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Petitioner resurrects effort to void $14.3 billion of Illinois GOs

The petitioner who sought to challenge the repayment of $14.3 billion of Illinois general obligation bonds has appealed the ruling that threw his case out of court.

Sangamon County Circuit Court Judge Jack D. Davis II erred in denying a taxpayer lawsuit challenging the state’s repayment of the bonds by going beyond the legal test for whether it could proceed and casting judgment on the merits, John Tillman argued in the long-expected appellant brief filed Wednesday with the state's Fourth Judicial District.


Tillman — who is head of the conservative Illinois Policy Institute and a frequent critic of state fiscal policies — had asked a lower court in July to allow the filing of a taxpayer complaint challenging the constitutionality of the state’s $10 billion GO pension obligation sale in 2003 and $6 billion of GO bill backlog bonds in 2017. A hedge fund that originally was named as a potential plaintiff will no longer be named in any filings.

The complaint he sought to file asked the courts to block further repayment on the remaining $14.3 billion of outstanding debt. Many 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.

The lawsuit argued the bonds violated state debt guidelines on the use of proceeds and the authorizing statutes lacked sufficient information as to the “specific purpose” for their issuance.

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.

“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 in the Aug. 29 judgment denying Tillman’s petition.

In the appeal, Tillman’s lawyers argue that the trial court went too far. “At the petition stage, the trial court was tasked with determining solely whether these arguments are ‘frivolous or malicious,’ or ‘otherwise unjustified,’” the appeal says.

“Yet the court ignored this limited standard of review and rejected Tillman’s claims on the merits,” the appeal argues. “Because the briefing and argument had been limited, the court’s cursory treatment did not meaningfully address Tillman’s arguments regarding the constitutional text, history, or precedent.”

Tillman named Gov. J.B. Pritzker, state Treasurer Michael Frerichs, and Comptroller Susana Mendoza as defendants in the July petition and complaint. The actual complaint Tillman originally sought to file also named as a plaintiff Warlander Asset Management LP, a New York-based hedge fund. Warlander will no longer be named in the complaint.

Tillman’s lawyers had previously filed a notice with the courts that they planned to appeal and the formal filing with arguments laid out was submitted to the court Wednesday, signed by Tillman attorney John Thies, of Webber & Thies. White & Case LLP also represents Tillman.

The appeal requests that oral arguments be scheduled and asks the court to reverse Davis’ opinion and order that complaint be placed on file and remanded for further proceedings. If the court concludes that it must undertake a full merits review at the petition stage, the trial court’s order should be reversed and the court should hold that the 2003 and 2017 bond acts are unconstitutional.

The August ruling
The lower court ruling 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.

“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 said.

The decision noted 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 and it argued repayment of alleged illegal bonds would impair the market value of its holdings of uncontested bonds. By dropping Warlander from the complaint, the lawsuit addresses one issue the judge questioned.

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.

The judge’s order outlined 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.

Tillman’s lawyers had argued that the only decision before the court was whether Tillman met a more limited test and not the merits but 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 appeal asks for a reversal on the argument that it met the legal test for a taxpayer action with the merits to be argued at a later date although the appeal does lay out Tillman’s arguments on the constitutionality questions.

“Long-term borrowing may not be used to cover deficits in the state’s general operating budget — a general purpose allowed only on a short-term basis … and therefore excluded from the ‘specific purposes’” language in the constitution, the appeal argues.

“Second, the legislature must adequately ‘set forth’ the Act’s specific purposes, and thus may not delegate to the executive branch the decision of how to spend the bond proceeds. The 2003 and 2017 Acts are unconstitutional because they authorized long-term borrowing for items that — even by the State’s own classification —were (and are) general operating expenses, and not specific purposes,” the appeal further argues. “Both Acts also failed to adequately set forth the specific purposes to which they were directed.”

“The proposed complaint is not frivolous or malicious under” state statutes and “Tillman simply asks that he be given the opportunity to file his proposed complaint and to pursue in court his claims on behalf of the taxpayers of Illinois,” the appeal concludes.

“Illinois taxpayers are so tired of Illinois Policy Institute CEO John Tillman and his named or unnamed partners who seek to profit from trying to tank Illinois’ finances,” Illinois Comptroller Susana Mendoza said in a statement. “This appeal should be laughed out of court the same way the original case was.

"A judge already ruled on this matter and the message was clear: this lawsuit is not worth the paper it’s written on. This is a tired tactic from the same people who dragged our state down for years in their failed ideological crusade," Pritzker's office said.

The attorney general's office said it would "review the brief." A response is due early next year.

Market sentiment
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 bolstered 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.

Those sentiments didn’t stop traders from driving a sharp widening of state spreads. The state’s secondary market spreads had shrunk to a low of 139 basis points on the 10-year in late spring and early summer but then shot up to about 175 bp in July after the lawsuit’s filing and narrowing began after the dismissal.

The state saw a 140 basis point spread to the Municipal Market Data’s AAA benchmark on the 10-year in its recent $750 million GO sale. The deal was the first since the lawsuit’s filing and dismissal.

How the market will react to the appeal remains to be seen. The state’s 10-year was at a 155 bp spread on Tuesday.

Illinois GOs are the weakest rated among states at BBB by Fitch Ratings, Baa3 by Moody's Investors Service and BBB-minus by S&P Global Ratings.

“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 said in a statement after the August ruling. "However an appeal by the plaintiffs could still complicate the state's near-term debt issuance plans."

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