New Jersey Gov. Phil Murphy signed into law the New Jersey COVID-19 Emergency Bond Act (the “Act”) on July 16, 2020. The Act authorizes the issuance of New Jersey State bonds up to $9.9 billion to respond to financial issues caused by the pandemic. The bonds may either be issued to the federal government or sold through a private or public sale.
Issuing the Bonds
Up to $2.7 billion of bonds may be issued for the period that began July 1, 2019, and ends September 30, 2020. The remaining $7.2 billion may be issued for the period of October 1, 2020, to June 30, 2021. Bonds, generally under this statute, are defined to include serial bonds, term bonds, refund bonds, or short-term notes. The individuals authorized to issue the bonds are the Governor, State Treasurer, and the Director of the Division of Budget and Accounting in the Department of Treasury (together, the issuing officials). The State is the entity directly obligation to pay back the bonds, and the faith and credit of the State is pledged for payment.
The issuing officials must provide a report to the Select Commission on Emergency COVID-19 Borrowing (the "Commission") stating that a decision has been made to issue bonds and describing the bonds. The Commission will be comprised of two members of the Senate, selected by the Senate President, and two members of the General Assembly, selected by the Speaker of the General Assembly. The Commission must vote on the report within six calendar days of its receipt. Three members must vote in favor of the report to approve the bonds. No bonds shall be issued without approval by the Commission. If the Commission does not vote within six days, the report is considered disapproved.
For a bond to be officially executed under this Act, it must be signed by the Governor, attested by the Secretary of State or an assistant of the Secretary of State, countersigned by the Director of Budget and Accounting in the Department of the Treasury, and manually authenticated by an authenticating agent or bond registrar. This can be done through electronic means. The bonds must state that they are issued for the purposes of providing financial relief due to financial distress caused by the COVID-19 pandemic and in pursuant of this Act. When a bond correctly states this information, is fully registered, and follows the terms of this act, it will be deemed incontestable for any cause if there is any suit involving the validity of the bond.
Refunding bonds are authorized to be issued only to pay off any principal, interest, or any redemption premium on the bonds authorized under this Act. These refunding bonds are not subject to the Refunding Bond Act, but only to the extent necessary for the purpose of this Act. These bonds cannot be issued exceeding the amount necessary to pay the outstanding bond payments.
Sale and Setting the Price and Terms
The issuing officials are in charge of determining the method of selling the bond and negotiating the terms of the bond. The bonds can be sold at a private sale to a private buyer, at a private sale to the federal government, or at a public sale. A private sale is authorized to be done without advertisement. If required by the private buyer, the issuing official is authorized to enter into a loan agreement, or a similar document, and the terms adopted will be recognized as an additional provision of the bond. Public sales can occur under the conditions and regulations that the issuing officials decide. Notice must be published at least once in at least three newspapers in the State. The first notice has to occur at least two days prior to the day of bidding, and the notice must explicitly recognize that any bid can be rejected.
In sum, the prices and conditions of the bond are determined by the issuing officials. The issuing officials can reserve a provision in the bonds to redeem any bond prior to the maturity date at the set prices and conditions. The date of maturity will be no later than 35 years from the date of the bond’s issuance. Both the principal and interest on the bonds shall be exempt from taxation by the State, county, or local governments. Further, except for the first and last interest periods, the interest is to be paid on a semiannual basis. This is because the first and last interest periods may be longer or shorter depending on the law or timing of the issuance.
Where the Proceeds Go
Once deposited in the separate statutorily created accounts by the State Treasurer, the proceeds can be withdrawn and put in any depository the State Treasurer decides. This money can also be invested in the ways authorized by current law and in government and local securities. Also, the expenses associated with the issuance of the bonds shall be paid from the proceeds of the sale of the bond.
The proceeds from the sale of refunding bonds shall immediately be paid to issuance expenses incurred, and to the payment of the principal, interest, and redemption premium on any outstanding bonds. If not required for immediate payment of an outstanding bond, the proceeds shall be deposited in trust with the State Treasurer separate from other funds of the State or with one or more trustees or escrow agents. These trustees or escrow agents are either trust companies or national or state banks. These proceeds also can be invested in government securities, which are not subject to redemption prior to their maturity date unless the holder of the security opts to do so. These proceeds held in trust or proceeds of reinvestment will only be used to the payoff outstanding bonds.
Except as otherwise stated above, the payments will be provided for by the revenue from the collection of taxes under the Sales and Use Tax Act. If there are not sufficient funds to pay the outstanding debt, then the State will institute a tax on real and personal property, the following year in each municipality, sufficient to make payments.
Litigation is expected to determine the constitutionality of the new law. The Ballard Spahr Public Finance Group will continue to monitor the issue and provide updates.
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