Judge gives thumbs down to lawsuit seeking to void Illinois bonds

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An Illinois judge Thursday ruled that a lawsuit seeking to block repayment of $14.3 billion of state general obligation bonds can’t move forward as a taxpayer action lawsuit.

“The court finds reasonable grounds do not exist for filing the proposed complaint,” said the order denying John Tillman’s “petition for leave to file a taxpayer action to restrain and enjoin the disbursement of public funds.”


Tillman plans to appeal.

The petitioner — who is head of the Illinois Policy Institute, a frequent critic of state fiscal policies — had argued the bonds failed to meet state debt guidelines because of what they were used for and the lack of information as to the “specific purpose” for their issuance. Tillman’s lawyers argued the case deserved to be heard.

The court rejected the arguments, finding the bond issues did offer specific enough language to pass constitutional muster and said that to allow the case to proceed would result in the improper interference with the application of public funds.

The order came two weeks after Sangamon County Circuit Court Judge Jack D. Davis II heard oral arguments in his Springfield courtroom about the case that opponents say is “frivolous” and filed for “a malicious or ulterior purpose.”

Warlander Asset Management LP, a New York-based hedge fund, was also named as a plaintiff but did not act as a petitioner. Market participants thought the challenge was a long shot, but secondary market spreads on Illinois paper widened by about 35 basis points after the July 1 filing.

“I strongly disagree with the court’s decision, will appeal and am confident that I will prevail. It was premature for the court to decide the case on the merits at the petition stage," Tillman said in an emailed statement. "Moreover, I disagree with the court’s conclusion that whether general obligation bonds have a specific purpose is a purely political question. The Illinois Supreme Court has ruled that the judiciary is in fact required to determine whether a challenged purpose is specific or not, and has done so on other occasions.”

The lawsuit argued that $10 billion of GO pension bonds sold in 2003 and $6 billion of GO debt issued in 2017 to pay down the state's unpaid bill backlog violated the constitution and that payment on the remaining $14.3 billion outstanding from the deals should end.

The court concluded that in 2003, the legislature's specific purpose for issuing bonds was to contribute to funding the state's five pension systems while the stated specific purpose on the 2017 debt was to make good on health insurance vouchers the state promised to pay to vendors.

“This court finds the legislature stated with reasonable detail the specific purposes for the issuance of the bonds and assumption of the debt as well as the objectives to be accomplished by enactment of the legislation,” Davis wrote.

The statute cited reads “state debt for specific purposes may be incurred.... in such amounts as may be provided...in law passed by the vote of three-fifths of the members elected to each house of the General Assembly....Any law providing for the incurring...of debt shall set forth the specific purposes and the manner of repayment.”

“Despite Tillman striving mightily to do so, he cannot ignore the plain language of the statutes in question. Tillman's proposed Complaint is chock-full of conclusory and argumentative statements describing the financial condition of the state that are irrelevant and which the court must disregard. Indeed, it resembles far more of a political stump speech than it does a legal pleading,” Davis’ order continued.

The decision notes that while Tillman is an Illinois resident, Warlander does not meet that description. The firm is a holder of $25 million of state GO bonds that it argued repayment of alleged illegal bonds would impair the market value of its holdings of uncontested bonds.

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 a joint brief filed Friday asking the court to allow it to file an amicus brief in support of Illinois’ position that the bonds were legally issued and should continue to be paid.

The judge’s order outlines the high bar for granting taxpayer lawsuits.

Taxpayer actions by a citizen and taxpayer of the state can move forward if the courts grant leave to restrain and enjoin the defendant or defendants from disbursing the public funds of the state.

The court must believe there is reasonable ground for the filing of such action, or it can grant leave to file the complaint as to certain items, parts or portions of any appropriation act sought to be enjoined and mentioned in such complaint, and may deny leave as to the rest.

The court’s permission is needed as a “check upon the indiscriminate filing of taxpayer lawsuits and to prevent unjustified interference with the application of public funds” and “reasonable grounds will not exist where the court finds the matter was filed for ulterior, frivolous or malicious purposes, where the filing constitutes an unjustified interference with/in the application of public funds, or, where the proposed claims fail as a matter of law.”

While Tillman’s lawyers argued that the only question before the judge rested on whether the complaint should be allowed to proceed, with the merits vetted during later proceedings, Davis said he could not make the determination of whether reasonable grounds existed to proceed without reviewing the language of the bond legislation.

“The court finds that to allow the filing of the complaint would result in an unjustified interference with the application of public funds. Moreover, Tillman asks this court to address a non-justiciable political question and substitute its judgment for the Illinois Legislature some two decades after it occurred,” Davis wrote referring to the 2003 bonds. “To do so would be improper and would violate the separation of powers. The court rejects Tillman's invitation to do so.”

The attorney general’s office, which represented the state, said in an emailed statement from spokeswoman Annie Thompson: “We are pleased with the court’s decision to deny the plaintiffs leave to file a taxpayer action that, according to the court, ‘resembles far more of a political stump speech than it does a legal pleading’ that ‘would result in an unjustified interference with the application of public funds.’”

Municipal market analysts had broadly dismissed the legal merits of the case pointing to the general application of “specific purposes” that requires only that a purpose be named and a repayment method cited to meet the legal test. They also believe a review process that included bond counsel, underwriters’ counsel, and the attorney general's office bolsters the state’s case. If the petitioners were to prevail, market participants also believe the state would find a way to make good on the debt service.

But some also warned that as the legal process played out, the state should expect the potential threat to take a toll on borrowing rates and while the judge’s Thursday decision is a positive for the state, the planned appeal means the threat still looms.

“We’re very pleased that Judge Jack Davis did the right thing and threw out this completely frivolous ‘political stump speech’ of a lawsuit,” state Comptroller Susana Mendoza said in a statement referencing language in the order.

“The administration is pleased that the judge repudiated this sham lawsuit brought on by the same far-right actors whose pathological desire to bankrupt the state brought us four years of devastation under Bruce Rauner,” Emily Bittner, spokeswoman for Gov. J.B. Pritzker, said in an email.

The lawsuit named Pritzker, Mendoza and state Treasurer Michael Frerichs as defendants.

"The judge's ruling today denying a lawsuit that sought to invalidate some of Illinois' general obligation debt is positive for the state and in line with our view that the plaintiffs' argument lacked merit," Moody's Investors Service lead Illinois Ted Hampton said in a statement Thursday. "However an appeal by the plaintiffs could still complicate the state's near-term debt issuance plans." Moody's rates the state's GOs Baa3 with a stable outlook.

The state's next planned deal is a $1.2 billion GO issue to cut the bill backlog and budget officials have said a decision on the final details and timing would be made in the fall.

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Lawsuits General obligation bonds Secondary bond market State of Illinois Illinois
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