Challenge to $14 billion of Illinois GOs resurrected by appellate ruling
Litigation seeking to void $14 billion of outstanding Illinois general obligation bonds remains alive after an appellate decision concluded the lower court erred in refusing to allow the taxpayer action to proceed.
The Thursday opinion from the appellate panel came in a case first launched in July 2019 by Illinois Policy Institute head John Tillman, acting as a taxpayer, and the New York-based hedge fund Warlander Asset Management LP, a state bondholder. Tillman heads a conservative group that is a frequent critic of state fiscal policies. Warlander is no longer a named plaintiff.
They sought the court’s permission to file a taxpayer action lawsuit that argues the state’s $10 billion 2003 GO pension obligation issue and $6 billion 2017 GO bill backlog borrowing ran afoul of the state constitution and repayment of the remaining balance of $14.3 billion blocked.
After oral arguments last summer, Sangamon County Circuit Court Jack D. Davis II in an August 2019 opinion rejected Tillman’s request for leave to file the case and the potential litigation ground to a halt. Tillman’s lawyers appealed to the Fourth District Appellate Court, arguing that Davis’ ruling went too far in considering the legal merits when the decision should have been limited to whether the lawsuit was “frivolous” or “malicious.”
“Tillman’s complaint sets forth a colorable reading of the Illinois Constitution that does not appear to be frivolous on its face. While we express no opinion on the ultimate merits of Tillman’s claims, we conclude that the petition and complaint state reasonable grounds for filing suit,” reads the 12-page opinion.
“We conclude that because Tillman’s complaint was not frivolous or malicious, the trial court erred by denying his petition for leave to file it. Accordingly, we remand the case for further proceedings,” reads the opinion delivered by Justice Robert J. Steigmann. Justices John W. Turner and Lisa Holder White concurred.
Illinois Attorney General Kwame Raoul’s office, who is representing the state in Tillman v. Gov. J.B. Pritzker, Treasurer Michael Frerichs, and Comptroller Susana Mendoza, could not immediately be reached to comment.
Gov. Pritzker cautioned against reading too much in to the opinion, noting the court’s action simply paves the way for the lawsuit’s filing. The state contends the bonds met all constitutional requirements and faced multiple layers of legal review including the attorney general’s office and bond counsel and met all state legal standards.
“This lawsuit continues to be a tired tactic of the extreme right who continue to push their ideology over sound fiscal policy. This administration will continue to focus on the important work of acting responsibly to keep the state on stable fiscal footing,” said Pritzker spokeswoman Jordan Abudayyeh.
“I’m encouraged by the court’s decision today. I have been a vocal critic of Illinois’ reckless debt accumulation for years. By continuing to issue debt in violation of the rule of law, state politicians in Illinois have harmed taxpayers and the poor and is advantaged who depend on the delivery of government services,” Tillman said in a statement. “Now that we are in the throes of the worst recession since the Great Depression, we must protect the people from financial mismanagement by their government. I look forward to my day in court.”
“I strongly disagree with the ruling of the appellate court that reinstated former Gov. Bruce Rauner’s number one advisor and the Illinois Policy Institute CEO John Tillman’s irresponsible lawsuit, aimed at tanking Illinois’ finances — for the profit of named or unnamed hedge funds,” Comptroller Mendoza said in a statement. “Bond counsel and the state Attorney General signed off on all these bonds. They were constitutional and we are confident Tillman will ultimately lose.”
Many market participants thought the challenge was a long shot given the state’s bond review process and the wide latitude of the statutory language, but secondary market spreads on Illinois paper widened by about 35 basis points after the initial filing, reversing improvements as market participants had been buoyed by a newfound political calm in the state with the 2018 election of Pritzker.
Spreads recovered after the trial court’s refused to allow the complaint to proceed and the state was further aided by the market’s thirst for higher yielding credits.
The opinion comes as the state’s spreads have of late been recovering from peak levels of more than 400 basis points to the Municipal Market Data’s top benchmark. They spiked amid market turmoil dating back to March as the COVID-19 pandemic accelerated and worries grew over the state’s ability to manage what is estimated at a $7 billion fiscal 2020 and 2021 revenue hit.
It’s unclear if the opinion allowing the case to be filed will have an impact on secondary trading. Market participants last year had stressed their belief that if the lawsuit was allowed to proceed and Tillman eventually prevailed the state would pass legislation making good on repayment of the debt in question to preserve its market access and investment grade ratings.
Pritzker is a Democrat and Democrats hold a legislative super-majority. Divisions between Democrats and Rauner, a Republican, drove a two-year budget impasse that left the state’s ratings one to two notches from junk. Fitch Ratings, Moody’s Investors Service, and S&P Global Ratings all now rate the state at the lowest investment grade level with a negative outlook.
The opinion does not address the legal arguments laid out during the circuit court proceedings just the Davis ruling.
“We repeat that we express no opinion on the merits of Tillman’s claims. We merely conclude for the purpose of this proceeding that Tillman should be permitted to file the complaint,” the 12-page opinion reads. On remand back to the lower court, the state may raise the defenses on the statute of limitations, the failure to join necessary parties, and any other defenses or bases for dismissal they may assert.
Warlander withdrew its name from the lawsuit after Davis expressed concerns over the New York-based fund’s involvement during oral arguments last summer.
During oral arguments, the firm disclosed in the courtroom that it stood to benefit if the bonds were ruled illegal because of credit default hedges it had entered into involving the challenged bonds. Nuveen Asset Management LLC and AllianceBernstein LP put forth the claim in support of Illinois’ position that the bonds were legally issued and should continue to be paid.
With the case now remanded back to the lower court, the state’s authorization of up to $5 billion of borrowing through the Federal Reserve’s Municipal Liquidity Facility to help balance the fiscal 2021 budget may come under heightened scrutiny as depending on the structure it could fall under the type of debt challenged in the lawsuit.
The state is hoping for direct aid for tax losses from the federal relief package being negotiated by President Trump and congressional leaders. It will borrow if the aid doesn’t come through this year. The Pritzker administration hopes eventually aid would come through that could repay the debt.
The Tillman lawsuit argues that deficit financing is not a “specific purpose” allowed under the state constitution. The state can borrow to cover a deficit under statutory provisions that allow for a term limited to one-year due to a failure of revenues. The state recently borrowed $1.2 billion through a MLF loan under that provision.
The appellate opinion noted that Judge Davis based his trial court ruling on findings that the statutes authorizing the 2003 and 2017 bonds did lay out a “specific purpose” for the borrowings in “sufficient detail” and that the filing of the complaint would be an unjustified interference with the application of public funds.
In his appeal, Tillman argued that the court should only consider the issue of whether the lawsuit was frivolous or malicious. Tillman’s lawyers argued that such a claim can’t be made because of its position that the borrowings were unconstitutional.
Tillman argued that the state’s use of funds for both financings fell short of meeting a qualified “specific purposes” because its was too “general” and also violated the type of specific purpose allowed for debt issuance like projects, capital improvements, and other non-recurring costs. The 2017 issue paid down bills and a portion of the 2003 pension issue covered near-term contributions easing pressure on the general fund.
The state countered that the Davis opinion correctly rejected the appeal on the argument that the statutes are constitutional as the bond legislation offered sufficient language on the specificity of use, that the statute of limitations had passed and the time to have filed the lawsuit was in response to the bond legislation.
The appellate court in overturning Davis looked at legal rulings on taxpayer action suits as the permission to proceed was designed as a check on frivolous litigation and interference with the distribution of public moneys.
In reviewing what the appellate court called a seminal case the state supreme court had written the sole question “is whether the facts alleged in the petition and proposed complaint, taken as true, disclose a reasonable ground for the filing of a suit.”
The high court concluded that while important to prevent unjustified interferences “it is equally important that suits which do not appear unjustified are not barred or foreclosed.”
The appellate panel in applying that high court finding to the Tillman case wrote: “We likewise conclude that nothing in the record indicates that the proposed complaint was frivolous, filed for a malicious purpose, or is otherwise unjustified…resolution of Tillman’s claims requires interpreting statutes and a constitutional provision to determine if those statutes are constitutional.”