Illinois Supreme Court sets oral arguments in challenge to state GOs

Bonds

The Illinois Supreme Court will hear oral arguments March 11 in a lawsuit that seeks to void $14 billion of outstanding state debt.

The court has several questions before it, starting with whether the litigation should be allowed to move forward as a taxpayer lawsuit. The state is asking the court to go beyond that and rule that the bonds are constitutional.

John Tillman of the Illinois Policy Institute, architect of a lawsuit seeking to invalidate $14 billion of Illinois GO bonds.

The state’s high court last year accepted Illinois Attorney General Kwame Raoul’s petition for leave to file an appeal of the August appellate decision that remanded the case to the circuit court.

The court set its March term Tuesday with Tillman v. Gov. J.B. Pritzker, et al listed as the third and last case to be heard on Thursday, March 11. The cases are scheduled to be livestreamed on BlueRoomStream. “Just like the U.S. Supreme Court, there is no set time for a decision. It varies on a combination factors including the complexity of the case,” said court spokesman Christopher Bonjean.

Illinois Policy Institute chief executive officer John Tillman originally filed the litigation seeking approval to move forward with a taxpayer action on July 1, 2019 in the state circuit court in Springfield.

Tillman wants to block repayment of the state’s $10 billion 2003 general obligation pension obligation issue and $6 billion of 2017 GO bonds issued to pay down Illinois’ unpaid bill backlog. Between the two, $14.3 billion is outstanding.

Market participants are following the case closely. Many thought it was a long shot given the state’s bond review process and the wide latitude of the statutory language on GO borrowing but past rulings have influenced the state’s secondary market spreads.

The bonds Tillman seeks to void are trading at a 20 basis point to 30 bp penalty over other state GO paper and market participants say the buy side would demand a penalty if the state sought to tap an existing backlog bond authorization without legal clarity.

Raoul’s office is asking the high court to review the appellate decision to clarify what should be considered in the decision of whether a taxpayer action can proceed. It goes a step further in asking justices to rule on the legal issue over whether the bonds at the center of the case were constitutional as the state argues.

The attorney general’s office argued that the high court’s review is warranted because the appellate decision “creates unnecessary and detrimental uncertainty for the state and its bondholders about whether, as proposed plaintiff John Tillman maintains, the Illinois Constitution’s requirement that long-term debt be issued for ‘specific purposes’ limits such debt to funding for capital improvements.”

The circuit court in an Aug. 29, 2019 opinion refused to allow the lawsuit to proceed, concluding that the state had met the legal threshold for issuing the bonds, which in turn, renders the potential challenge an unjustified interference with the application of public funds.

Tillman appealed.

The appellate court in an Aug. 6 decision revived the litigation, saying the circuit court went too far in considering legal questions beyond the standard for deciding whether a taxpayer action can proceed which is limited to the question of whether it’s frivolous or malicious. The appellate court did not consider the legal merits of the case and remanded the case to the circuit court for further proceedings.

The attorney general’s office, which represents the state, in September asked the high court to review the appeal in order to clarify the legal standard for denying or allowing a taxpayer action to proceed. It went further in also asking the court to rule on the constitutional question over whether the “specific purposes” language in the debt clause of the state constitution limits borrowing to fund capital.

The high court in November agreed to review the appellate ruling.

The question on “specific purposes” goes to the heart of the litigation. The state has long read the provision to require that it merely state a purpose for GO borrowing in legislation. The lawsuit argues that constitutional provisions limit borrowing to fund capital and bar what equates to deficit financing. The bond proceeds helped pay down the state’s bill backlog and unfunded pension liabilities and covered some pension contributions.

The state also argues that the statute of limitations on challenging the debt has expired based on when the bonds were sold and asks the high court to weigh in on that subject. Tillman says the statute has not expired based on the fact that debt service payments continue.

It’s unclear how far the high court might go in its ruling beyond the questions about taxpayer actions and whether the specific purposes language or the statute of limitations issue will be decided and resolve all legal issues.

In arguing for the high court to take the case, the AG said the appellate court created a conflict with precedent in ruling that a circuit court at the screening stage for a proposed taxpayer action can’t bar a case from proceeding if legally insufficient on its face.

“The public interest would be greatly advanced, therefore, by the court’s prompt and definitive resolution of the issue plaintiff presents: whether the State Debt Clause’s ‘specific purposes’ requirement limits long-term debt to capital projects,” reads the AG petition.

Tillman, who heads the conservative advocacy group, first launched the litigation along with the New York-based hedge fund Warlander Asset Management LP. Warlander is no longer a named plaintiff.

Warlander withdrew its name from the lawsuit after Sangamon County Circuit Court Jack D. Davis II expressed concerns over the New York-based fund’s involvement. The firm disclosed during court proceedings that stood to benefit if the bonds were ruled illegal because of credit default hedges it had entered into involving the challenged bonds.

The lawsuit names Gov. J.B. Pritzker, Comptroller Susana Mendoza, and Treasurer Michael Frerichs as defendants.

Davis in his 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.”

The appellate court agreed.

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