Press Room

Appealing Rejected Bond Issues to the New Jersey Commissioner of Education
By Ronald J. Ianoale, Esq.
McManimon & Scotland, L.L.C.

First published in Key Post, Vol XXI, No 3, April 2005

One often-heard comment since the adoption of the Educational Facilities Construction and Financing Act is "if the voters defeat the bond referendum again, the commissioner of education will order the sale of bonds." But to what extent is this statement true?

Educational Facilities Construction and Financing Act

On July 18, 2000, Governor Christine Todd Whitman signed into law the Educational Facilities Construction and Financing Act, N.J.S.A. 18A:7G-1 et seq. (EFCFA). The legislation dramatically changed the way school improvements are now financed in the State of New Jersey. One of the major changes permits school districts to receive grants instead of debt service aid. Another significant change allows school districts to appeal to the commissioner of education if it failed on two occasions to obtain approval to issue bonds.

Prior to the adoption of EFCFA, school districts were able to rely on their ability to execute facilities leases for terms that exceeded five years if they wanted to avoid submitting their bond questions to the voters in the case of a Type II school district or to a board of school estimate in the case of a Type I school. The facilities lease required school districts to make annual rent payments to a leasing company. These anticipated rent payments were sometimes issued in denominations of $5,000 certificates of payments, which were generally referred to as COPs. The funds raised by the sale of the COPs to investors were then used by school districts finance their improvements. The major criticism of the transaction by the voting public was that Type II school districts did not need the approval of the voters to enter into a facilities lease, which led to the demise of facilities leases with terms that exceeded five years with the adoption of EFCFA.[1]

In lieu of school districts entering into long term facilities leases, EFCFA now permits school districts to appeal to the commissioner of education[2] to authorize the issuance of bonds. N.J.S.A. 18A:7G-12 states, in part,

The procedures for instituting an appeal to the commissioner after two failed bond issues are found at N.J.A.C. 6A:26-3.7(i). The first step requires the district to initiate a petition to the commissioner of education, requesting authorization to issue bonds. The petition must set forth two important elements: (i) the second rejection did not include any "excess costs"[3] as that term is defined in N.J.A.C. 6A:26-1.2; and (ii) justification why the school improvements are needed for a "thorough and efficient" education. The regulations also require the school district to announce at a board of education meeting that interested persons may submit written comments to the commissioner. At the conclusion of this public comment period, the commissioner will assign either an administrative law judge (ALJ) or hearing officer to conduct a public hearing, requiring the board of education to publish a notice about the proposed hearing date. Both the board of education and interested members of the public will be allowed to present proofs or comments why the school district should be permitted or not permitted to finance the proposed improvements through the issuance of bonds. The ALJ or hearing officer will then make a recommendation to the commissioner of education, who will accept, reject, or modify the recommendation. If the commissioner decides to authorize the issuance of bonds, the proposed improvements are sent to New Jersey Schools Construction Corporation (SCC) to determine the costs of the improvements. Based on the SCC estimates, the commissioner will then determine the amount of bonds to be issued. Thus far, one New Jersey school district has submitted itself to this process.

The Clark School District

The Board of Education of the Township of Clark in the County of Union had three failed referenda. The first two referenda--December 12, 2000 and February 27, 2001--requested the voters to approve approximately $31.4 million in improvements, of which approximately $21.6 million would have been financed with bonds. The third referendum conducted on September 25, 2001 was scaled-back to eliminate the improvements' "excess costs" and asked the voters to approve $19.2 million of improvements, with a local share or bond amount of approximately $11.4 million. This third referendum addressed only health and safety issues and did not ask the voters to approve the construction of any new educational space as was done in the first two referenda. After the third defeat, the Clark School Board spent several months discussing whether to conduct a fourth referendum. They eventually decided to appeal to the commissioner of education on July 17, 2002 for appropriate relief under the EFCFA.

The Commissioner assigned an ALJ to the case. After reviewing extensive public comments and conducting public hearings, on April 10, 2003 the ALJ recommended that the Clark School District be authorized to undertake $19.2 million of improvements-consisting of the same scope and amount of work that was rejected by the voters in the third referendum. The ALJ rejected however Clark's argument that the Commissioner allow it to undertake the construction of new facilities that was submitted to the voters in the first two referenda.

In a decision dated June 2, 2003, the Commissioner of Education decided In the Matter of the Application of the Bd. of Ed. of the Twp. of Clark, Union Co., for an Order Directing the Issuance of Bonds Pursuant to N.J.S.A. 18A:7G-12 ("Clark"), and accepted all the findings of the ALJ. The Commissioner held that

The Clark School Board asserted that its schools are below the facilities efficiency standards[4] for functional capacity and lack specialized instructional spaces as set forth in the facilities efficiency standards and were therefore entitled to build new educational space. The Commissioner countered that the Clark School District could still provide a thorough and efficient education despite the deficiencies to its facilities. The relevant inquiry, according to the Commissioner, was "whether the existing configuration of school facilities is inadequate to afford students a thorough and efficient education." Clark, p. 27. In other words, old and antiquated facilities do not necessarily mean that students are incapable of obtaining a quality education. The Commissioner agreed with the ALJ that "the facilities efficiency standards must be educationally adequate to support the achievement of core curriculum standards . . . but not necessarily the only means to achieve that result." Clark, p. 27. The Commissioner was reluctant to provide a rigid application to the term "thorough and efficient" in order to avoid Clark School District's argument--and future appeals by school districts--that when facilities fall short of the facilities efficiency standards, the Commissioner is automatically required to order the sale of bonds.

The Clark School District also contended that the Commissioner should authorize bonds for all those improvements that did not have "excess costs." The Commissioner disagreed. Quoting the ALJ, the Commissioner wrote that "If the Legislature had intended to require approval of all projects that do not have excess costs, it could easily have said so without adding extra language mandating that the Commissioner determine whether such project was 'necessary.'" Clark, p. 27.

Conclusion

The Clark decision is the only case where a local board of education has petitioned the commissioner to authorize the issuance of bonds pursuant to the requirements of the EFCFA. Until more decisions are rendered, it is difficult to predict the outcome of future appeals. The Clark decision does provide some guidance.

Generally, health and safety issues are probably more likely to win an appeal rather than new construction. But what constitutes a health and safety issue is sometimes hard to determine. The regulation's definition of an "emergent condition" provides some guidance on this issue: "a condition [that] is so injurious or hazardous that it causes an imminent peril to the health and safety to students and staff." N.J.A.C. 6A:26-1.2. Roofing and heating systems failures, for example, can often lead to an emergent condition: These system failures are not only disruptive to the educational process but also could present serious health and safety issues to students and staff. Leaky roofs can cause dangerous mold and weaken the underlining structure of a roof. And the inability of a boiler to heat a school adequately is a potential health hazard to the students and the staff.

The Clark decision is also illustrative for those school districts seeking to finance new construction. The case suggests that school districts must demonstrate how existing educational space is inadequate to provide a thorough and efficient education. For example, large class sizes, temporary classroom units (or trailers), or split sessions (approximately one half of students attending morning classes and the other half attending afternoon sessions) are all indicators of insufficient educational space. But these inadequacies may not be enough for the commissioner to substitute his judgment for that of the voters. The appeal must demonstrate that the lack of educational space hinders student achievement of the core curriculum content standards-New Jersey's legislative effort to define what constitutes a "thorough and efficient" education with the adoption of the Comprehensive Educational Improvement and Financing Act of 1996.

Finally, in attempting to answer the accuracy of the statement-"two rejected bond issues allows the commissioner to order the sale of bonds"-is like most things in the law-true, but with exceptions. In keeping with the commissioner's reluctance to substitute his judgment for that of the voters or a board of school estimate, the Clark case does provide some insight. The commissioner is probably more likely to impose his judgment on the local taxpayers if obvious health and safety issues are prevalent in a school district. But when the appeal concerns the construction of new facilities, the school district will probably need to overcome a higher burden of proof by answering the following inquiry from the Clark case: How are existing facilities compromising student achievement?

[1] EFCFA still permits facilities leases but for terms that do not exceed five years, pursuant to N.J.S.A. 18A:20-4.2(f). These leases, unlike equipment leases, require, among other things, the approval of the commissioner of education. N.J.A.C. 6A:26-10.3 also requires that the school district conduct one public hearing and that the rent payments be appropriated in the general fund of the school district.

[2] Prior to EFCFA, New Jersey courts asserted the state's responsibility to ensure that every student was receiving a "thorough and efficient" education as guaranteed under the state constitution. One of the leading cases that provided the New Jersey commissioner of education the affirmative duty to order the issuance of bonds was In re Upper Freehold Reg. Sch. Dist., 86 N.J. 265 (1981).

[3] "Excess costs" means the additional costs, if any, which shall be borne by the district, of a school facilities project which result from design factors that are not required to meet the facilities efficiency standards . . . . Excess costs are to be distinguished from the additional costs arising out of design factors that are required to meet the facilities efficiency standards . . . ."

[4] The definition of the "facilities efficiency standards" under EFCFA is a flexible one. N.J.S.A. 18A:7G-4(h) states, in part, that "[t]he facilities efficiency standards developed by the commissioner shall not be construction design standards but rather shall represent the instructional spaces, specialized instructional areas, and administrative spaces that are determined by the commissioner to be educationally adequate to support the achievement of the core curriculum content standards . . . [a project] may eliminate spaces in the facilities efficiency standards, include spaces not in the facilities efficiency standards, or size spaces differently than in the facilities efficiency standards . . . ."

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