Challenge to $14 Billion in Illinois Debt Revived -- Update
August 06 2020 - 7:51PM
Dow Jones News
By Andrew Scurria
An appeals court in Illinois has reinstated litigation seeking
to block payments on $14.3 billion in municipal debt, saying the
attempt to restrain borrowing in the country's worst-rated state
isn't frivolous or malicious.
The appellate court said John Tillman, chief executive of the
right-leaning Illinois Policy Institute, had put forth a legitimate
claim in support of his theory that past bond sales by the state
were impermissible. The court stressed that it wasn't deciding the
merits of Mr. Tillman's claims but said that the litigation could
continue in a lower court.
The complaint accused Illinois of taking on more debt than its
constitution allows and breaking a state rule prohibiting deficit
financing with bond deals in 2003 and 2017. Some of those bonds
raised money to prop up Illinois pension funds, while others funded
back payments to stretched government vendors.
Mr. Tillman, a prominent foe of public-sector unions, argues
Illinois is barred from taking out long-term debt except for
"specific purposes" or to refinance longer-term debt, while the
state had instead borrowed to bridge deficits and to speculate on
financial markets.
He has asked for a court order declaring the 2003 and 2014 debt
sales invalid and unenforceable and prohibiting state officials
from making further payments to bondholders.
A state judge dismissed the litigation last year, saying it
risked "an unjustified interference with the application of public
funds" and it would draw the courts into political questions that
should be left to lawmakers.
Mr. Tillman's challenge has drawn fierce responses from state
officials, including Gov. J.B. Pritzker, a Democrat who was named
as a defendant in the complaint and who has accused Mr. Tillman of
a "pathological focus to drive Illinois into bankruptcy."
A spokeswoman for Mr. Pritzker said, "This lawsuit continues to
be a tired tactic of the extreme right who continue to push their
ideology over sound fiscal policy. This administration will
continue to focus on the important work of acting responsibly to
keep the state on stable fiscal footing."
Municipal bond-market investors including Nuveen Asset
Management and AllianceBernstein LP have defended the state, saying
the case had roiled the market for Illinois debt and cost them
money.
While state and local governments nationwide are grappling with
how to cover revenue gaps stemming from coronavirus restrictions,
few are as strained as Illinois, which entered the pandemic with
the worst credit rating of any state -- just above junk status.
Financial instability at the municipal level has become a
national political issue, with both President Trump and Senate
Majority Leader Mitch McConnell (R., Ky.) questioning whether
states should receive federal assistance during negotiations over
stimulus legislation.
Mr. McConnell suggested in April that instead of coming up with
a federal bailout for states, Congress should consider allowing
them to use bankruptcy protection to cut their debts, an option
they don't currently have. Illinois was the first borrower to
access the Federal Reserve's municipal lending program earlier this
year.
No U.S. state has failed to pay bondholders since Arkansas in
1933, although the island territory of Puerto Rico defaulted in
2016 and was later placed under a court-supervised bankruptcy.
Write to Andrew Scurria at Andrew.Scurria@wsj.com
(END) Dow Jones Newswires
August 06, 2020 19:36 ET (23:36 GMT)
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