Fitch Downgrades Cook County, Illinois GO Bonds to 'AA-'; Outlook Stable

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

--Approximately $256 million series 2009A;

--Approximately $251 million series 2009B taxable GOs (Build America Bonds - Direct Payment).

Series 2009A will refinance outstanding GO debt for debt service savings, while series 2009B will finance various construction projects. Fitch also downgrades the county's outstanding GO debt to 'AA-' from 'AA', which applies to $2.9 billion of outstanding GO bonds. Series 2009A and 2009B bonds are scheduled for negotiated sale on or about June 16. The Rating Outlook on all GO debt is Stable.

The downgrade reflects increased pressure on financial operations, as evidenced by declining general fund balances, growing dependence by the county's massive health system on tax subsidies, and a recent pension payment deferral. Further compounding diminished financial flexibility is the increased burden of a high-sales-tax environment in the current weakened economy. Additionally, Fitch believes that political and financial inconsistency in both general and health system governance, if not fully addressed, could lead to further financial pressure. The county has appointed a new chief executive officer and board in the health system; expenditure savings and enhanced patient fee recovery will be necessary to curtail rising operating deficits. The 'AA-' rating and Stable Outlook reflect the county's broad economy with above-average wealth levels and a moderate debt burden.

Key credit challenges going forward will be the ability to institutionalize meaningful reforms in the health system and to maintain adequate operating fund balances. Demand for correctional and hospital services is expected to remain high, and with little practical ability to augment revenues further, Fitch believes financial stability will depend on the county's ability to reduce spending. The county now has the highest sales tax rate in the nation, although management has indicated the likely repeal of 1/4% of the 1% increase that went into effect in July 2008 due to pressure from both commissioners and the public. The sales tax increase was used largely to subsidize the county's health system, but increases in other non-operating revenues should offset reduced sales taxes. A further decline in the rate beyond the 1/4% would likely strain financial performance, and without commensurate revenue increases or expenditure reductions, could cause negative rating pressure.

With 5.3 million residents, the county represents about 40% of the state economy. Per capita income is 7% above the state average and 14% above the U.S. Although the county's economic profile has weakened with the national recession through both 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. Unemployment, which typically slightly exceeds the Illinois average, has increased to 10.1% in April 2009, as employment in professional and business services as well as the financial sector have contracted in the past year.

The county's general fund balance has declined but remains sound, as unaudited fiscal 2009 unreserved balances are at 12.8% of spending. In part relating to increased medical malpractice and claims expense, the county produced deficits in fiscals 2008 and 2007, and would have produced a deficit in 2006 absent a significant transfer into the general fund. A further sign of financial weakening is the county's issuance of sales tax anticipation notes in fiscal 2008 to advance the revenues due from the sales tax increase. Additionally, the operating shortfall in the health fund in fiscal 2008 widened to about $500 million, funded through existing cigarette and property taxes as well as the increased sales tax. If the sales tax is reduced by 1/4% as proposed, the county expects to lose about $61 million in fiscal 2010. However, at least for fiscal 2010, additional funds from a change in the state distribution to public hospitals would more than offset this loss. Structural reforms will still be needed to curtail operating deficits.

Corrections and health care spending account for more than 75% of county costs. The county may impose a hiring freeze and reduce general government and health system positions to maintain an adequate fiscal position. Union contracts expired in November 2008 and the county has budgeted for wage settlements well below historical norms, although some financial cushion is available due to reduced departmental spending in 2009. Approved budgeted appropriations for fiscal 2010 are near 2009 levels. Sales taxes for the first quarter of 2009 were near revised estimates, but April collections show softening which Fitch believes could potentially be more protracted.

Cook County's overall debt burden is moderate at $4,370 and 3.5% of full market value. Although the county planned to issue debt for a missed fiscal 2007 pension payment of $104 million as well as its elevated claims expenses in the past three years, management now expects to fund these liabilities through operating revenues in the next several years as no debt beyond the current issuance except for about $100 million for equipment purchases has been approved by the county board.

The county pension plan was adequately funded at about 79% (including pension and retiree health care liabilities) in fiscal 2008, but investment losses are expected to reduce funding ratios over the next several years. Like most other municipalities in the state, the county typically makes the full statutory payment, which is significantly less than what would be paid on an actuarially determined basis, on an annual basis. However, the county did not make its full fiscal 2007 payment, which, if not addressed Fitch will consider a credit risk. Although management fully intends to make all statutory payments in the future, the mismatch of statutory and actuarially determined payments remains a credit concern.

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