* There is so much wrong with this Bloomberg story…
A hedge fund run by a protege of Appaloosa Management’s David Tepper and the chief executive officer of a conservative think tank sued Illinois Governor J.B. Pritzker, saying $14.3 billion of bonds should be invalidated because their issuance violated the state constitution.
Warlander Asset Management, a New York-based hedge fund formed by Eric Cole, and John Tillman, the CEO of the Illinois Policy Institute, said the state’s record pension bond sale in 2003 and debt issued in 2017 to pay a backlog of unpaid bills were deficit financings prohibited by the constitution. The lawsuit was filed Monday in Sangamon County circuit court.
First of all, this filing isn’t actually a lawsuit. In this state, a petition to file a taxpayer lawsuit must first be approved by the court. And those approvals are exceedingly rare. From the filing…
This Court is not tasked at the petition stage with determining “whether the allegations of the proposed complaint can, on hearing, be sustained,” but only with determining if Petitioner has offered “reasonable grounds for filing suit.”
* Back to Bloomberg…
Article nine, section nine of the Illinois Constitution says the state may issue long-term debt only to finance “specific purposes” if approved by three-fifths of the legislature or by popular referendum.
Um, no. The Bloomberg reporter should’ve glanced at the Illinois Constitution.
From the Tillman filing…
The Illinois Constitution expressly limits the State’s power to incur State debt. Article IX, section 9 permits the State to incur new long-term debt only to finance “specific purposes.” Ill. Const. art IX, section 9(b). “Specific purposes” refers to specific projects in the nature of capital improvements, including roads, buildings, and bridges. Simply obtaining cash to finance the State’s structural deficits or to speculate in the market is not a “specific purpose.”
* I’m not sure what Illinois Constitution they’re reading, but here’s what ours actually says…
SECTION 9. STATE DEBT
(a) No State debt shall be incurred except as provided in this Section. For the purpose of this Section, “State debt” means bonds or other evidences of indebtedness which are secured by the full faith and credit of the State or are required to be repaid, directly or indirectly, from tax revenue and which are incurred by the State, any department, authority, public corporation or quasi-public corporation of the State, any State college or university, or any other public agency created by the State, but not by units of local government, or school districts.
(b) State debt for specific purposes may be incurred or the payment of State or other debt guaranteed in such amounts as may be provided either in a law passed by the vote of three-fifths of the members elected to each house of the General Assembly or in a law approved by a majority of the electors voting on the question at the next general election following passage. Any law providing for the incurring or guaranteeing of debt shall set forth the specific purposes and the manner of repayment. […]
(f) The State, departments, authorities, public corporations and quasi-public corporations of the State, the State colleges and universities and other public agencies created by the State, may issue bonds or other evidences of indebtedness which are not secured by the full faith and credit or tax revenue of the State nor required to be repaid, directly or indirectly, from tax revenue, for such purposes and in such amounts as may be authorized by law.
By my reading, there is no “specific purposes” limitation in the Illinois Constitution. The language allows debt to be incurred as long as the law states what that specific purpose is and how it will be repaid. That’s it. And there is clearly no list of what is allowed and what isn’t (except for percentage limits on revenue anticipation bonds and bonds to cover fiscal emergencies). The provisions were a deliberate expansion of state authority to take on debt that were prohibited by the previous constitution. A well-written history of the 1870 vs. 1970 constitutions shows this conclusion by the Committee on Revenue and Finance of the 1970 Constitutional Convention…
As to its third contention, the committee found that: [T]he existence of constitutional debt limitations has increased interest costs and has caused the expenditure of large sums of money for additional administrative and insurance costs, resulting from the use of authorities and other techniques devised to avoid state debt limits.
Yet, somehow, the pension bond in 2003 and the 2017 bonding to pay off past-due bills are unconstitutional, according to this filing.
* Bloomberg’s story is just so irresponsible…
The lawsuit comes two months after the federal board overseeing Puerto Rico’s bankruptcy and a group of hedge funds sought to have more than $6 billion of the island’s bonds declared null and void and shows how the island’s effort to cut its debts is reverberating in the $3.8 trillion U.S. municipal-bond market. The Puerto Rico overseers have sought to have the debt tossed out on the grounds that it was sold after the territory breached its debt limits, a step that some analysts said could undermine confidence in a market that’s seen as a haven.
And now there’s a hedge fund and a right wing think tank coming after Illinois.
* From the governor’s office…
John Tillman and Bruce Rauner’s old buddies are back to playing dangerous games with our finances so they can keep up their quixotic quest to drive Illinois into bankruptcy.
*** UPDATE 1 *** Comptroller Susana Mendoza…
I prefer not to comment on pending litigation. But with a ridiculous-on-its-face filing like this, I’ll make an exception.
This is an extension of John Tillman’s and former Governor Bruce Rauner’s fantasy of pushing Illinois into bankruptcy so they could crush unions in Illinois. They succeeded in lowering the state’s bond ratings and forcing Illinois taxpayers to pay higher rates on bonds, but they failed in every other regard.
The media should waste no ink on a ridiculous lawsuit that misrepresents the Illinois Constitution and seeks to enjoin a state from spending money that was wisely spent years ago, approved by bond counsel. But this filing was never about the law. It was meant to generate headlines to scare investors in the bond market for political ends before the filing is laughed out of court.
With the $6 billion the state borrowed in 2017, we used federal matching funds to pay off $8.7 billion in high interest-accruing debt. Instead of paying 12 percent annual interest on that debt, the bond sale allowed us to convert that to 3.5 percent interest. Not only did that save Illinois taxpayers $4-$6 billion dollars over the life of the bonds, it saved small businesses, nursing homes, schools, medical clinics and other non-profits around the state from having to close their doors. Tillman now wants Illinois taxpayers to pay an extra $4-$6 billion for his adventures in absurdity.
Governor Pritzker and legislators of both parties are working hard and succeeding in cleaning up Governor Rauner’s and his key advisor John Tillman’s wreckage of the of the state economy. The markets should see this as nothing more than garbage that should be thrown out immediately by the courts.
*** UPDATE 2 *** Bond Buyer…
The Pritzker administration dismissed the allegations and highlighted the string of legal advisors that signed off on the deals.
“This is simply a new tactic from the extreme right to interfere in capital markets. We’re done with the far right’s dangerous financial games to pull Illinois underwater. We saw this repeatedly under Bruce Rauner, who funded and executed on John Tillman’s pathological focus to drive Illinois into bankruptcy,” Pritzker spokeswoman Emily Bittner said in an emailed statement, referring to the former governor.
“Several layers of bond counsel and Attorney General Madigan were required to sign off on bond offerings, and these met those standards. This lawsuit is not worth the paper it’s written on,” Bittner added.
Several market participants said while they needed to digest the lawsuit’s arguments, the Illinois constitution grants the General Assembly broad bonding powers and they voiced skepticism that the various legal reviews conducted on the bonds would have allowed such violations to occur. They also suggested the “specific purpose” language is broad and that the bonds were issued with a GO pledge that allows for the sweeping use of the general fund for repayment purposes.
That’s probably why they leaked the lawsuit to that Bloomberg reporter and not to Yvette Shields at the Bond Buyer.
*** UPDATE 3 *** Treasurer Michael Frerichs…
Today’s legal filing is another political stunt by Mr. Tillman and the extremists at the Illinois Policy Institute.
The 2019 legislative session showed what can happen when elected officials ignore the extremists and instead focus on working together in a bi-partisan fashion to improve Illinois’ finances.
Governor Pritzker and legislators from both parties passed a budget that begins to undo the financial harm done by four years of Bruce Rauner.
I intend to let Attorney General Kwame Raoul do his job and ask the court to reject this absurd request from Mr. Tillman and the Illinois Policy Institute to have the courts entertain the extremist agenda that the legislature and the voting public have already overwhelmingly rejected.