CHICAGO – Cook County, Illinois, plans a $175 million new money offering of its top-rated sales tax-backed paper later this summer.
The county, home of Chicago and its neighboring suburbs, will use proceeds to pay off about $125 million currently outstanding in a revolving line of credit. The other $50 million will finance upcoming projects.
“We fill that up and then refund it and that allows us to borrow short-term debt at a low rate” during construction, the county Chief Financial Officer Ammar Rizki said of the credit line use.
The borrowing authorization introduced to the county board at its Wednesday meeting names Loop Capital Markets LLC as senior manager and Barclays Capital and PNC Capital Markets LLC as co-senior managers. Another three firms serve as co-managers.
PFM Financial Advisors LLC and Acacia Financial Group Inc. are advisors on the deal, bond counsel is Ice Miller LLP and co-bond counsel is Pugh, Jones & Johnson PC. Another four law firms serve in roles including disclosure counsel and underwriters’ counsel.
S&P Global Ratings affirmed the county’s AAA sales tax rating and stable outlook last year ahead of a $165 million issue that primarily refunded 2014 general obligation bonds. About $45 million went to help finance a new health system building.
“The county's pledge of home rule sales tax revenues on the bonds greatly limits the possibility of negative sovereign intervention in the payment of the debt or in the operations of the county,” S&P said at the time. “Cook County has considerable financial flexibility, as demonstrated by its home rule status, strong general fund balance as a percentage of expenditures, and very strong liquidity.”
The report last year said the county had no plans at that time for additional issuance.
The credit benefits from a strong, historical additional bonds test that requires 2.5 times coverage of debt service remain in place for any new borrowing. The county last year had $262 million of debt secured by sales tax revenues while fiscal 2016 collections totaled $643.8 million providing 18.3 times coverage.
The county's home rule taxing powers provide it with the flexibility to adjust its sales tax rate. It was raised to 1.75% from 0.75% in 2016 as the county sought to stabilize its weak pension funding ratios through supplemental payments.
The AAA sales tax rating is higher than S&P's AA-minus rating of Cook County's general obligation debt, with its pension burden a primary driver of the rating agency’s decision earlier this year to shift the outlook on Cook's GOs to negative from stable.
"The negative outlook reflects our view that despite the strides the county has made to improve the funding of its pension liabilities, including passing a sales tax to support payments above the state's statutory requirement, the pressures the low pension funding levels put on the county's operations could negatively affect the rating," said analyst Lisa Schroeer.
Supplemental payments are on schedule. “Despite fiscal 2018 being an extremely difficult revenue year, the county is on track to make the full” supplemental payment, board President Toni Preckwinkle said during a luncheon address at The Bond Buyer’s Midwest Municipal Market Conference.
Preckwinkle’s reference to the county’s difficulties this year stems from the county board’s repeal late last year of a sweetened beverage tax against Preckwinkle’s wishes, which forced leaders to cut $200 million in costs. County officials are still working to close an $82 million gap ahead of releasing a fiscal 2019 budget in the fall.
The county made supplemental pension contributions of $270.5 million in fiscal 2016, $353.8 million in fiscal 2017, and is slated for $353.4 million more this year, which should bring total payments to about 80% of the actuarially determined contribution level. Regular payments are based on a statutory level tied to payroll and it falls short of actuarial levels.
Future supplemental payments are not reflected in the pension system’s reporting because the county still needs state legislative approval to codify the new funding scheme into law. It’s not clear yet whether the county will again pursue a change in the law during the fall veto session or wait for the next session early in 2019.
Gov. Bruce Rauner has been critical of higher taxes to fund pensions without reforms and the county could find a more friendly ally if the Democratic candidate J.B. Pritzker wins the November election. The county’s net pension liabilities totaled $14.124 billion in 2016.
Preckwinkle noted other county debt management measures during her tenure that include the elimination of borrowing to fund settlements and beginning in 2016 capping debt cost increases to 2% annually. The county front-loaded the savings and deferred principal in a refunding earlier this year to achieve that goal but the final maturity was not pushed out.
The county must close an $82 million gap in its next roughly $5 billion for the next fiscal year that begins Dec. 1. “We expect to pursue structural solutions” so as to maintain reserves, Preckwinkle said. New or higher taxes are not currently on the table.
Fitch Ratings Thursday affirmed its A-plus issuer default rating for Cook County and the same A-plus rating for $3.5 billion of unlimited tax GOs. The outlook is stable. Moody’s Investors Service rates the GO A2 with a stable outlook.
The new Fitch contained a warning that “a reduction in the county's commitment toward actuarial funding of pension liabilities would create negative rating pressure.” The 2018 supplemental payments brings the annual contribution to about 80% of an actuarially determined level and the projected 2019 payment would move that level up to 90%, Fitch said.