* Yvette Shields at the Bond Buyer…

A lawsuit that seeks to void $14.3 billion of Illinois’ outstanding general obligation debt amounts to nothing more than a policy statement masked under a legal guise that lacks any merit, Illinois Attorney General Kwame Raoul’s office argues in the state’s first official legal response.

The complaint seeking taxpayer action status from the court claims the state violated its constitution when it sold $10 billion of GO pension obligation bonds in 2003 and again in 2017 with a $6 billion borrowing to pay down its unpaid bill backlog.

About $14.3 billion is still owed on the two issues, according to the complaint filed by the Illinois Policy Institute’s leader John Tillman, acting as a taxpayer, and the New York-based hedge fund Warlander Asset Management LP, a state bondholder. […]

Market analysts have voiced skepticism about the case’s legal merits, based on the approval granted by bond lawyers and the state attorney general and their read of state debt rules that give the state broad issuance powers as long as it names a general purpose for the bonds, method of repayment, and approval by a three-fifths legislative majority. […]

Those beliefs didn’t stop the market from driving state yield penalties up in trading and there’s an expectation now that the state may get stuck paying more to borrow during the course of the lawsuit if not resolved quickly.

* AG Raoul’s filing is brutal…

Nearly two decades after the State issued General Obligation bonds backed by the full faith and credit of the State and applied their proceeds to the Illinois retirement systems, Petitioner seeks leave to institute an action requesting the Court declare the State a profiteering purveyor of worthless bonds and order it to default on billions of future bond payments after cashing the proceeds from selling the bonds. Petitioner similarly seeks to invalidate billions of already applied bonds issued in 2017 to pay an extraordinary backlog of unpaid vouchers, which were then accruing interest at rates greater than the subsequently issued bonds. Petitioner did not bring his suit to enjoin the issuance of the allegedly unlawful bonds before they were issued. Instead, Petitioner seeks to call back ships put to sea years ago, many of which are nearing their decommission date, to maximum detrimental effect. Petitioner does so without naming any holder of the bonds for a proper adjudication of their rights, instead advancing the interests of one noncitizen investor in different bonds against other bondholders, and attempting to elevate certain appropriations over others.

This extraordinary request for relief rests entirely on a single, erroneous premise that the General Assembly may incur State debt only for “projects in the nature of capital improvements,” subject to only narrow exceptions. Fused with this incorrect statement of law is a policy paper masquerading as a complaint, positing that Illinois has not been wise in its fiscal decisions. The wisdom of that fiscal philosophy is a matter for the People of Illinois to determine. The Court has no role to play in that debate.

Because there is no cause of action stated in the proposed complaint and no judicial work for the Court to do in relation to the remaining allegations, and because equity firmly stands against granting the extraordinary relief requested therein, the Petition should be denied as an unjustified interference in the application of public funds.

* As we’ve discussed before, the plaintiffs rely on a provision in the Illinois Constitution which does not actually exist. From the AG’s filing…

As explained above, Petitioner’s theory of bond invalidity turns entirely on his unfounded assertion, contained in paragraph 27 of his proposed complaint, that the term “specific purposes” in the State Debt Clause means “projects in the nature of capital improvements.” But Petitioner does not cite any authority for this conclusion, and he does not even draw the Court’s attention to the single, controlling case interpreting “specific purposes” in the context of article IX, section 9

* Ah, but there’s more…

In this case, Petitioner seeks to unscramble eggs that were cracked, cooked, and eaten sixteen and two years ago, with no explanation as to why he did not bring suit before breakfast hit the pan. Had Petitioner timely sought and obtained an injunction against issuance of the bonds, the State could have made different arrangements to fund its obligations, and bondholders 12 of 22 19-CH-235 would not now be needlessly placed in peril. Petitioner’s inexplicable delay in bringing this challenge maximizes the potential fallout, creating an “unjustified interference[]” in the application of public funds that warrants denying the Petition.

Raoul’s office also claims the statute of limitations has passed and that the hedge fund has no legal standing.