CHICAGO – Cook County, Ill. hits the market Thursday with $165 million of its high-grade sales tax-backed paper.
Traders said they will be watching to see where spread penalties land, given the recent range of mixed news for the county. The deal stands to benefit from the recent passage of a state budget and a top rating, but the county has faced negative headlines over its controversial sweetened beverage tax which the county stresses is not linked to pledged sales taxes.
A portion of the bonds will refund will general obligation bonds from a 2014 issue and raise new money for construction equipment and county facilities.
Citi is the senior manager. PFM and Acacia Financial Group are advising the county. Foley & Lardner LLP and Chico & Nunes PC are co-bond counsel.
Ahead of the sale, S&P Global Ratings affirmed the bonds’ AAA rating.
The bonds are backed by a pledge of the county’s 1.75% sales tax. The county receives the collected sales tax revenue through a monthly distribution from the state. “The transfer has not been delayed … by the state’s budget impasse,” county finance chief Ammar Rizki said in an investor presentation.
The nation’s second most populous county, like all other local governments that receive sales tax distributions from Illinois, is facing a 2% loss in revenues under the state budget package adopted last month due to a new 2% administrative fee.
The sales tax was originally levied in 1992 at a rate of 0.75%. Board president Toni Preckwinkle won approval to raise the levy to 1.75% effective Jan. 1, 2016 to generate new revenue “to start addressing the pension fund liabilities,” Rizki said.
Under an agreement with the pension fund, the county made a $270 million supplemental payment beyond its statutory contribution and will make a $354 million supplemental payment this year.
The tax hike pushed the local sales tax levy -- when all levels of government are included -- to one of the highest in the nation.
No other rating agencies besides S&P were asked for ratings. "Among other factors, the rating reflects our view of the county's deep and diverse economic base, broad-based pledged revenue, and its use of sales tax revenues to fund general fund operations," wrote S&P analyst John Kenward.
County officials in the investor presentation stressed that the sweetened beverage is a separate collection from the sales tax. The new levy has run into strong opposition and hit snags in its implementation.
The tax’s July 1 start day was delayed due to a temporary restraining order the beverage industry won in a lawsuit it filed in Cook County Circuit Court over disparities on what beverages are to be taxed. The suit was later dismissed and the tax took effect on Aug. 2. The lawsuit has been refiled in the same court.
The Illinois Department of Human Services has relayed federal warnings that $87 million in federal food stamp funds are at risk because the tax violates federal law. The county exempts purchases by families that receive subsidies but some retailers are allowed to charge the tax and then issue refunds. The county is attempting to resolve the issue.
This week a group of Republican lawmakers filed legislation seeking to repeal the tax but the legislature’s Democratic majority is unlikely to bring the bill up for a vote.
A repeal of the tax would leave the county with a $200 million hole to fill in fiscal 2018. The county turned to the tax as a means to both raise revenue and reduce consumption of drinks that some healthy eating advocates warn may lead to health problems. It covers carbonated soft drinks, fruit beverages that are not 100% fruit juice, sports drinks, and energy drinks.
The county is finalizing a budget for fiscal 2018 which begins Dec. 1. It currently operates on a $4.4 billion budget and is grappling with $98 million of red ink. The county faces a potential longer term strain from Republican efforts to dismantle the Affordable Care Act.
The county will follow up the sales tax sale with a general obligation refunding of up to $105 million in September. The county's GOs are rated A2 by Moody's Investors Service and A-plus by Fitch Ratings.
On Wednesday, Preckwinkle announced her pick of Rizki to take over as chief financial officer pending board approval. “Ammar Rizki is supremely qualified and is an exceptional candidate for Cook County Chief Financial Officer,” Preckwinkle said. “Ammar has a thorough understanding of Cook County’s finances and will guide our continued efforts to ensure long-term financial stability.”
Rizki had been serving as acting CFO since June when Ivan Samstein left to manage the University of Chicago’s finances. Rizki, who said he was “honored” to be tapped for the position, had served as deputy CFO since August 2013.
The county announced Thursday that it had resolved the federal concerns over the tax's collection by providing additional guidance to retailers. "Today, we will send a letter to the Illinois Department of Human Services alerting the state of this timely resolution with the federal government. The requested corrective action has been implemented and will ensure ongoing access of SNAP benefits for eligible Illinois households," said county spokesman Frank Shuftan.