Cook County, Illinois, drew a rating upgrade and an outlook boost pushing early pandemic clouds further into the background as it preps a nearly $250 million refunding.
The county will offer its general obligation refunding in two series: one for $202 million of tax-exempts and the other for $45 million of taxables on Nov. 17. Loop Capital Markets LLC is the lead manager.
The county expects about $41 million or 15.3% present value savings on the upcoming sale based on market rates as of late last week, the finance department said. New money borrowing of between $175 million and $200 million is planned for late next year under either the county’s general obligation or sales tax pledge, according to Chief Financial Officer Ammar Rizki.
The following day, the county board will cast its vote on Board President Toni Preckwinkle’s $8 billion budget, an easy sell thanks to a $1 billion cushion from the American Rescue Plan Act President Biden signed in March.
Those funds, along with the county’s navigation of the pandemic with an eye on preserving reserves and cash balances, and ongoing supplemental pension contributions that have pushed off insolvency threats, drove the two positive rating actions that reversed a negative trend.
Fitch Ratings lifted the county’s GO rating to AA-minus from A-plus and S&P Global Ratings returned the county’s outlook to stable from negative and affirmed the A-plus rating. Moody’s Investors Service affirmed its A2 rating and stable outlook.
Fitch said Thursday’s upgrade “reflects sustained improvement in its operating results, reserve position and overall resilience.” Fitch’s outlook remains stable at the higher rating.
“Since 2015, the county has shown marked improvement with a return to surplus operations, build-up in reserves and a continued commitment to supplemental pension contributions,” Fitch said. “Pensions are weakly funded, however, supplemental pension payments made since 2016 have supported notable improvement in funding levels over this period.”
“This upgrade is an encouraging indication that our efforts to create long-term fiscal strength and stability are being recognized by the rating agencies,” Preckwinkle said noting the upgrade is the first during her tenure. She plans to seek a fourth four-year term next year.
The county expects to close the books on fiscal 2021 Nov. 30 with an available fund balance equal to 38% of spending. It’s planning to raise the estimated $506 million 2022 balance to $595 million in 2026.
S&P Global Ratings lifted its outlook on $2.4 billion of GOs and $570 million of AA-minus-rated sales tax bonds.
“The outlook revision reflects our view of the county’s stabilizing revenue stream that was temporarily augmented with American Rescue Plan Act funding, and an economy that is recovering from the effects of the pandemic,” said S&P analyst Helen Samuelson.
S&P in January 2020, before the pandemic took hold, knocked the rating down a notch due to the pension system’s weight on the balance sheet despite the county’s ongoing supplemental contributions. In May 2020, S&P moved the outlook to negative from stable over the pandemic’s recessionary pressures.
“We believe the county is still exposed to a degree of budget pressure stemming from its large health care enterprise, which may be accentuated by the pandemic. However, the availability of federal stimulus funds helps to mitigate the risk at least partly in the short run,” S&P said.
Moody’s Investors Service in 2015 dropped the county to its current level over the pension burden.
Fitch cut the county two notches in 2011 and then another level to A-plus in 2014 all driven by pension woes and the threat of pension fund insolvency.
To stave off insolvency looming in 2039, the county began funneling supplemental contributions to the pension fund in 2016 fueled by a sales tax hike.
The county sent $271 million to the fund in 2016, $354 million in 2017, $353 million in 2018, $321 million in 2019, $306 million in 2020, $341 million in 2021 and will funnel $342 million in the 2022 budget. Those are on top of a roughly $200 million statutory payment in the past year that will rise to more than $400 million next year.
The unfunded liabilities totaled $6.7 billion in 2020 for a funded ratio of 64% that has risen from 55% in 2015. Between the statutory payment and the supplemental contribution the annual payment did hit an annual determined contribution in fiscal 2020, Fitch said. The county also continues to put cash into a pension reserve, $30 million this year and $20 million next year.
Incorporating the extra contributions into the funding scheme puts the county on a full funding path by 2046. Without the future supplemental contributions the fund is projected to exhaust assets in 2047. That’s because the county can’t count future supplemental contributions as an actuarial factor in calculating future health because they are made under an intergovernmental agreement with the fund and subject to annual appropriation and could still face a legal challenge.
The county needs to codify a funding overhaul in state law.
“We continue to work with the pension fund, our labor partners and the state legislature on legislation that incorporates actuarially based contributions going forward. Assuming the county can secure a mutually acceptable approach with all its stakeholders, we would expect to introduce legislation in next year’s legislative session,” Finance Department spokesman Edward Nelson said in an email.
Despite the lack of state legislative action, Fitch said it expects the county to continue its commitment to planned supplemental pension contributions, which should improve the health of the pension system over time.
Moody’s said its stable outlook reflects solid reserves that help offset the limited financial position of the county’s health enterprise system due to the combination of federal aid, accumulated reserves heading into the pandemic and expenditure reductions.
Preckwinkle unveiled last month the $8 billion 2022 budget package that forgoes new or higher taxes and fees and begins to spend down the county’s $1 billion of ARPA aid.
Stronger than expected tax growth — especially from the online sales tax that took effect in January and cannabis taxes — along with federal relief, and holding expenses in check plugged a $121 million hole projected in preliminary budget estimates last June.
The fiscal landscape marks a sharp turnaround from last year when the county struggled with a $410 million gap and uncertainty over the course of the pandemic and how it might impact the performance of tourism and other economically taxes.
The package includes a $2 billion general fund. The overall package spends $4 billion on the county’s healthcare system and includes a $667 million capital plan. The county’s finance team laid out a longer-term fiscal view that shows structural clouds have lifted with revenues now expected to mostly keep pace with expected expense growth with online sales tax growth a key driver of that stability. Without the online sales tax now on the books the county would have faced a $261 million structural hole in 2026.
The finance team acknowledges that uncertainty remains given the summer’s uptick in COVID-19 cases due to the Delta variant that has already put in a dent in the return of some tourism traffic and trade and convention business. The county will spend its $1 billion of ARPA relief over three years in equal installments.
Morgan Stanley and RBC Capital Markets are co-senior managers with four other firms serving as co-managers. Acacia Financial Group and Columbia Capital Management are advising the county. Foley & Lardner LLP and Hardwick Law firm are bond counsel.
Cook is home to Chicago and the second-largest county in the nation with 5.3 million residents with a slight increase seen in the 2020 census. It accounts for 40% of Illinois’ population.