Bond defaults follow Cook County's property tax delays

When Cook County, Illinois, ran into trouble transitioning to a new software system, its property tax bills were thrown off schedule.

There was a delay in bills sent out to taxpayers, which resulted in delayed property tax collections, which cascaded into a problem for some local governments and school districts in the nation's second-most-populous county.

East Dundee & Countryside Fire Protection District recently became a poster child for this dynamic when it disclosed a default on principal and interest payments for its Series 2021A general obligation refunding bonds and Series 2021B refunding debt certificates.

In a disclosure notice posted to the Municipal Securities Rulemaking Board's EMMA website, the district said it failed to make its Jan. 15 principal and interest payments. It will make them "either upon receipt of the delayed taxes from the County or upon the closing of a tax anticipation warrant, whichever comes first," according to the district, which is 40 miles northwest of the county seat in Chicago and serves a population of about 10,000.

According to the district's annual report for the year ended Dec. 31, 2024, 64% of its governmental activities revenue comes from property taxes.

Moody's Ratings Friday downgraded the district's issuer and underlying GO unlimited tax and GO limited tax ratings seven notches to speculative-grade B1 from investment grade A3 and placed the ratings under review for further downgrade.

The rating agency cited the default on the January debt service payment, which has not yet been repaid, as well as ongoing structural imbalance and weak financial management. It said the district's strained operating liquidity and weak financial management practices contributed to the default.

"The district's cash position eroded to 2% in fiscal 2024 because of unanticipated capital needs and over-budget staffing costs," Moody's noted. "In fiscal 2025, the district anticipated another operating deficit but issued long-term debt equivalent to about 20% of annual revenues to shore up liquidity for operations."

The 2021A bonds are insured by Assured Guaranty (AGO), rated AA by S&P Global Ratings.

Assured made a claim payment of approximately $299,000 to cover the Jan. 15 payment to holders of the Series 2021A bonds, the insurer said a statement attributed to Robert Tucker, head of investor relations and communications.

"As always, investors that own bonds insured by Assured Guaranty (AGO) will receive uninterrupted full and timely payment of scheduled principal and interest in accordance with the terms of Assured Guaranty's (AGO) insurance policies," the statement said.

The district did not respond to a request for comment.

Glenwood-Lynwood Public Library District also disclosed a payment delinquency related to the delayed property tax disbursements, said Lisa Washburn, chief credit officer and managing director at Municipal Market Analytics, which featured East Dundee & Countryside in a default trends report and detailed the operational risk from the county's troubles in an outlook report.

The library district ultimately reported making its Dec. 1 debt service payment on Dec. 30. The district was subsequently downgraded five notches, to BBB from AA-minus, by S&P Global Ratings.

"The broader issue is that a lot of districts were impacted, and it was handled in a variety of ways," Washburn said. "Those that had either the resources or access to the capital market to issue notes, or could liquidate investments, some did that. I'm not sure how many more will be filed? but don't think these are the last."

The tax bill situation caused a lot of downstream financial costs and operational issues "that are now being borne by entities that really had no control over the tax system upgrade," Washburn said, adding that there is reportedly a group of school boards considering a class-action lawsuit.

"Despite being a financially sophisticated county that regularly accesses the municipal bond market, (Cook County's) response to the fiscal disruption experienced by local governments was limited," MMA said in its March 9 outlook report.

County bureau of finance spokesman Edward Nelson said the county created the Property Tax Bridge Funding Program to provide access to no-interest loans for local taxing jurisdictions, an attempt to help with any short-term operational cash flow issues.

"This program made hundreds of millions of dollars in no-interest loans available to local governments and taxing districts while prioritizing underserved and disinvested communities," Nelson said by email. "About $23 million of the available $300 million in the Bridge Fund was used, so the fund was more than sufficient to cover all the applications we received."

East Dundee did not apply, he said, noting that the district is split between Cook and Kane counties and receives only part of its property tax revenues from Cook.

The program's "eligibility rules and administrative hurdles reportedly limited its use to about 20 local governments," MMA wrote.

"We continue to monitor the situation," Nelson said. "Timing is ultimately at the treasurer's discretion." The county's elected treasurer, Maria Pappas, operates independently of the Bureau of Finance, which is under the umbrella of the county's Board of Supervisors.

The primary support for the special districts is the property tax, said Richard Ciccarone, president emeritus of Merritt Research Services, an Investortools company. When that money doesn't come in when it's supposed to, "that presents you with a cash flow problem that you have to resolve either with a loan or cash on hand. Not everybody can get by," he said.

"If you look at special districts in general, most of the time, historically, they might have had days cash in the general fund of around six months' worth," Ciccarone said. "That's a good amount of money, but if that's all that is available to you, then you'll have a cash flow issue if you have a sizable amount of debt. Because you've got to support the operations of the special district, as well."

The debt service reserve fund rarely has enough in it to cover the second half of a year's property taxes, Ciccarone noted.

Such districts have to decide whether to keep large reserves or keep taxes down, he said, which will hinge on the culture of the community and those in management.

"During the subprime mortgage crisis, we would go in and say, how much cash do I have on hand? And if it's very low, you're more than likely going to have a big shortfall if the property taxes are not coming in because people are not making their mortgage loans," said Ciccarone.

"The default candidates would come in; first, when you had insufficient cash on hand," he said. "Secondly, do you have money in the other accounts that you can borrow from? And if not, do you have sources that you can borrow from? And if all those failed, usually they tried to get a third-party bailout? and we call that politics."

When access to other sources of funds broke down, "that's what caused the problem in Detroit, that's what caused the problem in Puerto Rico," he said, and that same principle would apply here.

In its outlook report, MMA raised the question of whether more protection from operational risk is needed.

"Should operational payment system failures be incorporated into credit analysis/ratings?" the report asked.

"Who should bear responsibility when a centralized system doesn't perform as expected? ? How should rating agencies address a downstream credit event caused by centralized operational failures? Should it be reflected primarily in the affected entity's rating, in the upstream entity's rating, or both?" MMA's report said.

"You can argue this two ways," Washburn said. "You can say that an entity, particularly like Glenwood-Lynwood, that was rated AA-minus? should have had the management capability to address a known delay with the distributions. On the other hand, you could say this is a failing of Cook County to get expected payments to taxing jurisdictions in a timely manner."

In Cook County, the operational risk was exposed by the issues with the software system upgrade, Washburn said. But many places have centralized collection systems.

"Is that a risk that market investors are willing to assume because it happens infrequently?" she said. "Or is it something that should be accounted for like what you would see in a structured finance transaction," where "there would be some analysis to make sure that there was a minimum operational expectation of that entity in the event of any sort of a failure?"

Cook is the only county in Illinois that has a chronic problem of late tax bills, Ciccarone said.

"I expect it will be short-lived," he said of the delayed property tax disbursements. "But any scar on a credit from a default is often remembered by the bond market, and leaves a bad taste until that trust is restored."