CHICAGO - Fitch Ratings dropped the Cook County, Ill. general obligation rating one notch to A-plus Friday citing the strain of its severely underfunded pension system.
Fitch warned of the potential for further credit deterioration by leaving a negative outlook on the credit.
The drop follows the state General Assembly's failure to pass a pension reform package proposed by county board President Toni Preckwinkle this spring.
"The downgrade reflects the challenges that the county faces as it attempts to shore up its severely underfunded pension plan," Fitch wrote.
"Meaningful improvement would require action by the state legislature, which is not expected to be back in session until the fall at the earliest, and possibly not until January 2015," analysts added. "Inability to implement an affordable plan to shore up long-term pension funding would likely lead to a downgrade."
The county's unfunded liabilities totaled $5.3 billion at the end of 2013 for a funded ratio of 61.5%, up from a ratio of 58.5% in 2012 using a 7.5% investment return ratio. When Fitch applies a more conservative 7% return rate, the funded level drops to 58.3%.
The county's contributions are capped by state statute, like Chicago and other local governments, and its actual contributions have fallen short of the actuarial required contribution for at least the last seven years. The county's fiscal 2013 statutory payment allocated to pensions was $156 million, or 26% of the actuarial ARC of $595 million. The portion allocated to other post employment benefits in fiscal 2013 was $42.2 million, adding to the pension fund's struggles.
Preckwinkle lobbied hard for the pension reform, saying it was necessary to shore up Cook's two troubled pension funds and stave off another downgrade from ratings agencies, which she said could come as early as this summer.
Preckwinkle's proposal would have raised the county's contribution by $147 million a year starting in 2016 and raised employee contributions starting next year. It would have retained a compounding cost-of-living increase, which reportedly sparked opposition from some Republican representatives.
She said the reform would bring the funds to full solvency after 30 years. The legislation would have increased employees' contributions by 2 percentage points starting in 2015. It would have prohibited the county fund from future funding of other post-employee benefits, which would be funded with the separate county contribution to the health fund.
The reform would have reduced annual cost-of-living increases for current workers and frozen all COLAs for current retirees for one year in 2016, but would have kept the compounded structure of the payment. The bill would have raised the retirement age for most county employees by five years.
Fitch did say that it believes the Illinois Supreme Court's recent decision that applies state constitutional protections of pension benefits to retiree healthcare benefits will not impact the county's prospects for pension and OPEB reform. "The section of the Illinois statute governing the county's benefit structure explicitly states that retiree health care benefits shall not be construed to be protected under the pension protection clause," Fitch wrote.
The credit also faces increasing strains from the operations of its health system with losses only partially offset by general government subsidies.
"While Fitch believes the system is poised for near-term fiscal improvement, longer-term concerns remain regarding the potential need for higher levels of county general fund support," analysts wrote.
The county is the second largest in the nation with 5.2 million residents. Chicago accounts for 50% of the county's total assessed valuation and population. New money GO borrowing is not anticipated before next year.
Moody's Investors Service rates Cook County A1 and Standard & Poor's rates it AA. Moody's also maintains a negative outlook on the county, chiefly due to underfunded pension obligations.
