With budget in rearview, Cook County turns sights to borrowing plans

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Cook County, Illinois, is readying new money and refunding deals totaling about $600 million after tackling a budget gap that ballooned due to the COVID-19 pandemic.

The county is planning a general obligation current refunding for about $400 million with room in the authorizing ordinance to go up to $450 million. About $70 million of present value savings are anticipated.

“This is part of our plan to keep some capacity to make sure our long term capital plan is affordable and doesn’t present an undue burden on our operations,” said Cook County CFO Ammar Rizki.

The nation's second most populous county, with its seat in Chicago, also will sell about $210 million under its sales tax-backed credit to retire $175 million of interim capital financing from a line of credit and another $35 million of new money.

The refunding “creates room and lowers the cost of capital in the out years” to help finance needs such as building a $240 million replacement for its Provident Hospital facility and jail facility upgrades, the county's chief financial officer Ammar Rizki said in an interview last week with other members of his finance team including financial analysts Julia Khiria and Juan Ramirez.

“This is part of our plan to keep some capacity to make sure our long term capital plan is affordable and doesn’t present an undue burden on our operations,” Rizki said.

The county board signed off on the borrowing at its meeting Thursday. The finance team is talking with rating agencies and will begin marketing the deals with the goal of pricing in mid-January.

Rizki said the county could have undertaken the current refunding earlier this year but knew investors and rating agencies would have questions about how the county was faring through the pandemic and wanted to have the answers.

With the exception of one outlook change, the county’s ratings are weathering the revenue hits and while tapping some reserves they remain at healthy levels based on Government Finance Officers Association recommendations. That’s the message Rizki said the county wants to promote with investors.

“We want to differentiate ourselves” from other struggling governments and show that the county has the ability to manage the impact, Rizki said. “That is the key message we are trying to provide as our marketing plan.”

Loop Capital Markets LLC and Barclays are senior managers on the GOs. RBC Capital Markets and PNC Capital Markets are co-seniors. Columbia Capital Management LLC and Acacia Financial Group Inc. are advisors. Chapman and Cutler LLP and The Hardwick Law Firm LLC are bond counsel.

Morgan Stanley is senior manager on the sales tax deal. Piper Sandler and Siebert Williams Shank & Co. LLC are co-senior managers. PFM Financial Advisors LLC and Sycamore Advisors LLC are advising the county. Nixon Peabody LLP and Sanchez Daniels & Hoffman LLP are bond counsel.

Both deals meet the county’s goal to give at least 25% of its business to minority-owned firms and 10% to women-owned firms with the inclusion of disabled veterans firms also now a target.

The county began using a sales tax credit in 2012. Rizki had considered establishing a sales tax securitization credit like Chicago's after lawmakers approved the structure in 2017 but he does not currently see any pricing benefits in the structure.

The board of commissioners last month unanimously approved a $6.94 billion 2021 budget that filled a $400 million hole in the general and health system funds through cuts, federal funds, a draw on reserves and other measures. The deficit stemmed from both COVID-19-related wounds to tax revenue and rising structural expenses. The fiscal year began Dec. 1.

Higher than expected revenues from recreational cannabis, gambling, and online taxes also helped close the gap and the county funneled an additional $40 million to the health system and renegotiated health reimbursement rates.

“This budget builds on years of hard work, hard votes and fiscally responsible steps taken to reshape Cook County,” board President Toni Preckwinkle said after the vote.

The county pieced together a fix for the estimated $400 million shortfall in the budget year that begins Dec. 1 — $222 million in a $1.89 billion general fund and $187 million in the $3.39 billion health fund.

The general fund hole was closed through a mix of one-time and structural fixes, including curbs on spending that includes the elimination of vacant positions, revenue from a Chicago-declared tax-increment financing surplus, $50 million in available federal CARES Act funds, and $77 million from the county’s $400 million in available reserves. It does not count on future federal relief.

About half the gap is due to COVID-19 wounds and the other half from rising costs. The reserve draw will leave the county with recommended levels of cash covering at least two months of operations.

The health fund deficit will be closed through job cuts, negotiated rate increases, expected new Medicaid patient revenues, and an additional $40 million in the county’s direct tax allocation, bringing that figure to $123 million. Rising uncompensated care that includes both bad debt and charity cases has increased $136 million between 2017 and 2019 and threatens future stability.

The 2021 strains followed a $297 million general fund tax blow in the last fiscal year. Lower expenses helped offset the losses by $77 million. Overall, the county dealt with a $280 million general fund and healthcare shortfall in fiscal 2020 through job cuts, expense reductions, and emergency federal funds for eligible expenses.

The county stays on course in 2021 with supplemental pension contributions under an intergovernmental agreement with its pension funds. The county will make a $342 million supplemental payment into the system above the $200 million scheduled payment based on a statutory formula in 2021. The county has made $1.6 billion in supplemental contributions since 2016 with revenues collected from a sales tax hike.

The county makes the supplemental contributions under an intergovernmental agreement with its pension fund that was renewed at last week’s meeting. Rizki said the county might be ready to pursue state legislation making the higher contributions permanent but some governance issues with the pension fund must still be resolved and the timing also depends on the state’s legislative agenda.

The county also faces longer term healthcare system strains and uncertain prospects tied to the Affordable Care Act’s fate. The county is projecting a fiscal 2022 gap of $86.7 million including $42.1 million in the general fund and $44.6 million in the health fund.

County officials agree that while so far managing the setbacks, uncertainty abounds with the course of the pandemic, potential treatments and vaccine rollouts impacting the region’s economy. The winter spike in cases is, by itself, a red flag, Rizki said.

While the budget doesn’t rely on new federal pandemic relief, Rizki said if lawmakers approve aid the county would use the funds to “super-charge” current programs with aid directed to help businesses and residents.

Moody’s Investors Service Thursday affirmed the county’s A2 GO rating and stable outlook. Post sale, the county will have $2.7 billion in outstanding GOs.

“The A2 rating balances the county's significant exposure to economically sensitive revenues against the recent accumulation of solid general fund reserves and management's demonstrated willingness to adjust revenues and expenditures,” Moody’s said. “The rating also considers the county's above average leverage primarily from pensions and operating risk stemming from Cook County Health and Hospital System.”

Declines in reserves beyond current expectations due to ongoing revenue pressures or a weakening of pension contribution practices could drive a downgrade.

Fitch Ratings affirmed the county's A-plus rating and stable outlook Friday. S&P Global Ratings will also rate the GOs, officials said.

S&P lowered the county’s GO rating to A-plus from AA-minus in January. The outlook was revised to negative from stable on both the GO and sales tax bonds May 1.

Kroll Bond Rating Agency and S&P will rate the sales tax bonds.

The county’s roughly $400 million of sales tax bonds carry Kroll's AAA rating and stable outlook and S&P's AA-minus rating and negative outlook from S&P.

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Coronavirus Primary bond market Cook County
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