A hedge fund run by a protege of Appaloosa Management's David Tepper and the CEO of a conservative think tank sued Illinois Gov. J.B. Pritzker, saying $14.3 billion of bonds should be invalidated because their issuance violated the state constitution.
Warlander Asset Management, a New York-based hedge fund formed by Eric Cole, and John Tillman, CEO of the Illinois Policy Institute, said the state's record pension bond sale in 2003 and debt issued in 2017 to pay a backlog of unpaid bills were deficit financings prohibited by the constitution. The lawsuit was filed Monday in a Sangamon County court.
The goal of the debt limits in the state constitution "was to ensure that the state's elected officials would act in a fiscally responsible manner — that they would cut spending or make structural reforms when needed, rather than continually using deficit financing to 'kick the can down the road' for future generations to resolve," the complaint said.
"The state's elected officials have done just the opposite. They have mortgaged the state's future to pay for the present."
The lawsuit comes two months after the federal board overseeing Puerto Rico's bankruptcy and a group of hedge funds sought to have more than $6 billion of the island's bonds declared null and void and shows how the island's effort to cut its debts is reverberating in the $3.8 trillion U.S. municipal bond market. The Puerto Rico overseers want to have the debt tossed out on the grounds that it was sold after the territory breached its debt limits, a step that some analysts said could undermine confidence in a market that's seen as a haven.
Mr. Tillman's Illinois Policy Institute has been at the forefront of legal challenges to public employee unions and progressive taxation. The institute backed an Illinois employee named Mark Janus in his challenge to the constitutionality of mandatory union fees. In 2018 the U.S. Supreme Court ruled in Mr. Janus' favor, dealing a heavy blow to the labor movement.
In 2014, the institute helped defeat a movement to amend the Illinois Constitution and replace the state's flat income tax with a progressive income tax. Mr. Pritzker, a Democrat who took office this year, persuaded lawmakers to put a progressive income tax back on the ballot in 2020.
Several layers of bond counsel and the attorney general signed off on the 2003 and 2017 bond offerings, said Emily Bittner, Pritzker's deputy chief of staff for communications, in an email.
"This is simply a new tactic from the extreme right to interfere in capital markets," Ms. Bittner said. "We're done with the far right's dangerous financial games to pull Illinois underwater. We saw this repeatedly under Bruce Rauner, who funded and executed on John Tillman's pathological focus to drive Illinois into bankruptcy."