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The municipal-bond market is putting long odds on a think-tank chief’s bid to have $14 billion of Illinois debt tossed out in court, Bloomberg News reported. While the yields on some of the challenged state bonds jumped by more than a third of a percentage point in the weeks after the suit was filed on July 1, they’ve since reversed course amid the market’s broader rally, indicating little risk that their legal status will be cast into doubt. Taxable Illinois debt due in 2033 is now yielding 4.46 percent, only about 0.3 percentage point more than bonds the state issued in April that aren’t being questioned by the suit. “You’re getting paid the extra 30 basis points to deal with this headline risk,” John Miller, co-head of fixed income at Nuveen LLC, said in an interview. His firm holds Illinois debt. “You could have this taint and outside risk, but it’s ultimately a low probability of it actually being invalidated.” The lawsuit, filed by the head of a conservative think tank and backed by a hedge fund, has drawn widespread attention in the $3.8 trillion state and local government debt market because it could set a novel precedent for groups seeking to challenge government spending. It came after Puerto Rico’s federal overseers asked a court to void a big chunk of that bankrupt island’s debt, arguing that it was illegally issued after the government had already run up against its borrowing limits.

A hedge-fund manager claiming Illinois has piled up more debt than its constitution permits is suing Gov. J.B. Pritzker and other state officials in an effort to wipe out $14.3 billion in municipal bonds, WSJ Pro Bankruptcy reported. New York-based Warlander Asset Management LP and John Tillman, chief executive of the conservative Illinois Policy Institute think tank, said Illinois broke a state rule prohibiting deficit financing by selling debt in 2003 to close a pension gap and in 2017 to pay down government vendors. Warlander, which holds $25 million in other Illinois bonds, said the outstanding portions of the 2003 and 2017 debt sales should be declared “unconstitutional and unenforceable.” The Illinois constitution bars the state from taking out long-term debt except for “specific purposes” or to refinance longer-term debt, according to the complaint filed yesterday in Sangamon County Circuit Court. Illinois instead borrowed to bridge deficits and to speculate on financial markets, the lawsuit said, lowering the state’s creditworthiness and heightening the likelihood of default.

Donald Dwyer left statehouse politics for retirement in Clearwater, Fla., at the Grand Venezia, a 336-unit condominium complex with a pool, tennis courts and ill-fated ambitions to bring a touch of Italian luxury to the Gulf Coast. But the former Maryland lawmaker is now leading an unusual community tax revolt against OppenheimerFunds Inc., which oversees $230 billion in assets, that may echo far beyond his tiny patch of Florida’s western shore. During the height of the real estate bubble, the Clearwater Cay Community Development District sold notes and bonds for a development that was supposed to include a water park and a gondola-lined canal with Venice-style bridges that would turn the Grand Venezia into a destination resort. But those amenities were never constructed, and the developer is serving a 40-year prison sentence for running a Ponzi scheme. So on June 4, Dwyer and the district’s board of supervisors opted to push it into bankruptcy, seeking to reduce the debt and the approximately $1,500 they each pay every year for it. The district had $13.9 million in bonds outstanding as of September 2017, according to its financial report, though Dwyer said he has doubts about the accuracy of that figure. James Spiotto, managing director of Chapman Strategic Advisors LLC and an expert of municipal bankruptcies, said the district faces an uphill fight. He said he’s not aware of any other community-development district that has gone bankrupt in Florida, and it will need the approval of the governor. Moreover, the revenue securing the bonds -- the assessments -- is a very secure type of debt that is “not supposed to be impaired,” Spiotto said. “I don’t really know if they can avoid the debt obligation.”

The municipal-bond market has shown some optimism recently that Illinois and Chicago will ultimately tackle their huge pension burdens. But one of the biggest buyers of state and local government debt isn’t so sure, Bloomberg News reported. Franklin Templeton Investments, which manages more than $60 billion in municipal securities, said it won’t buy uninsured general-obligation bonds from Illinois and any debt from Chicago and the city’s public school system, citing the threat from “pension beasts.” “Will Illinois’ governor and Chicago’s mayor eventually impair bondholders rather than push for sensible pension reforms? We think it’s more likely than not, unfortunately,” Franklin analysts led by Sheila Amoroso wrote in a blog post. The comments buck the broader sentiment in the market, where Illinois bonds have rallied this year on optimism about Governor J.B. Pritzker’s plans to mend the state’s finances, in part by scrapping the flat income tax to raise more revenue. But state and local politicians’ focus on levying new taxes or selling assets such as land won’t make the math work to solve a pension problem that for Illinois is a “fire-breathing monster that dwarfs Illinois’ revenue-generating capacity,” the Franklin analysts wrote.