The Illinois Supreme Court quashed litigation seeking to declare more than $14 billion of the state's general obligation bonds invalid.
The justices in a unanimous
At the time of the lawsuit’s filing in July 2019, $14.3 billion remained outstanding.
The opinion settles the issue over whether the case can proceed which, in turn, puts to rest the potential repayment challenge.
“As today’s ruling noted, bond counsel and the state Attorney General signed off on all these bonds. They were constitutional," state Comptroller Susana Mendoza said in a statement.
It provides direction for courts considering future taxpayer action petitions, but the justices notably declined to weigh in on the constitutional questions Tillman raised about state borrowing rules, appearing to leave the door open to challenges of authorized but unissued bonds to pay down the state's outstanding bills.
“I am of course disappointed in the Illinois Supreme Court’s ruling," Tillman said in a statement. "We are evaluating our options as to how to proceed from here. In the interim, I continue to be profoundly concerned about Illinois’ reckless debt accumulation. All Illinoisans should care about this."
The opinion, authored by Chief Justice Anne M. Burke with all six other justices concurring, focused on the doctrine of laches, or undue delay in asserting a legal claim.
"It is undisputed that petitioner waited to file his taxpayer action until 16 years had elapsed following enactment of the 2003 bond authorization statute and 2 years had elapsed following enactment of the 2017 bond authorization statute," says the opinion and judgment authored by Chief Justice Anne M. Burke and concurred with by the six other justices. "We find that this delay is unreasonable and supports the application of laches."
Because of that, "there is no reasonable ground…for filing petitioner’s proposed complaint," the opinion said. "We therefore affirm the circuit’s order denying the instant petition, although on different grounds than those relied upon by that court."
Sangamon County Circuit Court Judge Jack D. Davis II
An appellate court
Attorney General Kwame Raoul, who represents the state,
Municipal bond market participants followed the case closely and many believed the challenge was a long shot, given the state’s legal review process in advance of issuing the debt, and said they believed that if voided the state would find a way to make good on the debt to preserve its investment grade ratings. The state is rated one notch above junk, the lowest ratings of any state.
The undertow of doubt created by the case has influenced secondary bond market prices for Illinois debt. At some times since the case began in 2019, the bonds in question had traded wider by 15 bps to 20 bps than other outstanding state GOs.
The secondary market reacted positively Thursday with the bonds Tillman had challenged gaining value and a price boost seen generally on the state's short bonds.
“We narrowed our short IL GO spreads 10bps (in 5yrs and shorter),” said Greg Saulnier, a managing analyst at Refinitiv-Municipal Market Data. Spreads on the one-year/three-year/five-year narrowed to 30/50/65 basis points, respectively, to the MMD AAA benchmark. Bonds seven years and out remained at a 85 bp spread where they began the week.
While the firm had not been factoring in the wider spreads on the 2003 and 2017 bonds in its curve analysis, it observed a notable improvement in prices following the ruling. A 2026 bond from the 2017 sale that traded yesterday at a yield of 1.40% traded Thursday at 1.07% providing “one concrete example of a big move in the so-called lawsuit bonds,” Saulnier said.
"Illinois paper was definitely stronger today based on observed market activity," according to Christopher Taddoni of IHS Markit, who said the state's taxable GOs were trading about 10 bps tighter compared to activity before the ruling.
Many market participants believed the state could not issue debt the legislature has authorized to pay the state's overdue bills until the case was resolved. And if Tillman had eventually prevailed, the impact would have rippled across the market.
“The Illinois Supreme Court’s decision, siding with the state, is positive for bondholders and Illinois taxpayers. The decision is not a surprise and so I expect any spread tightening will be modest,” said John Ceffalio, senior municipal research analyst at CreditSights Inc.
“The suit, brought for political motives, caused uncertainty in the municipal market when it was filed, and disrupted Illinois’ ability to access the bond market,” Ceffalio said. “If Tillman had successfully invalidated full faith and credit bonds issued eighteen years ago, it would have had major negative consequences for our market and for taxpayers nationwide.”
The high court’s opinion first tackles questions over what constitutes “reasonable grounds” for allowing taxpayer actions to proceed, and that stands to have a more sweeping impact by providing guidance on future lawsuits.
Circuit Court Judge Davis in Springfield originally denied the petition to proceed after concluding the state had met the legal requirement on outlining the specific purposes and so concluded the case lacked “reasonable grounds.”
Tillman countered in his appeal, and the appellate court agreed, that such consideration of the legal merits went too far and the court should have limited its consideration to whether the litigation on its face was “frivolous” and “malicious.”
The high court disagreed with that interpretation, finding Tillman's argument and the appellate court's ruling to be "incorrect."
The court then turned to address directly whether Davis “abused his discretion” in his decision rejecting the litigation, looking first at the attorney general’s argument that the case came too late and so would cause undue harm to the state under “laches.”
Under laches, the defense must show the accuser knowingly “slept on his rights to the detriment of the opposing party,” the opinion said. It’s a separate argument from statute of limitation violations which outline a specific time to file a lawsuit and the AG had argued was violated with respect to the 2003 bonds.
Tillman “offers no excuse for why he waited 2 years (in the case of the 2017 bonds) and 16 years (in the case of the 2003 bonds) to file his action challenging the constitutionality of the bonds,” the opinion said. “The state issued and sold the 2003 bonds, applied the proceeds as specified in the law, and made payments on the bonds for years while petitioner did nothing.
The attorney general argues that granting relief to Tillman “would amount to a de facto default on outstanding bonds that are backed by the full faith and credit of the state. We agree. Enjoining the state from meeting its obligation to make payments on general obligation bonds will, at the very least, have a detrimental effect on the State’s credit rating,” the opinion read.
The high court’s conclusion on the “laches” violations differed from the reasons Judge Davis gave in rejecting the case. He centered on whether the state had met the constitution's threshold for the debt issuance but, in the end, both have the same effect: the taxpayer action can’t proceed.
Tillman’s effort to contest repayment of the bonds centered on his argument that the 2003 and 2017 bonds violated the “specific purposes” language governing debt. The lawsuit offered a narrow interpretation of the constitutional language limiting long-term bonds issuance to capital.
Tillman had argued the 2003 pension bonds violated the rules because they represented a “deficit financing” which he contends violated the constitution as $2.7 billion was used to cover near-term pension contributions with the remainder paying down the unfunded liability. The 2017 bonds to pay down the state’s bill backlog which Tillman also argued falls short of the “specific purposes” rule.
The justices did not settle the constitutional arguments Tillman raised about the debt.
“Although respondents [the attorney general] urge this court to address the merits of petitioner’s constitutional claims, we decline to do so before determining whether there are any non-constitutional grounds for affirming the circuit court’s decision,” the justices wrote citing precedent in other cases that look to constitutional questions to settle a case only as a last resort.
The justices instead ruled on the Tillman case by finding a violation of laches.
The case is John Tillman, Appellee, v. J.B. Pritzker, in his official capacity as governor, et al. It also names Comptroller Susana Mendoza and Treasurer Michael Frerichs.
"The administration is pleased that the Supreme Court sided with hardworking taxpayers over a frivolous lawsuit designed to grab headlines," said Pritzker's spokeswoman Emily Bittner.
Originally, the hedge fund Warlander Asset Management LP was named as a plaintiff in the taxpayer action. The firm was a holder of $25 million of state GO bonds and it argued repayment of alleged illegal bonds would impair the market value of its holdings of uncontested bonds.
During circuit court proceedings, Nuveen Asset Management LLC and AllianceBernstein LP submitted filings supporting Illinois’ position and it was disclosed Warlander at the time stood to benefit if the bonds were ruled illegal because of credit default hedges it had entered into involving the challenged bonds. The firm’s involvement and its named was dropped from further proceedings.
