Persistent pension pressures trigger a negative outlook on Cook County

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CHICAGO – Persistent pension pressures prompted S&P Global Ratings to shift its outlook on Cook County, Illinois’ general obligation rating to negative from stable ahead of its plans to refund $100 million next week.

The rating remains AA-minus.

"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.

Loop Capital Markets is the bookrunning senior manager on the deal that will refund 2006 GO paper. Columbia Capital Municipal Advisors and Phoenix Capital Partners are advising the county. Chapman and Cutler LLP and Reyes Kurson Ltd. are bond counsel.

The offering includes a refunding which defers principal and front-loads savings in the near years at the expense of outer years, Fitch Ratings said of the transaction.
Fitch on Monday affirmed its A-plus rating and stable outlook. Moody’s Investors Service affirmed its A2 rating and stable outlook last week.

The bond structure reflects the ongoing implementation of a debt management plan launched in 2016 that limits the rise in debt service cost to no more than 2% including new money issuance.

“The expected savings of $2.5 million from the strategic restructuring will allow the county to continue to implement that debt structure and keep the rise below the 2% target in the coming years,” said Ted Nelson, spokesman for the county’s chief financial officer, Ammar Rizki.

The county’s $5.2 billion fiscal 2018 budget was pressured by the board’s repeal in October of a sweetened beverage tax. County board president Toni Preckwinkle and commissioners agreed to spending cuts to offset the loss of $200 million in revenue.

"The county's efforts to establish a balanced budget after the sweetened beverage tax repeal, in our opinion, demonstrate a dedication to maintaining fiscal balance, which we view as a key factor supporting the rating given the pension burden," Schroeer said in the S&P report. The county's strong economy and reserve levels also support the rating.

The county, which covers Chicago and its neighboring suburbs and is the second most populous county in the nation, has about $3 billion of GO debt and $269 million of sales tax debt.

“While we support S&P’s, Fitch’s and Moody’s affirming our rating we are disappointed with S&P’s change of outlook,” Nelson said. “The county will continue to aggressively confront our challenges while working to responsibly ensure long-term financial stability.”

Challenges on Cook County's horizon include federal efforts to repeal the Affordable Care Act which has helped reduce the county’s subsidies to its public healthcare system, Fitch said.

A cut in supplemental pension payments could also strain the rating, Fitch said. The county made supplemental contributions of $270.5 million in fiscal 2016 and $353.8 in fiscal 2017 above its statutorily set levels.

Another supplemental contribution of $353.4 million is planned for fiscal 2018, which should bring total payments to about 80% of the actuarially determined contribution level. 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.

The county had $7.238 billion of unfunded liabilities, including retiree pension healthcare obligations, for a funded ratio of 56.7% in 2016, compared to $7.241 billion and a funded ratio of 55.4% in 2015. Applying newer accounting rules and using a lower discount rate, the county’s net pension liabilities totaled $14.124 billion in 2016.

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Primary bond market Ratings Cook County Illinois