Plaintiffs in Illinois bond challenge argue for their case to be heard

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The courts should get the chance to weigh whether Illinois legally issued $20 billion of general obligation bonds and can keep paying off the $14.3 billion still owed, attorneys for Illinois Policy Institute head John Tillman contend in a new filing.

The complaint filed in early July claims the state violated its constitution when it sold $10 billion of GO pension obligation bonds in 2003 and again in 2017 with by borrowing $6 billion in two deals to pay down its unpaid bill backlog. The petitioners — Tillman and New York-based hedge fund Warlander Asset Management LP — are seeking to block any further repayment. Warlander holds $25 million of state GOs that are not being contested.


The two contend the description of the deals in the authorizing legislation falls short of meeting the “specific purposes” requirement under the state constitution.

Their lawyers tell the court that their action is not “frivolous or malicious,” which has been cited in previous court decisions denying taxpayers actions, and whether the bond issues satisfy constitutional language on specific purposes “requires judicial consideration, as the drafters also anticipated…debt service on unconstitutional debt is a clear misuse of public funds, and Petitioner has a right as a citizen and taxpayer to sue to protect these funds.”

Illinois Attorney General Kwame Rauol’s office, in its July 19 response to the complaint, argues the bond legislation met the state’s broad authorizing language, that Warlander lacks standing to pursue a taxpayer action, and that the attack on the 2003 bonds comes too late based on a general five-year statute of limitations policy.

“Because petitioner slept on his rights for years, because the essential premise of his proposed complaint is wrong as a matter of law, including under clear Illinois Supreme Court precedent, and because the remainder of the complaint states no cause of action whatsoever, but rather seeks to conduct a fiscal policy debate in a courtroom, there is no role for the court to play and no reasonable grounds for allowing its filing,” the state filing says, calling the lawsuit "a policy paper masquerading as a complaint” that seeks to make the case Illinois has not been wise in its fiscal decisions.

Attorneys representing Tillman and Warlander responded that it’s too early to address the merits of their assertions.

“The state’s arguments are not only misdirected, but also premature. At this stage, petitioner simply seeks permission to initiate a complaint. The parties dispute numerous issues…but the state has offered no valid reason why the court should decide this dispute in an abbreviated petition procedure, rather than through an orderly merits adjudication,” the filing signed by Tillman reads. Tillman and Warlander are represented by Webber & Thies PC and White & Case LLP.

The filing argues that no statute of limitations can be applied because they are seeking to block future debt service payments and not to claw back past payments and that Tillman’s position as an Illinois taxpayer gives him standing without consideration of Warlander’s position.

The legal response argues that the cost of the state’s “blatant disregard” of constitutional safeguards on debt issuance is the state’s standing as the lowest-rated state in the nation. The state is rated one notch away from speculative grade by two rating agencies and two notches by a third rating agency.

“The challenged outstanding debt encompasses over $14 billion, which the state is not scheduled to finish repaying until 2033. Far from trying to ‘recall a ship nearing its decommission date,’ as the state argues, petitioner seeks to prevent a misguided voyage that will continue for another years and will carry away with it another $20 billion (in principal and interest payments) that belongs to the people of Illinois,” the response says.

The petitioner’s response highlights the foreshadowing of participants in the 1970 Illinois constitutional convention that the specificity of purpose would one day be questioned and that it would be the subject of a legal debate over whether lawmakers were specific enough in their description on a future bond deal.

Municipal market analysts have 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 market participants also warn that as the legal process plays out, the state should expect the potential threat to take a toll on borrowing rates. Municipal Market Data on Friday put Illinois GOs at 10 years and further out at a 175 basis point spread.

The state’s 10-year and 25-year GO was trading earlier last week at a 170 basis point spread to the Municipal Market Data AAA benchmark compared to a 160 bp spread on July 10 and a 139/140 spread just before the lawsuit’s filing.

The attorney general's office is representing Gov. J.B. Pritzker, state Treasurer Michael Frerichs and Comptroller Susana Mendoza, who are named as defendants in their official capacities. A hearing in the state’s Seventh Judicial Circuit for Sangamon County, in the state capital of Springfield, is scheduled for Aug. 15.

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Lawsuits General obligation bonds Hedge funds State of Illinois Illinois
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