The Illinois Attorney General’s office and lawyers for the head of a conservative policy group will square off
Illinois Policy Institute chief executive officer John Tillman filed suit in July 2019 seeking permission to move forward with a taxpayer action challenging repayment of $14.3 billion of outstanding general obligation bonds. The state sold $6 billion of bonds in 2017 to pay down its unpaid bill backlog and $10 billion in 2003 to fund pension liabilities and cover near-term contributions.
Sangamon County Circuit Court Judge Jack D. Davis II in Springfield tossed the litigation after concluding the state had met the constitutional threshold for the borrowing and the complaint posed an unjustified interference with the application of public funds.
Tillman appealed, arguing the judge should only have considered whether the case was frivolous or malicious in deciding whether to allow it to proceed as a taxpayer action. The Fourth District Appellate Court
Illinois Attorney General Kwame Raoul asked the Illinois Supreme Court last fall to uphold the lower court decision, to clarify what factors should be considered in allowing taxpayer actions to proceed and took a leap in also asking the justices uphold the constitutionality of the bonds issue. The high
The justices could limit their ruling to the taxpayer action issues or settle the constitutional question over just how specific lawmakers must be authorizing long-term borrowing and whether some purposes are barred. If the court opts to settle the constitutional questions, the opinion would have a broad reach that extends beyond the repayment of just the 2003 pension bonds and 2017 backlog bonds and would govern future borrowing practices.
“This court should definitively resolve the issue raised in petitioner’s complaint: whether the ‘specific purposes’ requirement of the State Debt Clause limits long-term debt to capital improvements, and whether the 2003 and 2017 Acts comply with the State Debt Clause,” the AG's brief reads.
“Doing so would greatly serve the public interest by eliminating any doubt about the state’s ability to issue long-term debt for purposes other than capital improvements, as it did when it authorized the 2003 and 2017 bonds,” the attorney general's office argues.
“This court should reject the state’s invitation to decide the merits of the constitutional questions now, before any discovery or considered judgment from the lower courts on the significant questions at stake,” Tillman’s brief argued. “If the state’s position is that purposes unspecified in the borrowing act can satisfy the requirements” of the constitution “discovery will be necessary to determine what those unspecified purposes are.”
Oral arguments are scheduled for Tuesday, March 16. The state and Tillman lay out their arguments in briefs filed with the court over the last three months with the state filing a reply Feb. 26 rebutting some issues laid out in Tillman’s brief.
Market participants are following the case. It was widely considered a longshot given the state’s bond review process and the wide latitude of the statutory language, but rulings in the case have influenced secondary market spreads on Illinois paper. Traders said they don’t expect the pending case to impact a $1 billion GO issue planned for next week to finance capital projects but have said existing authority to pay down the bill backlog can’t be tapped until the legal case is resolved.
The state seeks a decision on the constitutional question but if the justices decide not to, the AG asks the court to reverse the appellate court decision sending the case back to the lower court and to affirm the circuit court's original dismissal.
“Doing so would bring an end to the uncertainty about the state’s obligations under the 2003 and 2017 Bonds created by the appellate court’s decision,” the AG brief states.
The AG challenges the validity of the litigation on several fronts. It lacked the participation of bondholders with a stake in the deals and comes too late with the 2003 bond challenge past a five-year statute of limitations. The state also argues Tillman took too long to act based on the laches doctrine which requires the timely pursuit of a civil claim so that a defendant is not negatively impacted in putting up a defense.
The AG also asks the court to weigh in on whether legal merits can be applied by the circuit court in deciding whether to allow taxpayer status litigation to move forward.
The hope, however, is that the broader question interpreting state borrowing statutes is resolved.
“On the merits of petitioner’s constitutional claim, the plain meaning of the State Debt Clause refutes his cramped interpretation. It requires only that a law authorizing long-term debt set forth its ‘specific purposes and manner of repayment.’ It does not state that some specific purposes are permitted and others are not,” the AG brief reads citing prior court rulings that “gave that language a straightforward, common-sense interpretation.”
The state’s brief is signed by Raoul, solicitor general Jane Elinor Notz and Richard Huszagh, assistant attorney general.
Tillman’s lawyers first argue that the high court should allow the appellate court decision to stand and send the case back to the circuit court to hash out the legal merits of their arguments. The sole question at hand is whether the lawsuit’s accusations are “frivolous” or “malicious” — the standard for deciding whether a taxpayer status lawsuit can proceed — and Tillman argues that the legal questions over “specific purposes” language deserves the “same judicial scrutiny” applied in prior cases.
Because the court may opt to go ahead and settle those legal questions, Tillman also lays out his contention that the state ran afoul of the constitution’s debt clause from the 1970 constitutional conventions requiring lawmakers to offer the “specific purposes” of long-term borrowing for legal purposes.
“The complaint alleges that the 2003 and 2017 Acts are unconstitutional because they authorized long-term borrowing for items that — even by the state’s own classification — were (and are) general operating expenses, and not specific purposes,” Tillman argues. “Both acts also failed to adequately set forth the specific purposes to which they were directed.”
Tillman also interprets the language to exclude borrowing for general purposes such as deficit financing. A portion of the pension bonds and the backlog bonds, in effect, represented such a tactic.
“This plain meaning was well-established in state law and budgeting practice before the 1970 constitutional convention, was endorsed by the delegates to the convention, and remains well established in state budgeting today,” Tillman’s brief reads.
“Long-term debt cannot be incurred for an inherently general purpose such as borrowing to cover deficits in the state’s general operating budget,” the brief argued.
The litigation can proceed without running afoul of the five-year statute of limitations on the 2003 bonds because bond payments are ongoing and Tillman dismisses the state’s laches doctrine argument contending that time has not run out on its ability to challenge.
“Tillman is not seeking a remedy for any past misconduct—his suit concerns only future payments, to which a challenge is timely,” the brief argued.
The lack of impacted bondholder participation in the lawsuit shouldn’t matter because they can be afforded the ability to join, the Tillman brief argues. It’s unclear why an impacted holder would participate given that if Tillman prevailed their holdings would be voided.
Tillman is represented by Webber & Thies PC and White & Case LLP.
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.
Warlander withdrew its name from the lawsuit after Davis expressed concerns over the New York-based fund’s involvement during oral arguments last summer when the firm disclosed that it stood to benefit if the bonds were ruled illegal because of credit default hedges it had entered into involving the challenged bonds.
