NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned an 'A+' rating to the following Cook County, IL bonds:
--$303.4 million general obligation refunding bonds, series 2016A.
Fitch has also affirmed the county's Issuer Default Rating (IDR) and approximately $3.5 billion of outstanding county unlimited tax general obligation (ULTGO) bonds at 'A+'.
The Rating Outlook is revised to Stable from Negative.
The ULTGO bonds carry the county's full faith and credit and ad valorem tax pledge, without limitation as to rate or amount.
KEY RATING DRIVERS
The 'A+' rating incorporates the county's broad revenue raising capacity, limited expenditure flexibility and moderate long-term liabilities. A demonstrated ability to control rising costs and raise rates when necessary offsets the revenue stream's exposure to economic volatility. The Outlook revision to Stable from Negative reflects the progress the county has made in fundamentally realigning revenues and expenditures, improving its capacity to weather a moderate economic downturn, as well as its plan to dramatically improve pension funding in a way that does not present a risk to operations.
Economic Resource Base
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.
Revenue Framework: 'aa' factor assessment
The county's home rule status affords it a wide variety of revenue raising options. Fitch expects that in the absence of revenue raising action the county's revenues will grow slowly going forward, generally in line with inflation.
Expenditure Framework: 'bbb' factor assessment
The county's expenditure framework is characterized by notably high fixed costs for pensions and debt service as well as a limited ability to control workforce spending. Fixed costs will rise as the county implements actuarially sound funding of its pensions, but these should not pressure operations as it has raised revenues dedicated to this purpose. Improved health system performance has resulted in a reduced pressure on the general fund.
Long-Term Liability Burden: 'aa' factor assessment
Unfunded pension liabilities and overall debt present a moderate burden when compared with residents' personal income. Pensions are weakly funded, but the county recently implemented a plan to exceed its statutory payment and bring contributions up to actuarially sound levels.
Operating Performance: 'a' factor assessment
Revenue performance is vulnerable to economic cycles, but the county has demonstrated willingness to raise rates to compensate. While some temporary use of reserves can be anticipated in a stress situation, Fitch expects that the county would take steps to restore balance. The county has made significant efforts to restore structural balance in recent years, taking aggressive steps to control personnel costs through both attrition and layoffs. Management also has demonstrated the willingness to raise sales tax rates to offset revenue declines, with a temporary recessionary increase that was later rolled back, and a subsequent increase slated specifically to improve pension funding and capital.
Reserve Maintenance: The rating is sensitive to the county's ability to maintain tight budgetary control and reserves in line with Fitch's expectations for the rating level. Rating improvement would require enhanced financial flexibility in the form of an increase in the amount of financial cushion that Fitch expects to be maintained throughout an economic downturn and/or improved expenditure flexibility.
Self-Sufficiency of Health System: The improvement in health care system operations is significant to the stabilized credit outlook. Any developments that increase the risk that the system presents to general government financial operations would be a negative credit consideration.
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. Socioeconomic indicators are mixed as is typical for an urbanized area, with above-average per capita income and educational levels but also elevated individual poverty rates.
Cook County is a home rule unit of government, with unlimited legal ability to raise property, sales and other taxes and fees. This affords it a wide variety of taxes and fees in support of operations, a significant credit strength. Various taxes, including property (21% of fiscal 2015 general fund revenues) and sales (30%) comprise more than three-quarters of general fund revenues. Overall revenue performance is sensitive to economic cycles, but management has demonstrated a willingness to both cut expenditures and raise rates in response to revenue underperformance.
Historical revenue growth trend has been marginally positive but has not kept pace with either national GDP or the CPI, partially due to tax policy action which materially reduced the sales tax rate. The sales tax rate was recently increased, so revenues may be expected to increase as a result. Overall, revenue growth absent policy action is expected to follow economic trends on a lagged basis.
More than half of general fund spending (56% in fiscal 2015) is for courts, followed by corrections at 26%.
The pace of spending growth absent policy actions is likely to be moderate but above the level of expected revenue growth. Fitch expects the county will continue to take an aggressive stance toward expenditure control.
Cook County's fixed cost burden is elevated, with carrying costs for debt service, government-wide pension ARC and OPEB equivalent to a high 33% of governmental expenditures (or 42% when the self-supporting health system pensions are included). These percentages should drop somewhat in fiscal 2016 when the county begins ramping up pension contributions (increasing the denominator). The county has a generally productive relationship with its labor unions and has not sought aggressive benefit curbs. Illinois is a strongly pro-labor state and attempts by other governments to control costs by curbing post-retirement benefits have been unsuccessful and/or subject to protracted litigation.
Long-Term Liability Burden
Overall debt plus unfunded pension liabilities present a moderate burden on resources, at 13.3% of personal income (or 11.7% excluding health system pensions). The county's direct debt is modest, but borrowing by overlapping jurisdictions raises debt burden to elevated levels. Overall debt levels are somewhat understated, as overlapping borrowing by suburban school districts is excluded, but this should not materially alter the assessment. Pensions are weakly funded, the result of a statutory framework that has grossly underfunded the ARC. Higher contribution levels, beginning in fiscal 2016, should improve funded ratios over time. The unfunded OPEB liability is modest at 0.7% of personal income.
The county's revenue stream exhibits a moderate level of volatility, as expected given the significance of economically sensitive sales taxes. The general fund reserve cushion is augmented by balances in the motor fuel tax fund, which may be legally diverted to the general fund for court-related expenditures, a practice the county employed during the last recession. Fitch believes that when faced with an economic stress, the county would likely utilize its home rule powers to raise revenues and/or cut expenditures, as it did in the most recent recession. While reserves may be tapped as a short-term measure in a downturn, Fitch believes the county will maintain a reserve cushion adequate for the current rating level over time.
After several years of reserve draws and pension underfunding, the county more recently has taken steps to restore budgetary balance and improve pension funding , leaving it better prepared to withstand a moderate economic downturn.
Year-end days cash on hand was narrow in fiscal 2015 at fewer than 60 days. An untapped $100 million revolving line of credit provides an alternate source of liquidity.
Additional information is available at 'www.fitchratings.com'.
In addition to the sources of information identified in Fitch's applicable criteria specified below, this action was informed by information from Lumesis and InvestorTools.
U.S. Tax-Supported Rating Criteria (pub. 18 Apr 2016)
Dodd-Frank Rating Information Disclosure Form