NEW YORK--(BUSINESS WIRE)--Fitch Ratings assigns an 'AA-' rating to the following Cook County, Illinois (the county) general obligation (GO) bonds:
--$179 million GO refunding bonds, series 2011A;
--$210 million taxable GO refunding bonds, series 2011B;
--$125 million taxable GO bonds, series 2011C;
--$110 million taxable GO notes, series 2011D.
In addition, Fitch downgrades $3.02 billion in outstanding county GO bonds to 'AA-' from 'AA'.
The Rating Outlook is revised to Negative from Stable.
The county has irrevocably pledged its full faith and credit and its ad valorem tax, without limitation as to rate or amount.
KEY RATING DRIVERS
Downgrade Considerations: The downgrade primarily reflects the county's diminished financial flexibility and its ongoing challenge to realize structurally balance operations.
Negative Outlook: The Negative Outlook reflects Fitch's concern that spending pressures coupled with reliance upon economically sensitive taxes will continue to strain the county's ability to achieve structural balance and build reserves in the intermediate term.
Regional Economic Hub: Cook County serves as the economic and cultural hub for the Midwest region.
Challenging Financial Prospects: The county is projecting structural imbalance for the next several fiscal years, a situation worsened by the recent restatement of a prior-year audit.
Slim Liquidity: Liquidity is nominal but will improve with the issuance of these cash flow notes and bonds.
Notable Obligations: The overall debt burden is moderate; however, pension liabilities are notable, and annual funding remains weak.
WHAT COULD TRIGGER A RATING ACTION
Persistent Structural Imbalance: Management's inability to restore structural financial equilibrium and preserve adequate fund balance levels in the intermediate term.
Mounting Fixed Costs: Management's long-term inability to develop a realistic plan to address mounting fixed costs, including full funding of annual pension contributions.
Cook County, the second largest county in the nation with 5.2 million residents, serves as the economic and cultural center for the Chicago metropolitan region. The city of Chicago, which is located within the county, accounts for roughly 50% of the county's total assessed valuation and population. Socioeconomic indicators are mixed with above average per capita income and educational levels but also elevated individual poverty and unemployment rates. As of June 2011, the county's unemployment rate of 10.8% was above both the state (9.7%) and national (9.3%) averages.
STRONG ECONOMIC BASE
Cook County, and in particular the city of Chicago, acts as the economic engine for the Midwest region. Residents are afforded abundant employment opportunities within this deep and diverse regional economy. The county also benefits from an extensive infrastructure network, including a vast rail system, which supports continued growth. The employment base is represented by all major sectors with concentrations in the wholesale trade, professional and business services and financial sectors.
Financial operations have been continuously weakening since fiscal 2006 when the unreserved general fund balance equaled a healthy 20% ($259.5 million) of spending. Compounding the negative general fund operating trend, the county restated its fiscal 2009 financial results, which originally reported a 3% general fund operating surplus after transfers. As a result of account errors primarily related to the duplication of several non-property taxes, general fund revenues were overstated by $91.1 million or a material 7.3% of total revenues. After restatement, the general fund generated a negative $53 million (-4%) operating deficit. Ultimately the ending general fund balance was decreased to $51.3 million or 4% of general fund spending, down from 11.2% ($142 million) prior to restatement.
The county generated another operating deficit (-2.4%) after transfers in fiscal 2010, albeit a smaller deficit compared to the prior two years, despite a 9.5% increase in general fund revenues. The deficit further reduced the county's unreserved general fund balance to a slight 2.3% ($31 million) of expenditures including transfers out.
SALES TAX ROLLBACK
Prospectively, the county's financial position will continue to be challenged with the gradual phase-out of a previous sale tax increase. The home rule sales tax was increased 1% to 1.75% in July 2008 to fortify the county's budget. The new county administration rolled back the sales tax to 1.25% effective July 2010 through December 2011, which cost the county $32 million in fiscal 2010. Per a county ordinance, the sales tax is scheduled to be rolled back further, to 1% through December 2012, and then to 0.75% thereafter.
The county, as a home rule municipality, has the flexibility to levy a host of local sales and sin taxes. However, since Cook County already has a comparably high sales tax rate and is currently rolling back its sales tax, materially increasing any taxes would likely be politically unpopular and unrealistic. Sales tax accounted for 32% of general fund revenues in fiscal 2010, followed by fees & licenses at 23%, property tax at 16%, cigarette tax at 8%, and gasoline tax at 7%.
PERSISTENT FINANCIAL CHALLENGES
The fiscal 2011 budget process began with a $487 million general fund forecast gap primarily attributable to a $161 million reduction in sale tax revenues due to full-year impact of the roll back. The gap was fully addressed with some structural solutions including staffing and operational reductions and enhanced revenue collections and from one-time sources including debt restructuring, a line of credit (for a one-time cost), and other nonrecurring revenues. As of August 2011, the county is projecting a $20 million general fund operating deficit (GAAP basis); however, management believes the gap will be eliminated with additional expenditure reductions.
A pressured operating environment will continue into fiscal 2012. Sales tax revenues are projected to decrease another $53 million due to the roll back. Despite a nominal $2.5 million reduction in expenditures compared to the year prior, the current projected gap is $315 million or 14% of the $2.3 billion budget. The county is currently evaluating all areas of government to identify potential spending cuts. Management plans to address the shortfall primarily through staffing reductions achieved through greater efficiencies, shared services with the city of Chicago, and strategic reduction of services. The county's ability to successfully address its budget gaps and institute structurally balanced operations is instrumental to ratings stability.
The county's hospital healthcare system, which is classified as an enterprise fund on a GAAP basis, is a further source of operating pressure due to a consistent history of operating deficits. The system generated a $445 million operating deficit in fiscal 2010 which was subsidized through a combination of property, sales, and cigarette taxes; further deficits and continued subsidization are likely. To become more cost efficient, the county is shifted focus to out-patient care, improving Medicaid billing collections, and increasing procedural efficiencies through infrastructure and technological upgrades.
Liquidity has also dwindled in step with the county's overall financial deterioration. As of fiscal 2010 year-end, the county had three days cash and investments to average daily general fund expenditures primarily due to a delay in the collection of the second property tax installment. To bolster its cash position, the county is issuing cash flow notes and will also indirectly replenish the general fund reserve ($125 million) with bond proceeds, which will provide a needed additional financial cushion.
DEBT SERVICE FUND SEGREGATION
The county's debt service funds, which ended fiscal 2010 with roughly a $156 million balance, are maintained separately from the general fund. The county extends a levy for debt service payments six months beyond the end of the typical second-half collection cycle, whereby both property tax bills are generally received before payment of debt service in November and May of the following fiscal year. This advance collection timing provides additional liquidity for bondholders. Additionally, the trustee receives property tax receipts directly from the county treasurer, without comingling funds with the county's general fund.
Cook County's aggregate debt burden is moderate at $3,857 per capita and 3.6% of market value. Principal amortization is below average with 40% repaid within 10 years. Maximum annual debt service as a percentage of general fund expenditures is elevated at 23%; however a portion of annual debt service is paid by funds outside the general fund. The county's debt profile includes a reasonable 14% of unhedged variable rate debt that is supported by liquidity facilities that expire through 2015. The capital improvement plan through 2016 totals roughly $700 million, of which $295 million is expected to be bond financed. A portion of this debt offering is for debt relief in fiscal 2011 ($85 million), fiscal 2012 ($92 million) and fiscal 2013 ($85 million).
Long-term liabilities related to employment benefits are considerable. The county provides pension benefits to its employees through a single employer defined benefit plan. As of December 2010, the unfunded actuarial accrued liability (UAAL) totaled $4 billion or 63% funded based on Fitch's more conservative 7% investment return assumption. Compounding the issue, the county has not paid its full annual pension cost for at least the last five years as the county's property tax levy for pension liabilities is capped by state statute and management has opted not to use other resources to address the shortfall. County officials are currently pursuing several avenues including state legislative changes to ameliorate the funding ratio shortfall. As a credit positive, the county implemented a two tiered benefit plan for employees beginning January 2011, which should help moderate future liability growth. Other post employee benefits (OPEB) are also offered to retirees and their dependents. The county contributed $40 million, which equaled the pay-go amount, in fiscal 2010. As of December 2010, the UAAL totaled $1.7 billion or a nominal 0.3% of market value.
Additional information is available at 'www.fitchratings.com'.
In addition to the sources of information identified in Fitch's Tax-Supported Rating Criteria this action was additionally informed by information from Creditscope, University Financial Associates, and IHS Global Insight.
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria,' dated Aug. 15, 2011;
--'U.S. Local Government Tax-Supported Rating Criteria', dated Aug. 15, 2011.
For information on Build America Bonds, visit www.fitchratings.com/BABs.
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
U.S. Local Government Tax-Supported Rating Criteria