CHICAGO - Hit with two ratings downgrades, Cook County, Ill., will enter the market as soon as tomorrow with a $507 million new-money and refunding general obligation issue that will include taxable Build America Bonds. Meanwhile, debate among the county's leaders continues over the status of a controversial 1% sales tax increase.

The transaction includes $256 million of refunding bonds for savings and $251 million of new money that is expected to be sold as BABs with a back-loaded maturity schedule. The county will apply for the federal government's 35% direct-pay interest subsidy under the BAB program.

Loop Capital Markets LLC is senior manager and Samuel R. Ramirez & Co. is co-senior manager. Co-managers are Citi, SBK Brooks Investment Corp., Siebert Brandford Shank & Co., and William Blair and Co.

Mesirow Financial Inc. will be lead financial adviser, and A.C. Advisory Inc. and Davis Financial Inc. are co-financial advisers. Chapman and Cutler LLP is bond counsel and Perkins Coie LLP is co-bond counsel.

Ahead of the sale, Fitch Ratings downgraded the credit one notch to AA-minus and assigned a stable outlook. Moody's Investors Service lowered the rating one notch to Aa3 with a stable outlook and Standard & Poor's affirmed its AA and stable outlook. The county has $3 billion of GO debt.

The county has struggled to manage growing health care and other costs as the impact of the recession on its revenues and demand for its services mount. Corrections and health care represent 75 % of county spending.

The county faces declining sales taxes and pressure to rollback the unpopular 1% sales tax increase of last year that pushed the Chicago area's sales tax to the highest in the nation at 10.25%. While efforts to repeal or rollback the tax may win political points, such action would further stress the county's ratings.

Moody's Ted Damutz attributed the downgrade to overall deterioration in the county's credit profile. "Despite the county's large and diverse economy, it's feeling the impact of the current recession with big job losses, foreclosures. It's also impacting the economically sensitive sales tax revenues that the county has become so dependent on," he said.

The increase was expected to generate an additional $400 million annually for a total of $740 million in sales tax collections, but officials have since lowered that estimate by 6.4% due to the recession. The county board voted last month to repeal the tax pushed through by County Board of Commissioners President Todd Stroger but Stroger vetoed it.

Stroger's veto has survived several override attempts, but Stroger has also proposed a one-quarter of a percent rollback. If approved, the county anticipates a loss of about $61 million in fiscal 2010 revenues although it would be more than offset by increased funds from a change in the state's distribution of hospital assessment fees and matching Medicaid funds to public hospitals.

"A further decline in the rate beyond the 1/4% would likely strain financial performance, and without commensurate revenue increases or expenditure reductions, could cause negative rating pressure," Fitch's Melanie Shaker said. "Fitch believes financial stability will depend on the county's ability to reduce spending."

Stroger's acting chief financial officer Joseph Fratto did not return calls to discuss the deal.

In a statement after the Moody's downgrade, Stroger wrote: "As an economic enterprise, we're a huge operation on the world scale, and that provides us with both challenges and a measure of protection during this tough economic period. We continue to have one of the highest ratings among large urban governments, and it's important that we continue to take steps to ensure that we've got a stable funding base for vital services and financial obligations."

Analysts have also raised some concern over the county's fiscal management.

Stroger's chief financial officer and cousin Donna Dunnings resigned late in April under pressure from Stroger amid concerns over her relationship with a fired county patronage employee that she had bailed out of jail. Fratto, Stroger's chief of staff, is serving as interim CFO. He served as county comptroller before becoming chief of staff.

Positive factors in Cook's favor include a general fund balance that at 12.8% of revenues remains sound, although diminished from past levels. The county is the second largest in the nation with 5.3 million residents and enjoys flexibility in taxing powers from its home rule status in Illinois.

While broad and diverse, the local economy is struggling with unemployment that hit 10% in April. House values have dropped an estimated at 18% and in the last year foreclosure rates reached a 20-year high. Prior to the recession, the tax base was growing at an annual 12.4% clip to $666.2 billion in 2006.

As part of Stroger's $2.9 billion 2009 budget, he had sought to borrow $740 million for capital projects to fund a one-time pension payment, and self-insurance claims. County board members rejected all but the capital borrowing, so officials will need to address the self-insurance claims and 2007 pension payment through operations.

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