Hedge fund, think tank CEO sue to cancel $14B in debt

Illinois Capitol News

Illinois Policy CEO appeals after judge tosses suit

SPRINGFIELD, Ill. (WCIA) A New York hedge fund and the CEO of a well-funded conservative think tank are suing the state of Illinois to cancel $14.3 billion in bond debt, arguing that it’s unconstitutional for state lawmakers to borrow money to pay down “unspecified” old bills.

In 2017, in a maneuver to escape the state’s historic budget impasse and to avoid from plunging into junk bond status, Illinois issued $6 billion in bonds and used the cash infusion to pay down late bills that were accruing late payment interest penalties at a rate of 12 percent. The interest on those bonds is scheduled to cost Illinois taxpayers 5 percent interest.

“We were paying more in interest to borrow money, and that’s never a good thing for those who have to pay,” University of Illinois-Springfield political science professor Ron Michaelson said. “It’s a good thing for the lenders who are making money on the state, but not a good thing for the state.”

Comptroller Susana Mendoza, a Democrat whose office pays the state’s bills, defended the 2017 bond sale as “a great deal for taxpayers,” and criticized the plaintiffs for “essentially trying to bankrupt the state” in order “to make a killing off of killing the state’s finances.”

A circuit court judge dismissed the lawsuit earlier this month, writing that the suit “resembles far more of a political stump speech than it does a legal pleading.”

John Tillman, who boasts in the suit that he built the Illinois Policy Institute into “one of the most influential think tanks in the country,” promptly appealed his case to the Fourth Circuit Appellate Court.

In the court documents, Warlander Asset Management acknowledges that it owns $25 million in Illinois bonds. The suit complains that the hedge fund was “harmed” and “adversely affected” when the state borrowed money to pay down old bills. A footnote adds, “Warlander also has a separate financial interest in this litigation.”

“The worse our credit rating gets, the worse our fiscal situation gets, the better for these folks who are playing in this market of debt,” Mendoza explained.

The Comptroller said Tillman and Warlander “are betting on Illinois to go bankrupt…because they make a ton more money if we do.”

Michaelson said if Tillman wins his suit, it would present a “monumental chain of events.”

He predicted it would “cost the state more money” should Tillman prevail, because, “there will be fewer lenders, and those lenders would have more leverage to exact a better deal.”

While Tillman says he’s spearheading the suit as an individual taxpayer and not in his role as the head of the Illinois Policy Institute, the effort is generating some political blow back for his organization too.

“It’s really sick that anybody would actually think about doing that, and much less that people who are advising the governor would stand to benefit personally from this type of fiscal collapse of our state,” Mendoza said. “But this is who the IPI is. This is who the Illinois Policy Institute is, and it’s being driven by this man who really wanted our state to go bankrupt.”

Tillman was a close advisor to former Republican Governor Bruce Rauner during the budget battle. Rauner hired Kristina Rasmussen, the think tank’s former President, as his chief of staff for a brief period of time in 2017.

Tillman insisted his motives are based on principle, not for profits.

“It is shameful that Comptroller Mendoza is lying to the public about my role in this lawsuit,” Tillman responded. “I have nothing to gain financially from this lawsuit. I do not now, nor have I ever owned any Illinois debt or related securities.”

Mendoza said, “It makes me sick to my stomach that guys like John Tillman would actually have the stones to go to court and try to get us to be deadbeat states. Like he is actually, as a Republican, saying that Illinois should not pay its bills, but Illinois should go bankrupt so his pals can make a ton of money in exchange for the state’s demise. It’s terrible.”

Tillman said his “motivation is to prevent the state of Illinois from bankrupting its citizens by taking on excessive debt, including that which is unconstitutional.”

He argues the state’s poor fiscal condition is the “result of decades worth of fiscal mismanagement enabled by issuances of unconstitutional debt.”

“It’s one-hundred percent nonsense,” Mendoza shot back.

“Their only argument here is that the state should go bankrupt,” she said. “And why? It’s because they stand to make a ton of money in the process.”

“Comptroller Mendoza’s office is desperately trying to trick Illinoisans into thinking this immoral and unconstitutional borrowing is for their own good,” Tillman said. “She is confused as to both this lawsuit and the finances of the state. If successful, my lawsuit would take billions of dollars off the balance sheet of the state of Illinois. It would improve the state’s financial position, not drive it into financial ruin.”

While Mendoza frames the 2017 bond sale as a homeowner refinancing their mortgage to secure a lower interest rate, Tillman used a different analogy.

“It’s obvious to every Illinoisan that you shouldn’t take out a home equity loan to pay off your credit card bill,” he said. “The Illinois Constitution wisely includes protections against this reckless behavior and they have gone ignored. This is why I am suing the state.”

While Michaelson agreed with a portion of Tillman’s argument, he still sees little chance the lawsuit will be successful.

“Generally, you use bonds for capital projects,” Michaelson said. “You use bonds for roads or bridges or schools or buildings. You don’t use bonds to pay the bills.”

However, the political science expert said, “I can’t see the courts ever approving this proposal that Mr. Tillman has out there, because the ramifications would be so far sweeping. It would upset the apple cart big time.”

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