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Rating Action:

Moody's downgrades Cook County, IL to A1; outlook remains negative

Global Credit Research - 16 Aug 2013

$3.7 B of GO debt affected

New York, August 16, 2013 -- Moody's Investors Service has downgraded the rating on Cook County's (IL) general obligation (GO) debt to A1 from Aa3, affecting $3.7 billion of general obligation debt. The outlook remains negative.

SUMMARY RATING RATIONALE

The downgrade of the GO rating reflects Cook County's growing pension liabilities due to, in part, a statutory funding requirement that is not tied to the health of the County Employees' and Officers' Annuity and Benefit Fund of Cook County (the Fund), resulting in a growing disparity between the fund's actuarially required contribution (ARC) and its actual employee and employer contributions. Additionally, approximately 50% of the county's tax base includes the city of Chicago (GO rated A3/negative outlook), resulting in a significant overlapping long-term liability burden. These considerations are balanced by the county's key credit strengths, including a large tax base that comprises the second most populous county in the nation, inclusive of numerous communities with strong demographic profiles; broad revenue raising flexibility inherent in the county's home rule status; recent stabilization of financial operations across multiple funds; and a strong management team that continues to implement best practices across all lines of county business. Additionally, the A1 rating reflects the county's demonstrated willingness to pursue pension reform.

The negative outlook reflects the formidable hurdles facing the county in its quest to pursue meaningful pension reform. Changes to the Fund, including employer contributions and benefits received by plan participants, must be enacted at the State of Illinois (GO rated A3/negative outlook) level. The General Assembly's legislative paralysis to date with respect to enacting its own pension reforms may further delay the county's attempt to present a reform package, despite having a significantly developed plan. Further, strong constitutional protections for pension benefits may result in a legal challenge that could further delay the implementation of reforms.

STRENGTHS

-- One of the largest counties and most diverse economies in the US that includes the city of Chicago and 128 suburban municipalities

-- Home Rule status allowing broad financial flexibility to increase fees and special taxes

-- Ongoing reduction of structural operating deficit, with a focus to right sizing expenditures to revenues while reducing the politically unpopular one percentage point increase to the county's home rule sales tax rate

-- Carefully managed use of variable rate debt; ongoing revisions to debt portfolio mitigates concentration among liquidity providers and staggers expiration dates

--Political willingness to enact significant changes to the county's single employer pension plan

CHALLENGES

-- Underfunded single employer pension plan that reported an unfunded actuarial accrued liability (UAAL) of $5.6 billion as of December 31, 2012; using more conservative assumptions, Moody's calculates an adjusted net pension liability (ANPL) of $12.7 billion for fiscal 2012

-- The county's employer contribution, which is tied to a statutory multiplier that the county cannot exceed, has consistently been below the ARC; in 2012, the county underfunded its ARC by more than $387million

-- While conversations continue between the county and unionized employees with respect to pension reform, the Illinois Constitution's explicit protection of pension benefits may result in a legal challenge following an attempt to amend the benefits of existing members

-- Enterprise risks associated with the county's Cook County Health and Hospital System

-- Despite management's continued efforts to balance operations, projected budget gaps will likely require additional expenditure reductions and/or revenue enhancements

OUTLOOK

The negative outlook reflects the formidable hurdles facing the county in its quest to pursue meaningful pension reform. Changes to the County Employees' and Officers' Annuity and Benefit Fund of Cook County, including employer contributions and benefits received by plan participants, must be enacted at the State of Illinois (GO rated A3/negative outlook) level. The General Assembly's legislative paralysis to date with respect to enacting its own pension reforms may further delay the county's attempt to present a reform package, despite having a significantly developed plan. Further, strong constitutional protections for pension benefits may result in a legal challenge that could further delay the implementation of reforms.

What could change the rating -- UP (or removal of the negative outlook)

-Improved financial health of county employee pension plan, either through increased contributions or reduced pension costs that would withstand possible legal challenges

-Significant and sustained improvement in county's financial operations and reserves, reflecting the right sizing of expenditures to available revenues

-Continued evidence of disciplined management structure and oversight

What could change the rating - DOWN

- Continued growth in unfunded pension liabilities

- Inability to mitigate enterprise risk associated with the Health System

- Revenue losses and/or rising expenditures resulting in future General Fund operating deficits

PRINCIPAL METHODOLOGY USED

The principal methodology used in this rating was General Obligation Bonds Issued by US Local Governments published in April 2013. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Genevieve Nolan
Asst Vice President - Analyst
Public Finance Group
Moody's Investors Service, Inc.
100 N Riverside Plaza
Suite 2220
Chicago, IL 60606
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Rachel Cortez
Vice President - Senior Analyst
Public Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's downgrades Cook County, IL to A1; outlook remains negative
No Related Data.

 

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