Fitch Rates Baltimore County, MD GOs 'AAA'; COPs 'AA+'; Tax GOs 'AAA'; BANs 'F1+'; Outlk Stable
Fitch Ratings has assigned the following ratings to Baltimore County, Maryland (the county) general obligation (GO) bonds, taxable general obligation bonds (GOs), certificates of participation (COPs) and bond anticipation notes (BANs):
--$16.63 million metropolitan district bonds, 2012 refunding series 'AAA';
--$93.76 million consolidated public improvement bonds - 2012 refunding series 'AAA';
--$60 million metropolitan district bonds (75th Issue) 'AAA';
--$193 million consolidated public improvement bonds, 2012 series 'AAA';
--$256.4 million taxable GOs, 2012 series 'AAA';
--$10.97 million COPs (health and social services building project), refunding series 2013 'AA+',
--$60 million metropolitan district BANs - 2013 series 'F1+'.
--$140 million consolidated public improvement BANs, 2013 series 'F1+'.
The taxable GOs, 2012 series will partially fund the unfunded present or contingent liability of the county under the portion of the Employees' Retirement System of Baltimore County closed to new membership effective as of July 1, 2007, Plan A. The bonds are scheduled to sell negotiated on Nov. 27, 2012.
The consolidated public improvement and metropolitan district bonds will be used to refund certain series of bonds and permanently finance various series of notes. The bonds are scheduled to sell competitively on Nov. 29, 2012.
The COPs refunding series 2013 will refund the series 2001 COPs. The COPs are scheduled to sell competitively on Jan. 15 2013.
The BANs 2013 series will provide interim funding for the county's capital program. The notes are scheduled to sell competitively on Jan. 15 2013.
In addition, Fitch affirms the following ratings:
--$1.8 billion outstanding GO bonds at 'AAA';
--$142.53 million outstanding lease obligations at 'AA+';
--$200 million bond anticipation notes at 'F1+'.
The Rating Outlook is Stable.
The GO bonds and BANs are secured by the county's pledge of its full faith and credit and its unlimited taxing power. The principal source of repayment for the BANs will be proceeds from the sale of additional BANs or bonds. The principal source of repayment for the metropolitan district bonds will be special assessments and charges levied against all property in the metropolitan district. The lease purchase bonds are secured by purchase installments made by the county that are subject to appropriation and a security interest in essential leased assets.
KEY RATING DRIVERS
CONSIDERABLE ECONOMIC BASE: The broad and diverse economy benefits from the presence of federal installations, health care, financial services, and higher education. Highly structured development efforts, focusing on growth management and collaboration with surrounding jurisdictions, underscore excellent prospects for continued expansion.
HISTORICALLY STRONG FISCAL MANAGEMENT: Prudent management decisions and adherence to fiscal policies has helped maintained solid reserve levels despite some revenue declines experienced in recent years. Prior years of robust pay-as-you-go capital spending built into the budget were re-distributed to offset portions of recent revenue declines. Also, reductions in workforce through voluntary retirements, labor concessions and expenditure streamlining reduce structural imbalances.
FAVORABLE DEBT POSITION: Debts ratios are moderate and expected to remain so as principal amortization rates are above average.
APPROPRIATION RISK AND ASSET ESSENTIALITY: The ratings for the certificates of participation reflect appropriation risk and the essential nature of the assets subject to lien.
MARKET ACCESS: The 'F1+' short-term rating reflects the county's strong overall credit characteristics and expected market access.
Baltimore County, with its large population of 807,000, covers 612 square miles and surrounds the independent city of Baltimore. The county is unique in that it has no underlying governmental jurisdictions positioning it favorably for attracting new business and for overall central decisionmaking.
DIVERSE AND ROBUST ECONOMY
The employment base is broad and deep, consisting of over 21,000 companies. The largest private sector employers provide more than 65,000 jobs. Federal installations, health care, financial services, and higher education predominate, with skilled manufacturing and technology becoming a growing sector and major focus of economic development. The county is home to several government agencies including the Social Security Administration and Medicare and Medicaid Services, which combined employ 16,000 people, but federal employment represents only 5% of the total employment base limiting its exposure to any potential federal downsizing.
Residential unemployment (7.2% in September 2012) compares favorably with that of the U.S. (7.6%) although slightly exceeds the state average (6.5%). Wealth indicators are around those of the affluent region and state, but are well above the U.S. average.
Population growth is directed towards two areas anchored by major transportation networks, and preliminary engineering studies have begun for construction of a new light rail line to connect with existing regional rail lines. Fitch believes intermediate and long-range growth prospects are strong.
FINANCES POSITIONED FOR IMPROVEMENT
Drawdowns of general fund balance from fiscal 2007 - 2009 represented the implementation of the county's multi-year plan to reduce its reserves through appropriation of pay-as-you-go funding to its capital budget. Revenues declined in fiscal 2010, primarily the result of a $66 million overpayment of income taxes from the state that occurred in fiscal 2009, which not only had to be repaid in 2010, but resulted in an over estimate of revenues for 2010.
In response to weakened revenues, the county reduced pay-as-you go capital funding and returned to the general fund money previously committed to the capital and economic development funds in both fiscal years 2010 and 2011. The county lowered pay-as-you go capital financing by $100 million and transferred back $118 million to the general fund in fiscal 2010. It additionally released $25 million from its health care reserves. The 2010 fiscal year still ended with a $28.5 million reduction in total fund balance. Reserves equaled 13.6% of revenues, or in a measure more commonly utilized by Fitch, 12.5% of spending.
Fiscal 2011 included minimal pay-as-you go capital spending, at $2.6 million, and the return to the general fund of an additional $50 million of money previously committed to capital funding. Budgeted income tax revenues came in below estimates by $45 million, partially a result of taxpayer behavior due to the state's increase in the income tax rate effective that year. Expenditures were under budget by $28 million, but not enough to offset the reduction in revenues. The county experienced an operating deficit of $30 million, but with the infusion of $50 million in capital project funds returned to the general fund, the unrestricted fund balance (the sum of the assigned, committed, and unassigned fund balance under Governmental Accounting Standards Board 54)increased to $230.4 million (14.6% of spending).
The adopted fiscal 2012 budget appropriated $61 million in reserves to address the weakened revenues. The county's proposal to address its structural imbalance includes alterations in the terms of future contracts, previously implemented pension and OPEB modifications, and departmental consolidations. Towards this end, the county successfully implemented an early retirement program and obtained agreements from certain unions to forgo cost-of-living increases in fiscal years 2103 and 2014.
For fiscal 2012, the county experienced a large variance in total revenues, primarily due to management's prudent budgeting of expected income tax revenues. This source is projected to outperform budget by approximately $85 million (5.5% of total budgeted general fund revenues). Management is predicting a $43.8 million operating surplus resulting in an unrestricted fund balance of $295.8 million or 18.6% of unaudited fiscal 2012 expenditures. The county has a fully funded Revenue Stabilization Reserve Account of $84.8 million which is 5.2% of General Fund Revenues and is included in its unaudited fiscal 2012 unassigned fund balance. Because of the current volatility in the national economy and potential changes in intergovernmental aid, management has raised its target level for unassigned and assigned general fund balances during this period to 7% of general fund revenues.
Management's fiscal projections for the next five-years demonstrate compliance with this target and Fitch believes such projections to be reasonable based on the county's conservative budgeting practices and current level of reserves above its target.
CONSERVATIVE FISCAL 2013 BUDGET
The fiscal 2013 budget of $1.6 billion represents a 2.8% increase over the adjusted fiscal 2012 budget. The county has appropriated $40.8 million of fund balance in fiscal 2013, including $13.9 million of pay-as-you-go capital funding. The county has not budgeted the use of excess capital funds. Additional expenses include $15.7 million to address recently implemented state funding requirements for teachers' pensions, somewhat offset by $5.4 million of ongoing revenues. The county conservatively budgeted the expense but not the revenue enhancements. The adopted budget includes a downward adjustment of income taxes to account for an anticipated distribution adjustment. Current year income tax revenue projections are expected to exceed budget by $10 million.
DEBT PROFILE EXPECTED TO REMAIN MODERATE
Future capital needs are substantial but manageable. Overall net tax-supported debt ratios are a low $2,279 per capita and 2.2% of market value, and amortization is an above-average 63% within 10 years, excluding self-supporting metro district debt and pension obligation bonds. Debt ratios exclude outstanding metropolitan district debt, which is paid from rates and charges generated by the self-supporting water and sewer district, although it is secured by the county's full faith and credit pledge.
The county's capital budget and program for fiscal years 2013-2018 is $1.5 billion, including $824 million in consolidated public improvement general obligation bonds and $674 million in metropolitan district GO bonds. PAYGO funding is projected to be $13.9 million over this time. In addition, the county plans to issue $90 million for capital and equipment leases. As part of its capital plan, the county anticipates maintaining up to 20% or $200 million in variable rate debt through the county's CP program.
The county has traditionally funded a portion of its capital needs through the issuance of CP which is subsequently refinanced through the issuance of long-term debt. The county provides self-liquidity for the interest for all outstanding CP and historically interest expense has been below budget. The current bond issues will retire and subsequently refinance $53 million of outstanding CP. The total CP position is $200 million, the maximum that is supported by the current liquidity provider, Mizuho Bank. This CP position will result in a variable rate debt position equal to 6.8% of total debt, a level that Fitch considers appropriate for such a highly rated credit.
MANAGEABLE PENSION AND OPEB COSTS
The county is one of five local entities participating in a cost-sharing multiple employer pension and OPEB plan. The county pays 100% of its pension actuarially required contribution (ARC), equivalent to a low 3.7% of audited fiscal 2011 spending. The plan is adequately funded at 70.5%, using Fitch's standard 7% rate of return.
The county's objective for issuance of the taxable general obligation bonds is to fund the present value of the increased closed Plan A liabilities resulting from the county's decision to reduce the valuation rate from 7.875% to 7.25%. The rate was lowered based on information provided by the county's pension consultant and actuarial consultant. The contribution of $255 million in bond proceeds to the Plan A in fiscal 2013 will reduce the county's estimated long term annual required contributions. The funded status of the system as a whole is projected to improve to 80.1% funded in fiscal 2014 compared to the current estimated level of 71.4%.
The county administers an OPEB trust fund that provides post-employment benefits for its retirees. As of June 30, 2011, the county maintained a funded ratio of 11% based on actuarial asset values of $220 million and an accrued liability of $2 billion. Management has made a commitment to increase its annual OPEB funding in order to meet its ARC by fiscal 2018. The county budgeted $93 million towards OPEB in fiscal 2013, an increase of $30 million from the prior year, which equals 53% of the projected $175 million ARC. Fitch believes this budgeted increase this year and commitment to meet its ARC over time is a credit positive.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
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, American Community Survey, Maryland Department of Planning.
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 Criteria
U.S. Local Government Tax-Supported Rating Criteria
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