A lawsuit to invalidate $14 billion of Illinois bonds draws inspiration from Puerto Rico’s restructuring, according to a Bloomberg editorial. Indeed, munis are off to a blistering pace in 2019, with mutual and exchange-traded funds focused on the debt on track to pull in a record amount of cash this year. Investors are buying even though a closely watched gauge of relative value would suggest the bonds are a screaming sell. Never mind that at the start of the year, a federal oversight board argued that more than $6 billion of Puerto Rico’s general-obligation bonds should be declared null and void because issuing them in the first place breached the island’s constitutional debt limit. John Tillman, the CEO of conservative think tank Illinois Policy Institute, and Warlander Asset Management’s Eric Cole, a protege of Appaloosa Management’s David Tepper, are teaming up in an effort to invalidate a whopping $14.3 billion of Illinois debt on the grounds that the state’s pension bond sale in 2003 and securities issued in 2017 to pay a backlog of unpaid bills were in fact deficit-financing transactions prohibited by the constitution. It’s still very early days, especially for this type of fundamental challenge to a state’s ability to finance itself. Illinois general obligations have long been considered to have some of the strongest legal protections among states. And most crucially, it’s not Illinois looking to invalidate its own debt but rather a hedge fund and Tillman, who has been at the forefront of legal challenges to public employee unions and progressive taxation. Even if they prevail, the state could very well repay investors entirely, according to the editorial.
