By Joseph De Avila 

The New Jersey Supreme Court heard oral arguments Wednesday in a lawsuit over whether the state has the authority to borrow $9.9 billion to cover budget shortfalls fueled by the coronavirus shutdown.

Democratic Gov. Phil Murphy signed a law last month allowing the state to borrow the money after lawmakers passed the bill largely along partisan lines, with most Republicans in opposition.

The state Department of the Treasury has estimated that tax revenue will come up short by $9.2 billion through June 2021, and supporters of the new law say lawmakers will have to enact steep budget cuts if the Supreme Court strikes down the law.

The state's Republican Party along with GOP lawmakers challenged the new law, arguing that the state Constitution and a previous state Supreme Court ruling bar the use of borrowed money to balance the budget.

"We are dealing with nonvoter approved debt that will place a yoke on the backs of New Jerseyans for decades and damage an already weak credit rating that is the second lowest in the country, potentially placing New Jersey in junk-bond status," said Republican state Sen. Michael Testa, an attorney representing the plaintiffs.

Assistant Attorney General Jean P. Reilly, representing the state, said New Jersey doesn't take lightly the burden it will place on taxpayers. It took similar measures during the Civil War and the Great Depression, she said.

"The alternative -- not borrowing and imposing 'devastating cuts' as the treasurer called them -- is to visit upon future generations a far more grievous legacy, namely the indelible imprint of a generation or more lost to poverty and unemployment," Ms. Reilly said.

Lawmakers are awaiting the latest revenue figures following the July 15 tax-collection deadline. Mr. Murphy signed a $7.6 billion budget last month to cover three months of state spending and must propose a spending plan by Aug. 25 for the next fiscal year, which begins in October.

In their questioning of Mr. Testa, the justices zeroed in on whether the state could tie its fiscal crisis to the coronavirus pandemic. Mr. Testa said the pandemic created a public-health emergency that relates to New Jersey's fiscal problems, but the state hasn't shown that the projected revenue shortfall will actually occur.

"Obviously Covid-19 has been a disaster that has been felt worldwide, nationwide and statewide," Mr. Testa added. "It doesn't give the authority to our governor and the legislature to essentially write a blank check to be used for anything."

The justices asked the state what its limits to borrowing were, and if it would be allowed to take such measures to pay its operating expenses in the event of other disasters, like superstorm Sandy or Tropical Storm Isaias.

"I'm not sure I can draw a bright line," Ms. Reilly said. "But I can say that wherever the line is drawn, this event definitely falls on the side of emergency. It's on the scope and magnitude like the Civil War and the Great Depression."

Write to Joseph De Avila at joseph.deavila@wsj.com

(END) Dow Jones Newswires

August 05, 2020 16:36 ET (20:36 GMT)