Fitch Rates Worcester County, MD's $14.3MM GOs 'AA'; Outlook Stable

NEW YORK--()--Fitch Ratings assigns an 'AA' rating to the following general obligation (GO) bonds of Worcester County, Maryland (the county):

--$9.63 million consolidated public improvement refunding bonds, 2013 series (tax-exempt);

--$4.675 million correctional officers retirement system pension contribution refunding bonds, 2013 series (taxable).

The proceeds of the 2013 series (tax-exempt) bonds will be used to refund a portion of the county's consolidated public improvement bonds of 1998, 2002 and 2004 for debt service savings.

The proceeds of the 2013 series (taxable) bonds will be used to fund the accrued liability contribution of transferring correctional officers from the state retirement system to the state correctional officers' retirement system. The bonds will be offered by the county at a competitive sale on Jan. 15, 2013.

In addition, Fitch affirms the following ratings:

--$68.56 million in outstanding county GO bonds at 'AA'.

The Rating Outlook is Stable.

SECURITY

The bonds are general obligations of the county for which its full faith and unlimited taxing power are pledged.

KEY RATING DRIVERS

SEASONAL TOURISM-BASED ECONOMY: The tourism sector remains a significant economic driver, vulnerable to economic cycles and contributing to seasonal employment fluctuations.

HISTORICALLY STRONG FISCAL MANAGEMENT: Prudent management decisions and adherence to fiscal policies has yielded solid reserve levels despite revenue declines experienced in recent years.

LOW DEBT BURDEN: The county's debt burden is expected to remain low to moderate, given its manageable capital needs.

CREDIT PROFILE

Worcester County is located on Maryland's eastern shore and encompasses the entire Atlantic seaboard of the state. The county, a prime tourist destination, boasts many public beaches, a boardwalk, golf courses, and convention facilities. Visitation for 2012 totaled over eight million, compared to an annual population of 51,514.

FAVORABLE OPERATIONS DESPITE CHALLENGING REVENUE ENVIRONMENT

Financial operations are characterized by prudent budgetary management, maintenance of sound reserves, compliance with formal reserve policy, and comprehensive long-range planning.

During fiscal 2011 the county continued to reduce spending to offset weakened revenues due to taxable assessed value (AV) declines. Unrestricted general fund balance increased $8.4 million to $41.96 million, or an ample 25.4% of spending.

The fiscal 2012 budget was adopted with no fund balance appropriation or tax rate increase. Year-end results reflect an operating surplus after transfers of approximately $7.7 million. Room tax revenue, the county's second largest revenue source, came in 18% over budget, reflecting stability in the county's tourism-based economy. Income tax revenue increased for the first since 2009 and came in 40% over budget, reflecting positive changes in economic conditions.

The fiscal 2012 unrestricted fund balance improved to $49.7 million or 30.1% of spending. The county's formal reserve fund balance policy is equal to 10% of budgeted expenditures.

The fiscal 2013 budget was adopted with no general fund balance appropriation and a $0.07 increase to the property tax rate. Despite the tax rate increase, property tax revenues are estimated to remain flat due to a 9.3% decline in the county's AV.

The county has conservatively budgeted fiscal 2013 income tax receipts at 13% below fiscal 2012 actuals. The budget funds a 2% cost of living adjustment for county employees. Fitch believes the county will continue to make prudent fiscal decisions to maintain healthy reserve levels despite a challenged revenue climate.

SIGNIFICANT REMAINING REVENUE CAPACITY

The county's property tax rate is the second lowest in the state at $0.77 per $100 of AV in fiscal 2013. The property tax rate and levy are not subject to limitation. The county's income tax rate (1.25%) is the lowest in the state. Increasing the income tax rate to the cap would generate an additional $7.22 million, or a meaningful 4.4% of 2012 spending, although no such increase is under consideration.

TOURISM-DRIVEN LOCAL ECONOMY

Worcester County encompasses the entire Atlantic coastline of Maryland, serving as home to Ocean City, a prime tourist destination. Despite a weakened national economy, tourism-generated revenues have continued to increase year-over-year and the county reports no impact from superstorm Sandy.

A $45 million gaming facility at the Ocean Downs harness-racing track opened in January 2011 adding 200 full- and part-time jobs. With the affirmative vote on table games during the November election, additional expansion of the casino is being considered.

Tourism and hospitality is the leading employment sector at 36%. Top employers include several hotel and restaurant establishments including the Harrison Group (3.7% of employment) and O.C. Seacrets (2% of employment). County unemployment rates exhibit a pattern similar to that of tourist arrivals. Unemployment rates averaged 15% from January-April 2012, the traditional off-season for tourism, and dropped to an average of 8.2% from May-September, the onset of the holiday season when tourist arrivals began to increase.

The county's population continues to grow, with 11% growth in full-time residents between 2000 and 2010. The population also continues to age, which puts less strain on education spending, the county's largest expenditure (46%). The county's wealth metrics are mixed, as evidenced by a county median family income at 110% of the national average but 79% of the state's high average. However, additional wealth flows into the county during the summer months from tourists and second homeowners.

FAVORABLE DEBT PROFILE

Overall debt levels are moderate at roughly $3,955 per capita and low at 1.2% of market value, and amortization is rapid with 84% of outstanding principal repaid in 10 years. Debt service costs accounted for an affordable 6.7% of fiscal 2012 spending, well within the county's 10% policy.

The county's fiscal years 2013 - 2017 capital improvement plan totals just $112.9 million. Major projects include $65.7 million for schools and $34 million for public works. The county expects to issue approximately $58 million in general obligation bonds to fund the program, which will not materially impact existing debt ratios. The county's pay-go program funds 12% of the plan.

MODEST PENSION AND OPEB COSTS

Long-term liabilities related to employment benefits are not expected to pressure future operations. The county provides pension benefits to its employees through the State of Maryland Employees Retirement and Pension System. State pension funding levels have deteriorated, although the state has undertaken extensive pension and other post-employment benefit (OPEB) reforms. The county contributes 100% of the annual required contribution (ARC), which accounts for less than 1% of spending.

Beginning fiscal 2013 a portion of teachers' pension costs will be shifted from the state to local governments over a four-year phase-in process. The state is expected to offset the majority of the costs with increases in various revenue streams, such as income tax, indemnity mortgage recordation tax, and local income reserve relief. While the state has estimated the net cost to the county at $861,000, the county was conservative and did not budget for receipt of any offsetting revenues to offset the $1.27 million in additional costs.

The county also provides OPEB to its retirees. During fiscal 2012, the county contributed $8.7 million for county and board of education employees (5.3% of spending), of which $5.7 million was the pay-as-you-go amount. The remainder went to a trust that has a combined current balance of $61.5 million, or 61% and 21.5% of the OPEB liability for the county and board of education, respectively, as of July, 1, 2010, the date of the last valuation.

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.

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

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015

U.S. Local Government Tax-Supported Rating Criteria

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

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Contacts

Fitch, Inc.
Primary Analyst
Evette Caze, +1-212-908-0376
Director
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
Michael Rinaldi, +1-212-908-0833
Senior Director
or
Committee Chairperson
Jessalynn Moro, +1-212-908-0608
Managing Director
or
Media Relations
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

Sharing

Contacts

Fitch, Inc.
Primary Analyst
Evette Caze, +1-212-908-0376
Director
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
Michael Rinaldi, +1-212-908-0833
Senior Director
or
Committee Chairperson
Jessalynn Moro, +1-212-908-0608
Managing Director
or
Media Relations
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com