March 23, 2006

Madison Borough Board of Education

Morris County, New Jersey

45,920,275 School Facilities Project

(approved by the Madison voters via 9/27/05 special school election)

State’s Legal Options for Providing Awarded State Aid to Project

            In accordance with the requirements of the Educational Facilities Construction and Financing Act (EFCFA), the New Jersey Department of Education (NJDOE) has formally awarded State Aid to the Project in an amount equal to 24.14% of the total Project costs of $45,920,275 (which aid also equates to 40% of the Project’s “final eligible costs” of $27,711,770 as determined by NJDOE in accordance with the EFCFA).  The EFCFA has been the applicable State law under which the State has awarded State school facilities aid to all New Jersey school districts since January 2001.

            Under the EFCFA, the State has the legal option of paying the State aid to the Board of Education in either of the following two ways:

            (1)       via an $11,084,708 up-front State grant (in which case, the Board of Education would only borrow the $34,835,567 “local share” of the Project costs, as was already undertaken by the Board in December 2005 via a 25-year, 4.67% school bonds issuance);

            or

            (2)       via annual State debt service aid payments to the Board of Education in an amount equal to 24.14% of the aggregate annual debt service  payments (principal and interest) the Board would pay in each year on its aggregate Project debt (in which case the Board of Education would also issue additional school bonds for the $11,084,708 “State share” in addition to the already issued “local share” school bonds).  The ECFCA provides that when the State Aid is paid via annual State debt service payments, the aid includes both the principal of the Board of Education’s debt allocable to the State Aid amount plus the interest allocable that principal.

            In early summer 2005, as permitted under the EFCFA, the Board did formally advise the State that it “elected” to receive the State aid via an up-front State grant for so long as the grant was available.  However, under either State aid payment method (up-front grant or annual debt service aid), the net property tax impact for the Madison property taxpayers would be the same, for so long as the State makes the full up-front grant payment or makes the full annual debt service aid payments in each year.  Notwithstanding the Board’s election to receive the grant, the Project ballot question presented to and approved by the Madison voters at the September 27, 2005 special school election expressly acknowledged (as required by the ECFCA) that the awarded State Aid for the Project could be paid by the State to the Board of Education via either grant or annual debt service aid.

            Since early January 2006, various NJDOE representatives have been making informal public statements that all remaining moneys in the State school facilities grant fund are now fully committed to school facilities projects approved via school elections conducted on or prior to the date of the April 2005 annual school election.  In addition, there does not currently appear to be any realistic effort in the State Legislature to replenish the grant fund, and Governor Corzine’s just introduced, proposed FY 2006-07 State Budget also does not contain any such proposed replenishment.

            Therefore, despite not yet receiving formal NJDOE notification on this issue, the Board of Education is currently assuming it will most likely receive its awarded State Aid via the method of annual State debt service aid, which the State would pay pro rata annually over the 30-year life of the Board of Education’s Project debt.

            NJDOE Division of Finance representatives have also informally advised the Board of Education’s bond counsel that the State will most likely provide the debt service aid on the basis of 24.14% of the total $45,920,275 Project debt (which includes both the $34,835,567 “local share” and the $11,084,708 “State share”), as opposed to providing 100% debt service aid on the yet to be issued $11,084,708 school bonds representing the “State share”.  Although 24.14% of the total debt is the mathematical equivalent of 100% of the “State share” portion of the debt, this distinction is still relevant, in the context that the State will have to “true up” with the Board of Education in FY 2007-08 (the year the State currently intends to commence making the annual debt service aid payments to the Board) for the aid owed but not paid to the Board for its FY 2006-07 Project debt service payments during that year.  Thus, the FY 2007-08 State debt service aid payments to the Board will actually cover two fiscal years (a retroactive payment for the already completed 2006-07 year plus the current payment for the 2007-08 year)

Reliability of State Aid when Paid as Annual State Debt Service Aid

            The State has fully funded annual State debt service aid for schools since State FY 1999-00, and NJDOE Division of Finance representatives have advised the Board of Education’s bond counsel that Governor Corzine’s proposed FY 2006-07 State Budget also provides for fully funded debt service aid.  However, (1) it is currently unknown whether the final 2006-07 State Budget as and when approved by the State Legislature and the Governor by June 30, 2006 will still contain such full funding, and further, (2) there have been instances in prior State Budget years (over the last 20 years) in which the State has not fully funded debt service aid (and in some instances such aid was funded as low as 58% of the requirement).  

            It is also important to understand, however, that all such prior year annual State debt service aid has been specifically paid by the State pursuant to a law called the “Comprehensive Educational Improvement and Finance Act (CEIFA).  CEIFA is wholly separate from the EFCFA,  and as stated earlier, EFCFA (not CEIFA) is the actual law under which the State will operate when it makes its annual debt service aid payments to the Board of Education.

            The Board of Education’s bond counsel has advised that it is legally impossible to state with 100% certainty that the State will fully fund annual State debt service aid under EFCFA in each year over the 30-year term of the Board’s Project debt.  However, certain legal and political distinctions between the operation of EFCFA and CEIFA make it more likely that the State will fully honor its EFCFA payment obligations (as opposed to CEIFA, where the State has in certain instances not fully funded its stated payment obligations in certain prior years).

            Such legal and political distinctions are as follows:

            1.  In accordance with the requirements of EFCFA, prior to presenting the Project to the Madison voters for their consideration at the September 27, 2005 special school election, the Board of Education received a formal State Aid commitment letter from NJDOE expressly setting forth the exact amount of State Aid awarded to the Project.  In stark contrast, for all prior school elections conducted when CEIFA was exclusively applicable (pre 2001), the State was not required to and did not ever issue any express State Aid commitment letter to a local board of education prior to its voters voting on any proposed school facilities project presented by such board of education.

            2.  Of arguably even more critical legal and political significance, EFCFA expressly requires that all school facilities project ballot questions shall expressly set forth the exact amount of State Aid awarded to the proposed project.  Further, in addition to the voters obviously seeing the ballot questions in the voting booth, under applicable State law, the forms of such ballot questions are also advertised by the applicable County clerk in local newspapers and mailed to registered voters prior to the date of the election.  Accordingly, as required by EFCFA, the voters are expressly advised of the awarded State Aid prior to when they vote, thereby “statutorily inducing” the voter to take the State Aid into direct consideration and “rely” on same when determining how to vote.   In stark contrast, prior to the enactment of ECFCA in mid 2000, there was no State law or other applicable requirement of any kind which required that the voters be advised in any way (via the ballot question or otherwise) about any potential State aid of any kind prior to their voting on any project proposal.  In addition, the Board of Education’s bond counsel is of the opinion that the inclusion of any such information would have been actually prohibited under then applicable State law.  Accordingly, prior to EFCFA, voters voted on project ballot questions which either expressly stated or clearly implied that the property tax payers would be paying for the entire project (i.e., no “statutory inducement or reliance” was caused or offered by the State). 

            3.  Notwithstanding the combined effect of 1 and 2 above, the Board of Education’s bond counsel has advised that it is still impossible to predict with 100% certainty whether the State will in the future fully honor its payment obligations under EFCFA, or, how any applicable Court would rule on any State attempt to provide less than full aid under EFCFA.  But given the legal and political distinctions between EFCFA and CEIFA, bond counsel does believe it to be more likely that if the State were to attempt to revise the EFCFA debt service aid payment requirements in the future, that such changes would be applicable only prospectively to school facilities projects approved by voters after such revisions took effect.   Bond counsel has advised the Board of Education that there are strong legal arguments supporting its view.  In addition, it would surely be very difficult politically for the State to breach its own express promise of State Aid, particularly when State law required that such express promise be expressly communicated to the voters prior to when they voted.

            To date,  the State has given no formal or informal indications that it would ever pay less than the full amount of State Aid as has been formally awarded to the Project under EFCFA.