Legal answers are nearer in case challenging Illinois GOs

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SPRINGFIELD, Ill. — The fate of the lawsuit seeking to block repayment of $14.3 billion of Illinois general obligation debt is in a judge's hands.

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


Lawyers for lead petitioner John Tillman, the head of a conservative think tank, argued that he should be permitted to file a taxpayer action complaint against Gov. J.B. Pritzker and the state comptroller and treasurer. The New York-based hedge fund Warlander Asset Management LP is a co-petitioner with Tillman but it was Tillman’s attorneys who participated in the arguments.

A decision is expected within the next 14 days. The case was “well-briefed” and “well-argued” on both sides, Davis told those attending the hearing, which included a handful of professionals from institutional investment houses and broker-dealers.

Several market participants at the hearing said they were impressed with the judge’s knowledge and questioning but had no comments on the market impact of the case going forward. “The judge did his homework," said Dennis Derby, senior tax-exempt analyst & portfolio manager at Wells Capital Management.

The filing of the lawsuit in early July arguing the state’s 2003 pension bonds and 2017 bill backlog repayment bonds violate state statutes and that the $14.3 billion that is still outstanding should not be repaid has rattled the market.

While many municipal analysts believe the case fails on its merits based their reading of state statutes and the review of the deals’ counsel and the attorney general’s office at the time, state spreads have taken a hit. Spreads 10 years and out were at a 175 bp spread to the Municipal Market Data top benchmark Friday compared to a 140 spread before the lawsuit’s filing.

The lawsuit argues information on how the bonds would be used failed to meet the legal threshold in outlining a “specific purpose” for GO borrowing and that the use of some proceeds amounted to deficit financing which is permitted under some cases but must be repaid in one year. The state, defended by the attorney general's office, counters that the information in the legislative acts meets all borrowing requirements and accuses the petitioners of filing a policy paper “masquerading” as a complaint.

Tillman attorney Daniel Thies, of Webber & Thies PC, sought to keep the arguments focused on whether the case meets the threshold to move forward, limiting the dissection of the merits.

Thies argued the bonds were issued for the general purpose of simply raising more money for the state to spend. The judge asked Thies to explain why that’s illegal, and Thies pointed to the constitutional framers who sought in the specific purposes language to limit borrowing for a specific improvement “on a looking-forward basis” whereas both the 2003 and 2017 bonds involved “borrowing for operations.”

Thies said on the specific clause, the $6 billion of 2017 bonds fail because the bond act gives too much discretion to state Comptroller Susana Mendoza over what bills were to be paid down. He also pointed to more than $2 billion of the $10 billion 2003 issue that went to reimburse the state for contributions and covered some future contributions. “The real purpose is to plug a hole” and the framers intended to block that form of borrowing, Thies said.

“Our claim is not frivolous,” Thies said based on the constitutional limitations placed on state borrowing and the ability of taxpayers, like Tillman, to act to safeguard public dollars.

The judge questioned Warlander’s involvement in the case, asking why Tillman would “want” them as a co-plaintiff “at this stage.”

Judge Davis also agreed to permit the filing of an amicus brief from Nuveen Asset Management LLC and AllianceBernstein LP, which echoes many of the attorney general's arguments against allowing the lawsuit but goes a step further to bring arguments of potential malicious intent with the claim that Warlander, which holds $25 million of the unchallenged bonds, would profit by a state default through its holding of credit default swaps on a portion of the challenged bonds.

Tillman’s attorney confirmed that Warlander holds swaps tied to the bonds when asked by Davis but no amount was disclosed.

Thies said as holders of Illinois debt they have a claim and it didn’t make sense for the firm to pursue its own case. The judge asked if Warlander would pursue its own case as a bondholders outside of the pending case and Thies said he could not say how Warlander and its attorneys would proceed. He also noted that it was unlikely Warlander would maintain the swaps if the case proceeds.

The judge shot back, questioning how that could be predicted now.

Thies sought to downplay Warlander’s involvement arguing that motives and the potential profit that any plaintiff stands to gain should be excluded from consideration based on prior legal precedent and he turned to Tillman’s standing to pursue the case.

“Tillman's motives are unimpeachable... he's been part of politics in this state for decades....no one can question he has a sincere interest in protecting the taxpayers,” Thies said. Tillman heads the Illinois Policy Institute, a conservative think tank that’s been critical of the state’s financial management.

Thies also called the debate over Warlander “extraneous” and not germane to the question over whether the case meets the standard to proceed.

The judge shot back that yes “it’s distracting as all-get out…I think it clouds the entire analysis.”

Assistant AG Joshua Ratz argued the complaint “is unjustified because it's too late, it’s improper and it is unjustified because it fails as a matter of law.”

Ratz argued Warlander’s presence is improper because it’s not a taxpayer. He also countered that in effect “every bond issue is plugging a hole” as it relieves pressure on the general revenue fund. “The question” is whether you’ve met the specific purpose threshold and we are confident that” the bond acts comply that language and also with requirements that bonds be issued for a public purpose.

The two traded swipes over the market impact. “There is damage” to the state from the lawsuit and it “will disrupt the markets” and “it’s going to make borrowing more difficult” if the case moves forward and if the petitioners prevail, Ratz said.

Thies disagreed. “The state’s credit rating is going to be helped…$20 billion of debt will be taken off its books” and there will be a court ruling outlining what is constitutionally allowed in the future. “This will help the state and its ability to borrow.”

All the points, however, are moot, Thies said, because remedies and consequences of the lawsuit should not play into the decision as to whether the lawsuit can proceed. Instead, they are “for later in the game,” he said.

If the judge grants the petition, the lawsuit may be filed. The state could not appeal the decision allowing it to move forward.

If the judge denies the petition to let the lawsuit proceed, Tillman can appeal to the appellate court.

If the case moves forward, it then would move through the regular appeal process. If the case moves forward and Tillman prevails at the circuit level, the case likely would go directly to the Illinois Supreme Court because it involves constitutional provisions. The case is number 2019-CH-000235.

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