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Tuesday, October 22, 2019

Taxpayer suit says state constitution drafters would be 'horrified' to see long-term debt issued to fund Illinois’ structural budget deficits

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By Dan Churney | Aug 14, 2019

Illinois Gov. J.B. Pritzker | Youtube screenshot

Plaintiffs suing to bar Illinois' government from treating borrowing like tax revenue are asking a state judge for the chance to make the case that two state bond issues are illegal and prohibited by the Illinois State Constitution.

They maintain the State Debt Clause of the amended 1970 Illinois Constitution permits the state to take on long-term only debt for "specific purposes," limited to capital improvements such as roads, bridges and buildings that will be used by future taxpayers asked to pay off such debt. 

In line with the specific purposes provision, plaintiffs assert issuing bonds to fund annual budget deficits— paying unpaid state government bills that have merely piled up because of overspending—  is "unconstitutional and unenforceable," and the bonds, consequently, should not be paid.

John Tillman

“If one were to ask the (Illinois Constitution) drafters whether the State should be permitted to...issue 30-year debt to pay current expenditure deficits...they would have been horrified,” the plaintiffs said.

"The results of the State’s blatant disregard of the safeguards of (the Illinois state constitution) are obvious. Illinois has the lowest credit rating of any state in the country."

Plaintiff John Tillman of north suburban Golf, joined by Warlander Asset Management, filed a petition July 1 in Sangamon County Circuit Court in Springfield, asking for permission to sue to block the state from continuing to pay off such “structural debt” bonds issued in 2003 and 2017. Plaintiffs said the state owes $14 billion on these bonds.

Tillman is chief executive officer of the Illinois Policy Institute, which has offices in Chicago and Springfield. Warlander is an investment firm based in New York City, which has loaned $25 million to Illinois, according to court papers.

Illinois State Constitution - then and now

The Illinois Constitution of 1870 authorized the state to borrow only up to $250,000 absent a popular referendum, but that led to a higher cost of borrowing because state officials used various "back-door" financing to evade the rigid cap, the plaintiffs lay out in the complaint.

When amended, one of the issues addressed was state debt, as found in Article IX, Section 9(a-e). Instead of capping debt, Section 9 uses a combination of other limits to control against over-borrowing. Relevant to petitioners' argument, Section 9 puts strict limitations on the state’s ability to incur general obligation debt.

"Section 9 as a whole is thus designed to limit the State’s borrowing to reasonable amounts and for reasonable purposes," the plaintiffs argue. "Its provisions work together to prevent 'back-door' borrowing, keep the State’s cost of borrowing to a minimum, and most importantly, avoid the 'snowballing' effect of a growing, unsustainable debt load."

In particular they argue that Section 9means state debt for specific purposes must be authorized by a law approved by either a three-fifths vote of the General Assembly or a popular referendum.

State responds: 'policy paper masquerading as complaint'

Gov. J.B. Pritzker, state treasurer Michael Frerichs and state comptroller Susana Mendoza are named as defendants.

The state responded by deriding the plaintiffs' suit as a "policy paper masquerading as a complaint," which "seeks to conduct a fiscal policy debate in a courtroom." 

There is "no role for the Court to play,” the state asserts, claiming the Constitution’s “special purpose” clause is vague and allows state leaders to issue long-term debt for any reason they desire, including the funding of government in their current year.

The state additionally said that, in the case of the 2003 bond issuance, it is too late for a taxpayer challenge of their constitutionality. A five-year statute of limitations applies to any challenge of a long-term bond issuance, the state claimed, and the plaintiff "slept on his rights."

Drafters anticipated 'specific enough' challenge

Tillman recently responded to the objections, saying the state "offers a strained reading" of the clause and "misapprehends nearly every aspect of Petitioner's claim." Moreover, Tillman pointed to discussions recorded in the transcripts of the state's 1970 constitutional convention which specifically indicates drafters of the constitution anticipated the courts would need to weigh in on the question of whether a debt's purpose was "specific enough," so court is a proper venue for the issue, in plaintiffs' view.

"Debt service on unconstitutional debt is a clear misuse of public funds, and Petitioner (Tillman) has a right as a citizen and taxpayer to sue to protect these funds. The State issued the challenged 2003 and 2017 bonds for the general purposes of deficit financing, refunding debt, and market speculation, each of which does not satisfy the 'specific purposes' requirement," Tillman said.

Tillman continued, saying their interpretation of the provision is "faithful to its text, the Supreme Court precedents, and the drafters' intent. The State’s competing interpretation, by contrast, does violence to all of those authorities."

As far as the statute of limitations, Tillman said it does not apply, but even if it did, the statute would not prevent the suit. Tillman explained he wishes to use the court action to prevent future disbursements, not target past conduct that could fall under the statute.

"Petitioner is not seeking to unwind anything," Tillman said.

Since the initial exchange between Tillman and the Illinois Attorney General's office, two other investment fund managers, Nuveen Asset Management and AllianceBernstein, filed a petition seeking to file a brief to intervene in the case. In the brief, Nuveen and AllianceBernstein assailed Warlander, in particular, claiming the lawsuit is being brought to allow Warlander to profit from a court action against the state.

Tillman replied on Aug. 13, asking the court to ignore the fund managers' brief, as it wrongly sought to conflate Tillman's desire to save the state $20 billion, with Warlander's alleged motives for participating in the court action.

Tillman said the fund managers' brief was filed merely to "distract the court" from Tillman's legal claims.

"...The very submission of the Motion itself, coupled with the fact that the Fund Managers are seeking to intervene now before the Complaint has even been filed, shows that the Complaint is clearly not frivolous," Tillman wrote. "If the Fund Managers were so certain that Mr. Tillman’s Petition were actually frivolous, they would not waste the time and expense of opposing it."

Sangamon County judge to decide

The first hearing in the case is Thursday. Sangamon County Associate Judge Jack Davis II is presiding.

Plaintiffs are represented by attorneys with the firms of White & Case, of Chicago, and Webber & Thies, of Urbana, Ill.

The state is represented by the Illinois Attorney General's Office.

Jonathan Bilyk contributed to this report.

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Organizations in this Story

Sangamon Circuit Court State of Illinois Webber & Thies White & Case

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