“We are very pleased to see Standard & Poor’s affirm our AA rating. Government at every level is facing economic hardship. With the fiscal pressures related to rolling back the sales tax, managing the health system, pension and retiree healthcare benefit costs, we are continuing our work to increase fiscal responsibility and make County government more effective and efficient for its residents. Their report points to Cook County’s commitment to instituting necessary financial management practices to instill long-term financial stability and accountability.”
The text of the Standard & Poor’s outlook:
Standard & Poor’s has affirmed its ‘AA’ long-term rating on , Ill.’s general obligation (GO) bonds outstanding. The outlook is stable.
The rating reflects our view of the county’s:
- Good financial management practices;
- Taxing flexibility and recent budget balancing efforts under a newly-elected administration;
- Pension that is adequately funded but may lose ground since annual contributions are consistently less than the actuarial required amount;
- Moderate debt burden; and
- Stable local economy.
In our opinion, fiscal pressures related to managing the health system, pension and retiree healthcare benefit costs, and crimped revenues brought on by the recession and by the sales tax rate rollback partly offset the above strengths.
The ‘AA’ long-term rating and Standard & Poor’s underlying rating (SPUR) on Cook County, Ill.’s GO debt outstanding have also been affirmed. The ‘A-1+’ rating on the county’s series 2002B and 2004D-2 bonds reflects liquidity facilities provided by Landesbank Hessen-Thueringen Girozentrale (guaranteed; 2002B) and The Northern Trust Co. (2004D-2). The ‘A-1′ rating on the county’s series 2002A variable-rate bonds reflects liquidity facilities provided by Bank of America. The county no longer has swaps outstanding.
Cook County’s administration, led by its newly elected Cook County Board President announced that as part of the fiscal year ended Nov. 30, 2010 audit process, an error was made in its 2009 financial statements, which overstated the general fund’s revenues and ultimately, financial position.
Officials withdrew the 2009 audit and will restate the general fund’s beginning balance in the 2010 audit. The county announced its 2009 ending general fund balance was lowered to approximately $100 million upon discovery that certain revenues were over-accrued and double-recorded. Fiscal 2009 general fund expenditures totaled $1.3 billion, which means the $100 million fund balance is roughly equivalent to 7.9% of expenditures, a level we deem is good.
Though cost cutting efforts were implemented, including staff level reductions, the 2010 budget included a $25 million use of general fund reserves to support the health fund. Officials indicate that overall, the general fund was in good shape, with spending slightly below appropriated amounts and revenues consistent with budgeted amounts, but the health fund needed a subsidy because patient fees were down and the state is behind in Medicaid and other related payments. Coupled with the 2009 restatement, the result could mean a decline in both financial position and liquidity to potentially just adequate levels. Officials tell us the 2010 audit should be available in late July 2011, after they have ascertained there are no errors that would again affect the accuracy of its stated fund balance.
The 2011 budget, adopted in February 2011, sought to close a $487 million budget gap. Officials confirm the 2011 budget was not balanced using reserves, but does include various cost-cutting measures.
Budget balancing initiatives affecting the general fund include:
- Structural changes expected to yield $195 million of savings, achieved through several actions, including 16% cuts to departments supported by the general fund, though we note some departments cut more than 16%;
- Roughly $41 million in savings by charging overhead rates to 30 special purpose funds to fully cover the cost of the employees charged to those accounts;
- $84 million in revenue initiatives, calling for more aggressive efforts in collecting late and unpaid taxes such as cigarette taxes, foreclosure fees, and fee increases, as well as making luxury boxes at sporting events subject to amusement tax;
- $136 million in savings, consisting of $60 million from restructuring debt to smooth payments and $45 million saved by financing a lump sum lawsuit settlement rather than cash funding it; and
- $32 million from strategic initiatives such, as the reassignment of responsibilities for county employees to reduce unnecessary administration.
In recent weeks, Chicago and the county announced a joint effort to reduce costs through shared services and purchasing. This is an effort that, if carried out as planned, we believe will have modest, yet positive budget implications.
Home rule status provides increased taxing and borrowing capacity, as well as a wider array of tax sources with fewer limitations compared to entities without this status. However, the county has long imposed property tax caps on itself, and its recent approach has been to lower its tax burden. The county board rolled the home rule sales tax rate back by one-half cent, effective July 1, 2010, to 1.25%. The plan is to eliminate the home rule sales tax increase entirely by 2013.
The county’s financial management practices are considered “good” under Standard & Poor’s Financial Management Assessment methodology. This indicates that practices exist in most areas although not all may be formalized or regularly monitored by governing officials.
Debt and other liabilities
Cook County independently manages a defined benefit pension for most of its employees and, similar to many other plans, experienced a market-driven drop in assets. The county is required to make pension payments for employees covered under its own single-employer, defined-benefit pension plan with a defined contribution minimum based on a statutory formula. The statutorily required amount is not equivalent to the annual required contribution. In 2009, the most recent year data is available, the county contributed 29% of the annual pension cost (which is the annual required contribution less adjustments). The unfunded actuarially accrued liability (UAAL) was $3.5 billion, which was adequately funded at 69% as of Dec. 31, 2009. By comparison, as of Dec. 31, 2007, the UAAL was $1.3 billion and 86% funded. In 2010, the county made an extra $100 million payment into the fund and had planned to include additional pension payments in the 2011 budget. Ultimately, the adopted 2011 budget included only the statutory amount. The county also offers other post-employment health care benefits (OPEB) to its retirees, which it funds on a pay-as-you-go basis. The unfunded liability is $1.7 billion as of Dec. 31, 2009 and is 0% funded.
In addition to the overall effort of managing costs in a difficult revenue climate, one of the county’s primary challenges, in our opinion, has been streamlining its health care delivery system, which although it is reported and managed as an enterprise fund, receives annual subsidies from general fund revenues. For instance in 2008, the health fund reported an operating loss of $529 million, which was partially offset by $160.3 million of sales tax revenues, $140 million of property tax revenues, and $136 million of cigarette taxes. The audited results show the net loss being narrowed to just $12.5 million on a $911 million budget. Management notes both underperforming patient revenues, delays in Medicaid receipts from the state, and the imposition of cost-containment measures as part of the challenge of managing the fund while lessening its reliance on general fund subsidies.
The county’s direct GO debt stands at roughly $3.5 billion. In our opinion, the county’s overall debt burden, including overlapping debt, is moderate at $3,517 per capita and low at 2.8% of fair market value. Excluding capital outlays, debt service carrying charges were a moderate 10.5% of total government fund expenditures in 2008. In our opinion, amortization is slow, with roughly 27% retired in 10 years and 67% in 20 years.
Located in northeastern Illinois, Cook County encompasses Chicago and more than 60 suburbs. The population is estimated at 5.4 million and has been stable. Chicago accounts for about half of the county’s population and 45% of its equalized assessed valuation (AV). In addition to Chicago’s job base, many of the county’s suburbs are also a source of economic activity and contribute to the area’s vitality. The county is experiencing an economic downturn, but we believe the county’s deep and diverse employment base should help insulate the impact of declines in any one area.
The estimated market value of the county’s tax base stood at $656.5 billion, or an extremely strong $124,212 per capita. The tax base is diversified, with the 10 leading taxpayers accounting for just 0.7% of equalized AV. The median household effective buying income of county residents was, in our opinion, good at 101% of the national level in 2009. The county’s unemployment rate was 10.8% in July 2010, which is slightly above the state’s 10.6% rate.
We anticipate that, with a new administration and perspective, management will likely exercise fiscal discipline to continue to balance its budget in the face of cost pressures in the health fund and pension and OPEB benefits, crimped revenues brought on by the recession and by the sales tax rate rollback, and self-imposed property tax caps. If the county is unable to accomplish this, and replenish reserves to higher levels, it will affect the rating.