CHICAGO — After years of perceived mismanagement and allegations of corruption, a new administration has taken over the helm of Cook County, Ill. with fiscal responsibility as its mantra.
The administration, led by President Toni Preckwinkle, is expected to soon propose a $3 billion fiscal 2011 budget that addresses a record $487 million deficit. The nation’s second largest county will hire a new chief financial officer and a new deputy CFO. The new team expects to meet with rating agencies.
Administration officials also said they will issue a request for proposals to establish new pools of underwriters, financial advisers, and bond counsel to assemble a finance team that will help the county refinance a large chunk of its $3.8 billion debt portfolio.
Fiscal watchdog groups like the Civic Federation of Chicago say a new administration presents a rare chance to overhaul some of the county’s questionable fiscal policies and a government structure that led to charges of nepotism, wasteful spending, and political infighting that often choked the political process.
Credit analysts say they are eager to meet with the new administration to hear how fiscal 2010 ended and receive an update for 2011.
Preckwinkle, a longtime Democratic Chicago alderman, is taking over Cook’s reins after nearly 16 years of rule by the Stroger family, most recently Todd Stroger and before that, his late father, John.
To help her tackle Cook’s short-term and long-term problems, Preckwinkle assembled a transition team made up of dozens of high-profile Chicago-area financial and political professionals. Public finance experts on the team include Carole Brown of Siebert Bradford Shank & Co., Adela Cepeda of AC Advisory, and Jim Reynolds of Loop Capital Markets LLC.
The county expects to hire a new CFO and fill the vacant position of deputy CFO within the next week or two, said Kurt Summers, Preckwinkle’s chief of staff.
Former CFO Jaye Morgan Williams left office after Preckwinkle was sworn in on Dec. 6. The new administration also recently created a new position, director of fiscal initiatives, and hired a long-time union finance professional, Robert Ginsberg, to fill the position.
“This is not a typical administration, and professionals that make up our senior staff have a stronger grasp on fiscal matters and capital markets issues,” said Summers, a former Goldman, Sachs & Co. investment banker. “That is going to bode very well for investors.”
Summers recently acted as chief of staff for Chicago’s failed bid for the 2016 Olympics.
Anchored by Chicago, the double-A rated Cook County is considered a strong credit and an economic engine for the Midwest.
Like most governments, it has suffered from falling revenue since 2008. Its general obligation debt portfolio totals $3.8 billion and has a relatively slow amortization rate, with only 10% maturing within the next 10 years. Debt-service payments will spike $100 million in fiscal 2011, according to Summers.
At least two of Preckwinkle’ fiscal proposals — repealing a deeply unpopular sales-tax increase and restructuring the county’s debt to reduce annual debt-service payments — could prompt frowns from rating agencies.
The 1% tax hike increased the county’s sales tax to 1.75% from 0.75%, pushing Chicago’s total sales-tax rate up among the nation’s highest. The hike sparked major opposition — many say it was the reason Stroger lost the Democratic primary — and last year the board repealed half of the one percentage point.
Preckwinkle said she plans to repeal 0.25% in 2012 and the final 0.25% in 2013. The move would reduce Chicago’s overall rate to 9.25% from 9.75%.
The tax increase was originally projected to bring in $400 million in new money annually. It ended up generating less than that — around $190 million last year. Credit analysts warn that loss of revenue during a weak economy will pressure the county’s finances.
To help offset the revenue loss, Preckwinkle plans to restructure Cook’s debt to push out maturities and lower annual debt-service payments. The move will help the government close its budget gap and absorb revenue losses from the sales tax repeal, Preckwinkle has said.
A 27-page transition report outlining Preckwinkle’s financial goals said the restructuring would help close the budget gap.
“Deferring principal payments will reduce immediate debt-service payments by tens of millions of dollars, thus allowing the county time to absorb the impact of cutting the sales tax before paying down its debt obligations,” the report said.
Pushing off principal payments can be seen as a credit weakness, said Ted Damutz, an analyst with Moody’s Investors Service who covers the county. “We’re seeing that with more frequency in the current environment, but it’s just an immediate pressure release which is still going to catch up with them later.”
Repealing the sales tax hike will also challenge the bottom line, Damutz added.
“They are already in a pressured environment, and lowering your revenue stream is going to just keep that pressure on,” he said. “They’re discussing some serious disciplined cuts that will seemingly improve credit quality, but at the same time reducing revenues is going to be an issue.”
The county plans to meet with rating agencies after Feb. 1, when Preckwinkle releases her proposed spending plan. The county’s fiscal year begins Dec. 1. A final budget is not required to be in place until Feb. 28.
“We know there will be concern around the sales tax decrease, and we will talk about how we are shoring up revenue and what sources of revenue we are solidifying and our more efficient capital structure,” Summers said. “Our focus will be how we want to be more fiscally responsible.”
The administration has also frozen capital spending and plans to consider other ways to finance projects — such as public-private partnerships — rather than traditional GO borrowings, officials said.
“We’ve got more than $700 million in the current pipeline of capital projects, and almost all rely on traditional debt financing,” Summers said. “We need to look at new ways to structure these programs.”
For example, the county will consider partnering with other public or quasi-public groups, such as the Illinois Medical District Commission or the Chicago Public Buildings Commission, on high-profile projects.
They include the planned $108 million rehab of a massive and now-vacant former county hospital building that is considered a historic landmark.
“There are lots of opportunities for projects that size,” Summers said. “If there are public transfers available, that’s one way to do it.”
The transition report notes that fiscal 2011 revenues total $3.31 billion and expenses total $3.8 billion, leaving a structural gap of nearly $500 million. Some of that money — about $200 million — is considered one-time expenses, Summers said. More than 80% of the county’s finances are personnel costs.
Fitch Ratings and Standard & Poor’s rate the county AA with a stable outlook. Moody’s rates it Aa2, also with a stable outlook.