With Deteriorating Financial Situation, Moody's Slashes Illinois County Rating

(June 20, 2011) — Moody’s Investors Service has cut the rating of Illinois’ biggest county as a result of concerns about health care costs and unfunded pension liabilities.

As a result, the county likely will have to now pay more to borrow money, putting additional pressure on the budget.

“Cook County’s financial position has historically been pressured, but recent revelations that a reporting error resulted in overstatement of the county’s revenues by $90 million, coupled with a projected deficit at the health system for the current fiscal year and growing unfunded pension liabilities, have exacerbated the problems facing Cook County,” Moody’s said in a statement.

The rating for Cook County, which includes the city of Chicago, was cut to Aa3 from Aa2 with a stable outlook, with the downgrade affecting $3.5 billion of outstanding general obligation bonds.

The heightened scrutiny by Moody’s follows the Securities and Exchange Commission’s (SEC) investigation into credit-rating firms for contributing to financial collapse. Last week, the SEC asserted that it is considering charges against credit-rating agencies for their role in rating mortgage-bond deals. SEC officials are focusing their attention on whether ratings companies committed fraud, the Wall Street Journal reported, noting that they failed to do sufficient research to properly rate subprime mortgages. The SEC is reviewing the conduct of companies including McGraw Hill’s Standard and Poor’s and Moody’s Investors Service, owned by Moody’s Corp, on at least two mortgage-bond deals.

While banks and brokerage partners have been the focus of charges and regulatory reforms, ratings firms have been successful in largely dodging such levels of scrutiny until now. The recent inquiry into ratings firms broadens the SEC’s probe into the sales and marketing of mortgage-bond deals.

Ratings agencies have downgraded other states in recent months. In February, for example, citing financial stresses of New Jersey’s large unfunded pension liabilities, Standard & Poor’s lowered its ratings on the state’s general obligation debt. “The lower rating reflects our concern regarding the stresses from the state’s poorly funded pension system, substantial post-employment benefit obligations, and above-average debt levels,” Jeffrey Panger, credit analyst, said in a report. “The downgrade also reflects the application of Standard & Poor’s newly adopted criteria on U.S. states, which more transparently incorporates debt, pension, and other post-employment liabilities, along with other rating factors.”

Even with New Jersey Gov. Chris Christie’s proposed public pension reforms, Moody’s Investors Service subsequently warned that the state’s pension system, which is already the 7th-lowest funded in the US, will continue to deteriorate.