Moody’s calls the decision ‘credit negative’ for Illinois
By PETER HANCOCK
Capitol News Illinois
SPRINGFIELD — A lawsuit seeking to force the state to default on billions of dollars in outstanding bonds should move forward, a state appellate court said last week.
A three-judge panel of the 4th District Illinois Court of Appeals ruled Thursday that a lower court acted prematurely in dismissing the suit by John Tillman, CEO of the conservative think tank Illinois Policy Institute.
“We repeat that we express no opinion on the merits of Tillman’s claims,” Justice Robert Steigmann wrote in an opinion also signed by Justices John Turner and Lisa Holder White. “We merely conclude for the purpose of this proceeding that Tillman should be permitted to file the complaint.”
Tillman and Warlander Asset Management LP, a New York-based hedge fund that holds some of the outstanding bonds, filed the suit in July 2019 seeking to block the state from making further payments on the bonds.
The case was filed under a state law that allows “any citizen and taxpayer” to file an action to block the disbursement of public funds by a state officer. But before such a case can go forward, the plaintiff first must ask a court for permission to file the suit and demonstrate there are sufficient grounds for the action.
In this case, Tillman argued that a $10 billion bond issuance in 2003 used to shore up the state’s struggling pension funds and another $15.2 billion bond issuance in 2017 used to pay down a backlog of past-due bills violated the Illinois Constitution’s requirement that bonds only be issued for “a specific purpose.”
The 2017 bonds were part of a legislative deal that ended the state’s historic two-year budget impasse.
At the time the suit was filed, roughly $14.35 billion of those bond issuances remained outstanding.
In August, Sangamon County Circuit Judge Jack Davis II denied Tillman’s petition, citing a 1927 case that said courts are not required to consider petitions based on allegations that are “vague, conclusory, or irrelevant.”
“Tillman’s proposed complaint is chock-full of conclusory and argumentative statements describing the financial condition of the state that are irrelevant and which the court must disregard,” Davis wrote in his opinion. “Indeed, it resembles far more of a political stump speech than it does a legal pleading.”
In its ruling Thursday, however, the appellate court relied on a different precedent that says suits can only be denied if they are “frivolous or malicious, or that a filing of the complaint is otherwise unjustified.”
“Tillman’s complaint sets forth a colorable reading of the Illinois Constitution that does not appear to be frivolous on its face,” the appellate court said. “While we express no opinion on the ultimate merits of Tillman’s claims, we conclude that the petition and complaint state reasonable grounds for filing suit.”
The court sent the case back to Sangamon County for reconsideration, although the state has the option of appealing to the Illinois Supreme Court. Attorney General Kwame Raoul’s office did not immediately say whether it plans to appeal.
In a statement Monday, Moody’s Investor Service, one of three credit rating agencies that rate Illinois bonds, called the court’s decision “credit negative” for the state.
“We still view an ultimate ruling in favor of the plaintiff as highly unlikely, in view of the state’s constitutional power to borrow for statutorily defined needs,” Moody’s said in Monday’s Credit Outlook. “Moreover, a court-ordered debt service disruption would harm bondholders and other parties, as well as the state’s capital market access, while providing comparatively little benefit to the plaintiff or other parties.”
Moody’s currently rates Illinois’ bonds as Bbb3 with a negative outlook, the lowest investment-grade rating available.
A Moody’s spokesman noted in an email that a declaration of a “credit positive” or “credit negative” event is not the same as a rating or outlook change — it only indicates the impact that a distinct event or development could have as one of many credit factors affecting the issuer.
Gov. JB Pritzker’s press secretary Jordan Abudayyeh said in an email Monday that the two bond issues in question went through extensive legal review and were approved both by bond counsel and then-Attorney General Lisa Madigan.
“This lawsuit continues to be a tired tactic of the extreme right who continue to push their ideology over sound fiscal policy,” she said. “This administration will continue to focus on the important work of acting responsibly to keep the state on stable fiscal footing.”