Cook County Bond Refunding Creates Millions in Long-Term Savings
Considerable investor interest credited to fiscal responsibility and strong management
Cook County Board President Toni Preckwinkle announced that a bond refinancing priced this week will garner $56.6 million in reduced interest cost savings over the next 15 years when measured in today’s dollars.
The refinancing generated intense interest from more than 50 institutional investors across the country following recent positive news from the three major bond rating agencies that highlighted the County’s strong management and willingness to confront its fiscal challenges
All three major ratings agencies -- Moody's, Fitch, and Standard and Poor's -- upgraded the County's bond rating outlook to stable last week, recognizing County efforts to create financial stability and confront its legacy liabilities. The agencies recognized the County's efforts to confront the growing burden related to its unfunded pension liabilities as a stabilizing credit factor.
The bond market’s view of the County’s General Obligation credit spread – the interest cost above the tax exempt benchmark interest cost for a AAA bond -- peaked shortly after the Supreme Court invalidated SB 1 and the associated state pension reforms that affected the market’s view of all bond issuers in the Illinois. At that time, trading activity indicated a full 2% higher interest rate for County bonds versus AAA tax exempt bonds in June of 2015.
However with this week’s sale, the market cut the County’s credit spread in half from its peak a year ago. This change generated $23.5 million of the $56.6 million in reduced interest costs from the refinancing, specifically attributed to credit improvements driven by Cook County’s one percent sales tax increase and the determination of President Preckwinkle and supportive commissioners to begin addressing the unfunded liabilities associated with the Pension Fund.
The remaining savings were generated by market timing as the County priced its offering during a week when the 10-year tax exempt municipal benchmark hit the second lowest value on record. Ironically, the only week when interest rates were lower was in late 2012, the last time the County sold a sizeable bond offering.
"We received a great deal of interest from investors due to our willingness to face our challenges and stabilize our long-term financial position," Preckwinkle said. "The bond market is recognizing our significant efforts to responsibly confront the Pension Fund’s unfunded liabilities."
The refinanced bonds were subject to an average interest cost of 4.83%. Following the transaction, the new bonds will have a blended cost of 3.16%. This is expected to provide reduced interest cost savings of approximately $56.6 million in measured in today’s dollars (on a “net present value” basis) which the County will deploy to future years to manage its budget responsibly not just today, but in the years to come.
"Refinancing these bonds was a fiscally prudent measure that will provide important savings to Cook County,” Preckwinkle added. “Through our efforts to promote fiscal responsibility and the resulting interest from the bond market, we were able to save millions on interest costs and better manage our legacy debt. We will continue looking for financially responsible opportunities to reduce costs to taxpayers and encourage long-term stability."