NEW YORK--()--Fitch Ratings assigns an 'AAA' rating to the following Charles County, Maryland general obligation (GO) bonds:
--$27.2 million GO refunding bonds of 2013.
Proceeds will be used to refund various GO bonds for upfront savings equal to approximately 2.5% of the refunded par. The bonds are scheduled for competitive sale on February 26.
In addition, Fitch affirms the following rating:
--$296.6 million in outstanding GO debt at 'AAA'.
The Rating Outlook is stable.
The bonds are GO bonds to which the full faith and credit and unlimited taxing power of the county are pledged.
KEY RATING DRIVERS
LOWER BUT HEALTHY RESERVE LEVELS: The county has maintained a reduced but healthy fund balance as reserves were utilized over the past several years for capital and other well-defined requirements.
NARROW YET STABLE AND WEALTHY ECONOMY: The economy benefits from the presence of a naval research facility as well as a location proximate to the employment centers of Washington D.C. and northern Virginia. Employment and wealth indicators are sound.
DECLINING TAXABLE ASSESSED VALUE: Softening in the housing market has been somewhat tempered by banked assessed value growth in prior years and sustained commercial growth. Additional taxable assessed value declines are projected for fiscal 2014.
HEALTHY DEBT PROFILE: A low debt burden, affordable capital needs, sound debt affordability policies and a rapid amortization rate underpin the county's healthy debt profile.
REDUCTION IN RESERVE LEVELS: Use of reserves could place downward pressure on the rating.
Charles County, with a 2011 population of 149,130, is located less than 45 minutes from the myriad employment opportunities in Washington D.C. and northern Virginia.
HEALTHY RESERVE LEVELS
Financial operations are strong and reserve levels are expected to remain healthy, given year-to-date fiscal 2013 performance. The county had systematically used reserves that were accumulated during the economic boom, largely to fund capital and other one-time needs although occasionally to compensate for revenues weakened by the recession.
Fiscal year-end 2012 results reflected a second consecutive year of positive income tax revenue variance, the county's second largest revenue source, representing 31% of the general fund, supporting a $7.1 million operating surplus. The unrestricted fund balance increased to $39 million or a healthy 11.3% of general fund spending, compared to the conservative budgeted drawdown of $5 million.
The approved 2013 budget includes a 0.4% increase in the property tax levy and a $5 million fund balance appropriation. Most notably, the budget funds salary increases, the Waldorf library opening, and a 11% rise in pension contributions due to the shift in pension costs of public school board employees from the state to the school boards.
Year-to-date general fund revenues, driven by strong income tax performance, are outperforming budget and management's expectation for roughly break-even results appear reasonable.
Fitch views the county's margin under the state income tax rate cap and a regionally competitive property tax rate as an important measure of financial flexibility given their combined dominance of the general fund revenue base.
ECONOMY ANCHORED BY MILITARY PRESENCE
Charles County's close proximity to D.C. and northern Virginia employment centers is a key economic driver, mitigating the more narrow local economy anchored by several key military installations including a naval research and development center at Indian Head, employing 3,358 with annual civilian payroll totaling $180 million.
The county hopes to leverage the base's technological research to attract tenants to its planned Indian Head Science and Technology Park. A number of office and industrial parks are in various stages of development, and the county has historically maintained a vacancy rate below regional averages. The county's unemployment rate trends comfortably below state and national averages, as evidenced by the 5.7% unemployment rate of December 2012. Wealth indicators are well above state and national averages.
DECLINING TAX BASE
Over the last several years the county's tax base has been impacted by current recessionary pressures. Assessed value declined to $17.1 billion from $20 billion between 2010 and 2013. The decline, while substantial, was somewhat softened by the county's 'banked' homestead tax credit which was essentially depleted from $23 million over the same period. Fitch views management's projection for a 3% decline in fiscal 2014 as reasonable given recent trends.
The county benefits from a statewide triennial assessment construct that smoothes annual volatility in tax base performance. The county is somewhat limited on upside potential given the adopted homestead percentage of 107%, limiting annual assessment growth on certain owner-occupied residential property to no more than 7%. Despite softening in the housing market, commercial growth within the county remains positive. County data reports sustained commercial growth through fiscal year 2012, with additions to square footage and capital investment.
FAVORABLE DEBT PROFILE
Charles County's prudent debt policies support a modest tax-supported debt burden even as the county has met capital needs related to its strong population growth over the last decade. Overall debt equals just 1% of market value, or $1,190 per capita. The county's policy caps debt service at 8% of general fund operating revenues; fiscal 2012 debt service expenditures accounted for 7% of general fund revenues. Amortization is rapid.
Fitch expects the county's debt burden to remain manageable. The fiscal year 2013-2017 capital improvement plan totals $294.3 million. The plan is over 60% debt funded and over a quarter is expected to be funded through state funding related to school construction projects. Pay-go funding totals $15.6 million.
Fitch does not expect long-term liabilities related to employment benefits to pressure future operations. The county provides pension benefits to its employees through two single-employer defined benefit plans and annually contributes 100% of the annual required contribution. As of July 1, 2012 the general employees' plan was well funded at 87.5% and the sheriffs' plan was adequately funded at 76.3%. Using Fitch's more conservative 7% discount rate, funding levels were 80.8% and 70.4%, respectively. The aggregate unfunded actuarial accrued liability (UAAL) totaled $61.2 million or a very low 0.36% of market value.
The county also provides OPEB to its retirees. The county funded its OPEB cost for fiscal 2012 on a pay-go basis and the UAAL associated with OPEB totaled a manageable $154 million or 0.92% of market value. Carrying costs for debt service, pension and OPEB totaled a manageable 11% of governmental (less capital) fund spending.
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, Maryland Department of Business & Economic Development.
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