CHICAGO – Cook County, Illinois heads into the market next week with positive news from two rating agencies and a downgrade from another.
Moody's Investors Service and Fitch Ratings both revised the county's outlook to stable from negative ahead of the sale, while S&P Global Ratings hit the county with a one-notch downgrade.
S&P still rates Cook County higher, at AA-minus, while Moody's affirmed its A2 rating and Fitch affirmed its A-plus.
The county plans to price a $300 million general obligation refunding issue June 14.
Moody's said county's progress in dealing with its pension and healthcare funding strains prompted the improved outlook.
"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," Fitch said.
S&P also acknowledges those strides as stabilizing factors but said the downgrade of the nation's second most-populous county is warranted because of concerns over the county's ability to rebuild stronger reserve balances as its grapples with the same pension funding challenges that have dragged down the ratings of the county seat of Chicago and its sister agencies.
"We believe that the pension funding challenges of the overlapping governmental entities and the actions taken by those entities to address them could impose practical limitations to the county's revenue and expenditure flexibility, given their shared tax base," said S&P analyst Helen Samuelson.
S&P's AA-minus rating reflects the county's broad and diverse economic base that benefits from both Chicago and neighboring suburbs with a population of 5.3 million.
Barclays and Loop Capital Markets are lead managers with A.C. Advisory Inc. and Columbia Capital Management LLC advising the county. Chapman and Cutler LLP and Burke, Burns & Pinelli Ltd. are bond counsel. In additional to an optional par call, there's also a make whole call feature at 102% of the amortized value prior to the call date.
County board president Toni Preckwinkle's finance team projected about $27 million in savings on the refunding when it was approved by the county board. The borrowing marks the county's first GO sale since early 2014, after which the administration escalated efforts to tackle the problems of a pension system on course to exhaust assets in 2039 without action.
Preckwinkle last year modified a funding proposal aimed at stabilizing its system saddled with a $5.9 unfunded tab for a funded ratio of 60.2%. The revised plan dropped benefit cuts after court rulings made clear direct cuts violated the state constitution, but kept the shift to an actuarially required contribution, or ARC.
Current funding rules set at a percentage of employee contributions under state statute fall short of an ARC. "This funding structure is untenable," county chief financial officer Ivan Samstein told investors in a presentation that lays out the county's actions to preserve the "solvency of the retirement fund."
The county plans to make supplemental payments into the system, including $270 million this year and $350 million next year, on top of its regular roughly $195 million payment. It will then increase supplemental contributions by 2% annually to reach a 90% funded ratio in 2046.
The county has raised its share of the local sales by 1% to pay for the pension contributions and infrastructure. The supplemental payments could face a challenge due to existing statutes that limit pension contributions to the statutory formula and to property taxes.
State lawmakers gave final approval on May 26 to SB2819 which grants the authority Cook County needed to make the payments.
If signed by Gov. Bruce Rauner, the "likelihood of legal challenges to the county's ability to make additional contributions to the retirement fund would be reduced or eliminated," the offering statement says.
The Rauner administration said Monday that the legislation "is under review."
The county has some impact from the state's liquidity and budget crisis, but it's limited to late payments and the lack of funding for $18.6 million child support enforcement program. Motor fuel payments have come in for the current year under a special appropriation but there's no such appropriation for the state's fiscal 2017 year.
The county has seen a sharp decline in tax supported funding for its healthcare system primarily due to federal healthcare reform which has increased the number of Medicaid and insured patients at county facilities.
The county added $37 million to its balance at the close of fiscal 2015, bringing it up to $99 million, or 7% of revenues, after three consecutive years of declines. A debt service fund balance declined to $96 million in fiscal 2015 from $226 million in fiscal 2013 and will fall by another $32 million over the next two years.
Cash and investments totaled $739 million, or 19% of annual revenue, in 2015. The county, which operates on a $4 billion budget, has a $125 million GO revolving line with PNC Bank with $6.5 million outstanding and a $100 million line for liquidity with BMO Harris Bank and no balance outstanding.
The county has $3.5 billion of mostly GO outstanding debt with about 13.7% in a floating rate. Events of default on credit support would be triggered at the lowest investment grade level of Baa3/BBB-minus.
The retirement fund recorded a negative .1 rate of return in 2015, according to the 2015 results. The unfunded liabilities of the county's pension fund deteriorated to $5.9 billion in 2015 from $5.3 billion in 2014, with the funded ratio declining to 60.2% from 62.3%. The total net pension liability as reported under new accounting standards rose to $15.3 billion from $12.9 billion.
"Our work is far from done, but we appreciate that the rating agencies have recognized the progress we have made to date," Preckwinkle said in a statement on the positive rating actions.
