a “balanced budget.” The short answer was no. The Court could not reasonably find that the 2004-2005 Appropriations Act constituted a balanced budget without defeating the very purpose of the Appropriations Clause of New Jersey’s Constitution. That purpose is to bar the State from adopting an annual budget in which expenditures exceed revenues. Borrowed monies are not State revenue and cannot be used for the purpose of funding or balancing any portion of the budget pertaining to general costs without violating the Appropriations Clause.
In making its decision prospective, the Court held that barring the 2004-2005 bond sales would require significant revisions to, if not a complete overhaul of, the current fiscal year’s budget. The resulting disruption to the State government could be great. The Court was satisfied that the legislative and executive branches acted in good faith, relying on an honest, albeit erroneous, belief that the budget was properly balanced under existing constitutional standards.
Given the McGreevey Court’s reluctance to provide relief in the current fiscal year, even where a finding was made that the 2004-2005 Appropriations Act was unconstitutional, the likelihood of a successful litigation solution, at least in the current fiscal year, is limited. Even if a court found that S-1701 was unconstitutional, a very unlikely prospect, the same arguments for prospective application in 2005-2006 and forward could be credibly made and would likely be successful for all the reasons contained in the preceding paragraph.
In summary, the likelihood of success in litigation over S1701 is limited. Like most litigation, the road will be long and costly both in terms of time and money. A legislative solution appears to be much more reasonable and practicable. It is the Legal Department’s recommendation that NJSBA continue to survey its membership in an effort to obtain information regarding S-1701’s impact on local districts. As stated earlier in this memorandum, the information gained from our members on the consequences of this bill will support advocacy efforts at the state and legislative district levels. The ability to provide a state legislator with anecdotal information as to how the law specifically hurts her constituent voters and negatively affects children in her community, perhaps even her own, could be very persuasive. This recommended approach appears to make much more sense from both a likelihood of success and a cost and time efficiency perspective.
S1701WebsiteLitigationMemo.mfk