Illinois Supreme Court to hear suit challenging $14 billion of state GOs

Bonds

The fate of litigation seeking to void $14 billion of outstanding Illinois general obligation bonds could be settled in the coming months by the Illinois Supreme Court.

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

Illinois Policy Institute head John Tillman wants the courts to void repayment of $14 billion of Illinois general obligation bonds

That’s where 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.

He wants to block repayment of the state’s $10 billion 2003 GO pension obligation issue and $6 billion 2017 GO bill backlog borrowing, of which $14.3 billion is outstanding.

Market participants are following the case, which many thought was a long shot given the state’s bond review process and the wide latitude of the statutory language, but past rulings have influenced secondary market spreads on Illinois paper.

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 were constitutional that is at the center of the case.

The attorney general’s office argued that the high court’s review was 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 last month agreed to review the appellate ruling and the first brief is due Dec. 23. Oral arguments could be held as soon as the court’s March term, said court spokesman Christopher Bonjean.

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.

“Given the recurring nature of these important issues” on precedent and the specific purposes issue the high could “should take this opportunity to clarify the law on both of them,” the AG petition read. “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. It names Gov. J.B. Pritzker, Comptroller Susana Mendoza, and Treasurer Michael Frerichs as defendants.

Sangamon County Circuit Court Jack D. Davis II 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. “We conclude that because Tillman’s complaint was not frivolous or malicious, the trial court erred by denying his petition for leave to file it. Accordingly, we remand the case for further proceedings,” reads the appellate opinion. “We repeat that we express no opinion on the merits of Tillman’s claims. On remand back to the lower court, the state may raise the defenses on the statute of limitations, the failure to join necessary parties, and any other defenses or bases for dismissal they may assert.

Warlander withdrew its name from the lawsuit after Davis expressed concerns over the New York-based fund’s involvement during oral arguments last summer. 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.

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