Fitch Rates Cook County, IL ULTGOs 'AA-'; Outlook Negative

Fitch Ratings has assigned an 'AA-' rating to the following Cook County, Illinois (the county) bonds:

--approximately $130.0 million general obligation refunding bonds, series 2014A.

Fitch has also affirmed the 'AA-' rating on approximately $3.7 billion of county unlimited tax general obligation (ULTGO) bonds.

The Rating Outlook is Negative.

SECURITY

The ULTGO bonds carry the county's full faith and credit and ad valorem tax pledge, without limitation as to rate or amount.

KEY RATING DRIVERS

REGIONAL ECONOMIC HUB: Cook County is the economic and cultural hub for the Midwest region.

NOTABLE LONG-TERM OBLIGATIONS: The overall debt burden is moderate; however, unfunded pension liabilities are concerning, and the statutory framework of annual funding remains significantly lower than actuarial funding requirements.

CHALLENGING FINANCIAL PROSPECTS: Multi-year forecasts show improvement with a diminishing structural imbalance for the next several fiscal years, following essentially breakeven operations in fiscal 2012. However, full funding of the actuarial required pension contribution would have produced weaker results in all years.

HEALTH SYSTEM PRESSURES: The county's health system has been a growing source of budgetary stress, with losses only partially offset by general government subsidies. While Fitch believes the system is poised for near-term fiscal improvement, longer-term concerns remain regarding the potential need for county general fund support.

RATING SENSITIVITIES

MOUNTING PENSION/OPEB PRESSURE: Fitch believes the county is making significant progress towards meaningful pension reform. Management's inability to implement an affordable plan in the near term to shore up long-term pension funding would likely lead to a downgrade.

STRUCTURAL IMBALANCE: The rating will be downgraded if management fails to achieve structural financial equilibrium, adequate funding of long-term liabilities, and preservation of fund balance levels that are satisfactory for the current rating level.

PENSION AND HEALTH CARE IMPROVEMENT: The rating could stabilize at 'AA-' if:

--The county implements a pension solution that allows for adequate funding of retirement liabilities without undue stress on operations; and

--The health system makes an orderly transition to the new federal health care funding structure in a manner that clearly reduces risk to the county from health care system operating deficits.

CREDIT PROFILE

Cook County, the second largest county in the nation, with 5.2 million residents, serves as the economic and cultural center for the Chicago metropolitan region. The city of Chicago, which is located within the county, accounts for roughly 50% of the county's total assessed valuation and population.

STRONG ECONOMIC BASE

Cook County, and in particular the city of Chicago, acts as the economic engine for the Midwest region. Residents are afforded abundant employment opportunities within this deep and diverse regional economy. The county also benefits from an extensive infrastructure network, including a vast rail system, which supports continued growth. The employment base is represented by all major sectors with concentrations in the wholesale trade, professional and business services and financial sectors.

Tax base drops of 4.3%, 10.8% and 10.5%, respectively, in 2011, 2012 and 2013, reflect lagging recessionary valuation declines, as property assessments are done on a rolling three-year schedule. Socioeconomic indicators are mixed with above-average per capita income and educational levels but also elevated individual poverty and unemployment rates. As of October 2013, the county's unemployment rate of 8.9% remained above both the state (8.3%) and national (7.0%) averages. The rate was unchanged from the 8.9% recorded a year prior, as modest declines in employment were matched by minor labor force contraction.

PENSION & OPEB PRESSURES

Long-term liabilities related to employment benefits are considerable and threaten the current rating level. County officials report progress in their collaboration with organized labor on a comprehensive pension reform package. Any such package would require legislative approval.

The county provides pension benefits to its employees through a single employer defined benefit plan. As of December 2012, the unfunded actuarial accrued liability (UAAL) totaled $5.6 billion, representing a poor reported funded ratio of 58.4%. The funded ratio declines to an estimated 55.3% using Fitch's more conservative 7% investment return assumption.

Compounding the issue is the county's statutorily-based pension whereby the county pays the statutory amount to the pension fund and the pension fund can allocate a portion of the pension payment to OPEB. The county's fiscal 2012 statutory payment allocated to pensions was approximately $153 million, well short of the actuarial annual required contribution (ARC) of $595 million.

The county's contribution for pension liabilities is capped by state statute and has not met the ARC for at least the last six years. As a credit positive, the county implemented a two-tiered benefit plan for employees beginning in January 2011, which should help moderate future liability growth. Other post-employee benefits (OPEB) are also offered to retirees and their dependents. The county contributed $36.7 million, which equaled the pay-go amount, in fiscal 2012.

MODERATE DEBT BURDEN

Cook County's reported aggregate debt burden is moderate at $4,113 per capita and 4.8% of market value, although this is somewhat understated as the reported overlapping debt figure excludes suburban school districts. The county's debt profile includes a manageable 13% of unhedged variable-rate debt that is supported by liquidity facilities, the earliest of which expires in 2015.

Principal amortization is below average with 39.4% repaid within 10 years, but all debt is scheduled to be retired within 20 years. Recent capital funding has been met through the issuance of sales tax bonds. Fitch does not expect these sales tax borrowings to significantly impact the amount of revenue available for operations.

Future borrowing plans are moderate, including a possible commercial paper program in 2014. The 10-year capital improvement plan totals roughly $1.9. New money GO borrowing is not anticipated prior to 2015.

RECENT IMPROVEMENT BUT RISING FIXED COSTS

The county benefits from its home rule status which affords it a wide variety of revenue options. Recent rollback of the sales tax rate and spending on wage increases, long-term liabilities and the county's health system continue to pressure financial operations. Financial results have recently shown improvement since the unreserved general fund balance dropped to a very low 2.3% of spending ($30.8 million) in fiscal 2010.

The general fund budget gap for fiscal 2012 was originally projected at $315 million, but was eliminated through the implementation of a hiring freeze, lower election-related costs, contractual savings, and better-than-budget sales tax revenue. Fiscal 2012 ended with essentially balanced operations, with a general fund net operating deficit (after transfers) of a scant $2.4 million (0.2% of spending). Unrestricted general fund balance improved from 13.8% in fiscal 2011 to 14.6% in fiscal 2012.

The county has taken aggressive steps to control personnel costs through both attrition and layoffs; the county's budgeted personnel headcount has declined 9% or 2,400 positions since 2010, and filled positions are 1,500 less than that.

The county's improved financial position was achieved despite the gradual roll back of the sales tax in 2010 - 2012. The home rule sales tax, which represents a significant source of operating revenue, was increased by 1% to 1.75% in July 2008 to fortify the county's budget. The new county administration rolled back the sales tax increase in three steps over three years. It now stands back to the original rate of 0.75%, as of January 2013. Year-over-year sales tax revenues are therefore down; underlying normalized sales tax activity shows modest growth.

The county's finances would be under considerable additional pressure if full ARC funding was included as favorable operating results would have been much more difficult to achieve, absent offsetting revenues. The county spent 5.4% of governmental spending on pensions in fiscal 2012, but full ARC funding would have required a much higher 19.7% of governmental spending. Carrying costs rise to a very high 32.7% when other long-term liabilities (debt service and OPEB pay-go) are included.

BUDGET GAPS PRESENT A CHALLENGE

The county has made progress toward achieving structural balance; however, Fitch believes that structural balance will not be achieved until the county's spending plan includes annual, actuarially sound funding of long-term liabilities.

Budgetary pressures continued in fiscal 2013 primarily due to reduced sales tax revenue and negotiated wage increases. The 2013 budget identified a $267.5 million gap which the county planned to resolve with $50.7 million of expenditure reductions and $216.8 million of new revenues, including increased health care revenues at the health system. The county has been largely successful in achieving its budgetary goals; management projects a roughly $16 million net operating deficit after transfers in the general fund for fiscal 2013, reflecting an estimated $3 million draw for operations and $13 million for pay-down of the county's line of credit.

The adopted fiscal 2014 budget is balanced with measures to close the originally identified gap of $152 million (equivalent to 5.2% of spending). However, the statutory pension payment (some of which the pension fund may divert to OPEB), is $443.6 million short of the ARC. Fiscal 2014 solutions are largely recurring although not yet realized. The county's ability to successfully address its budget gaps and institute structurally balanced operations is instrumental to rating stability.

HEALTH AND HOSPITAL SYSTEM STRAIN

The county's hospital healthcare system, which is classified as an enterprise fund on a GAAP basis, has been a source of operating pressure due to a consistent history of operating deficits. Fitch believes the system is poised for improvement; however, the county's financial profile remains tangentially pressured until the system reaches solid operating footing.

The system generated a $417 million operating deficit in fiscal 2012, which was only partially offset through a combination of property, sales, and cigarette taxes amounting to $250 million. Further deficits and continued subsidization from discretionary revenue sources are likely, which may impact the county's overall financial flexibility.

The county is shifting focus to out-patient care, improving Medicaid billing collections, and increasing procedural efficiencies through infrastructure and technological upgrades, in an effort to improve cost efficiency. The health system also benefited from $170 million in disproportionate share hospital (DSH) funding in fiscal 2012 (including a $20 million additional payment from the state) and budgeted $140 million in fiscal 2013. Uncertainty around supplemental funding going forward is a credit concern but should be offset with the expected increase of insured individuals.

Fitch expects near-term improvement for the system primarily due to elevated revenues easing the transition to the Affordable Care Act (ACA). These additional revenues result from an 1115 federal waiver expanding Medicaid eligibility which is expected to bring in $99 million on top of the system's current $983 million budget. Slow processing of applications at the state level has resulted in delayed realization of approximately $79 million of this revenue.

The pace of applications is on schedule and associated revenues should be remitted retroactively upon approval. Fitch expects much of these will be accrued back to fiscal 2013, but some of the delayed portion of the revenue may be realized in fiscal 2014. The system received a three month extension which will allow it to accept new applications through March of 2014. The ability of the system to increase revenues under the ACA and decrease general fund exposure to the system will be critical to ratings stability.

Additional information is available at 'www.fitchratings.com'.

In addition to the sources of information identified in Fitch's Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope, University Financial Associates, S&P/Case-Shiller Home Price Index, IHS Global Insight, National Association of Realtors.

Applicable Criteria and Related Research:

--'Tax-Supported Rating Criteria' (Aug. 14, 2012);

--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 14, 2012).

Applicable Criteria and Related Research:

Tax-Supported Rating Considerations for 2010

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=500988

U.S. Local Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=813996

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

Fitch Ratings
Primary Analyst
Arlene Bohner
Director
[phone]
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
Eric Friedman
Director
[phone]
or
Committee Chairperson
Jessalynn Moro
Managing Director
[phone]
or
Media Relations:
Elizabeth Fogerty, [phone] (New York)
[e-mail]