Fitch Rates Cook County, IL GO Bonds 'AA'; Outlook Stable

NEW YORK--(BUSINESS WIRE)--Fitch Ratings assigns an 'AA' rating to the following Cook County, Illinois (the county) general obligation (GO) bonds:

--$121.06 million tax-exempt GO 2010 series G.

The bonds are expected to sell via negotiated sale on Sept. 16, 2010.

In addition, Fitch affirms the 'AA' rating on the following:

--$3.1 billion in outstanding GO bonds.

The Rating Outlook is Stable.

RATING RATIONALE:

--The county economy is broad and diverse, although unemployment rates remain above national averages. Wealth levels are slightly above state and national averages.

--The county has benefited from historically solid reserve levels and diverse revenue streams; however, recent revenue declines, the repeal of a portion of the sales tax increase and high mandated expenditures for hospitals and jails have pressured general fund reserve levels.

--Deferred spending for operating costs (pension payments and claims liability) are now pressuring the corporate fund and expected to continue to do so.

--Debt levels are moderate and expected to remain manageable; however, pension liabilities are high, and the funding level remains weak.

KEY RATING DRIVERS:

--Further repeal of county sales tax without additional budget solutions will limit financial flexibility.

--Health fund deficits continue to widen; to date there has been a lack of evidence of meaningful reform.

--Ability to develop a realistic plan to address and control rising retiree benefit costs given the current large Unfunded Actuarial Accrued Liability (UAAL) and severe underfunding of the annual required contribution (ARC).

--Further fiscal weakening, either through significant general fund balance deterioration or deferred annual costs, could place downward pressure on the rating.

SECURITY:

The bonds are GOs of the county, and the full faith and credit of the county is pledged to the payment of debt service.

CREDIT SUMMARY:

With 5.3 million residents, the county represents about 40% of the state economy. Per capita money income is slightly above the state average and 7% above the U.S. Market value per capita is high at $126,421. Although the county's economic profile has weakened with the national recession as evidenced by a stagnant housing market and increased unemployment, the local economy remains broad and diverse. Tax base growth has been robust over the past five years but is expected to slow significantly in the next three years. The county has a high level of subprime mortgage exposure and foreclosure rates remain persistently elevated. Unemployment in May of 2010 remains high at 10.7% and is just slightly above the state level of 10% but well above the national rate of 9.3%. Employment in professional and business services, the financial sector, and manufacturing and construction activities have all contracted in the past year.

The county's general fund balances which have been declining since 2006 improved slightly in 2009 despite another significant shortfall in the county's health fund. Unaudited results for fiscal 2009 show an unreserved general fund balance of $142.4 million, or 10.8% of total expenditures and transfers. A decline in home rule taxes of 7.9% compared to budget was somewhat offset by the benefit from the sales tax increase, a one-time Disproportionate Share Hospital (DSH) payment and additional Medicaid funds. Corrections and health care spending account for more than 75% of county costs. Union contracts expired in November 2008, and the county continues negotiations. The more positive results followed an operating deficit in fiscal 2008, resulting in an unreserved general fund balance of $103.5 million, or 8.1% of total expenditures and transfers, compared to 15.5% in fiscal 2007. The deficits in 2007 and 2008 were in part attributed to increased medical malpractice and claims expenses no longer being funded through debt issuances. In addition, the operating shortfall in the health fund in fiscal 2009 widened to about $500 million, funded through existing cigarette and property taxes as well as the increased sales tax. The county reports while fiscal 2010 revenues year to date are below budget by $10 million, officials expect a shortfall of $60 million at year end and have reduced expenditures to offset some of the decline. While the county's revenue stream is fairly diverse, Fitch believes the 2009 roll back of a portion of the 1.75% sales tax increase implemented in 2008, the continued volatility in all of its revenues streams, and the rising expenditures associated with retiree benefit costs and the health delivery system will put downward pressure on county operations going forward.

Cook County's overall debt burden is moderate at $3,632, or 2.9% of full market value, but amortization is below average at a slow 35% over 10 years. The county's 2010-2014 capital improvement plan of $825 million is manageable with no additional debt currently authorized by the board. The current issue refunds certain outstanding county bonds. The total county debt portfolio consists of 11% of variable rate debt, and there are no swaps currently outstanding. The county pension plan was adequately funded at about 79% (including pension and retiree health care liabilities) in fiscal 2008, but fell to a weak 69% funding ratio in fiscal 2009 as a result of investment losses and recalibration of life expectancies. As do most other municipalities in the state, the county typically makes the full statutory payment, which is well below the ARC. Although management fully intends to make all statutory payments in the future, the continued future mismatch of statutory and actuarially determined payments remains a credit concern. The county's unfunded pension liability is $2.1 billion, and when combined with the $1.4 billion liability for other post employment benefits, the total liability is high.

Additional information is available at 'www.fitchratings.com'.

In addition to the sources of information identified in the report 'Tax-Supported Rating Criteria', this action was additionally informed by information from Creditscope, University Financial Associates, LoanPerformance, Inc., IHS Global Insight, and the Underwriter.

Related Research:

'Tax-Supported Rating Criteria', dated Aug. 16, 2010;

'U.S. Local Government Tax-Supported Rating Criteria', dated Dec. 21, 2009.

Related Research:

U.S. Local Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=492470

Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=548605

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