NEW YORK--()--Fitch Ratings assigns an 'AAA' rating to the following Howard County, Maryland (the county) general obligation (GO) bonds:
--$100 million consolidated public improvement bonds, 2013 series A;
--$45 million metropolitan district project and refunding bonds, 2013 series A.
The bonds are expected to sell competitively on March 19th. Proceeds from the issuances will be used to permanently finance $100 million in outstanding commercial paper bond anticipation notes, funds various water and sewer projects, and refund approximately $15 million in bonds outstanding for debt service savings.
In addition, Fitch affirms the following ratings:
--$999.7 million GO bonds at 'AAA'.
The Rating Outlook is Stable.
The consolidated public improvement and metropolitan district bonds are secured by the county's full faith and credit pledge and its unlimited taxing power.
KEY RATING DRIVERS
STRONG FINANCIAL MANAGEMENT: Prudent management and planning are evidenced in the county's stable financial performance and solid reserves, which tempers risk to the credit profile of volatility in income tax.
STABLE AND WEALTHY ECONOMIC BASE: Low levels of unemployment and robust income indicators reflect the quality of the local labor force, the county's favorable location along the Baltimore-Washington, D.C. corridor, and the extensive presence of the federal government and its contractors.
MODERATE DEBT PROFILE: Howard County continues to adhere to good debt management guidelines, which have allowed overall debt levels and amortization to remain moderate.
MAINTENANCE OF STRONG FINANCIAL PROFILE: Sequestration cuts could cause job losses, which will weaken income tax revenues.
Howard County, Maryland is 251 square miles in area and is home to approximately 293,142 residents. The county is located between Baltimore, Maryland and Washington, D.C.
HEALTHY RESERVE LEVELS
Financial operations are strong and reserve levels are expected to remain healthy, given year-to-date fiscal 2013 performance. Positive fiscal year-end 2012 results reflected a second consecutive year of growth in income tax revenue, the county's second largest revenue source at 41% of the general fund. The unrestricted general fund balance increased to $111.9 million or a healthy 13% of general fund spending, resulting from a $19.2 million operating surplus compared to the conservative budgeted drawdown of $16.3 million.
The fiscal year 2013 general fund budget is 3.2% more than the fiscal year 2012 budget and includes a $21.8 million fund balance appropriation for capital. The budget funds a $5.1 million increase for pay-as-you-go capital, $15.3 million in education ($9.8 million attributable to the shift in teachers' pension costs) and $3.4 million for public safety.
Year-to-date operations show strong positive variances, driven by strong income tax performance. Expenditures are tracking close to budget. Management is estimating a much more modest use of fund balance than budgeted, at $8.1 million, or less than 1% of spending.
SEQUESTRATION IMPACTS EXPECTED TO BE MINIMAL
Federal sequestration cuts effective on March 1, 2013 are expected to have a modest impact on the county. Approximately 19,000 residents or 12% of the labor force are directly employed by the federal government and press reports suggest the figure increases to 30% when employees of federal contractors are included. The county's estimated impact to personal income tax revenue for fiscal 2013 is $2.7 million (full-year estimated revenue loss of $10.8 million), which represents the 20% furlough wage cut of federal employees. Revenue loss could be broader, based on private sector contraction. However, Fitch believes a portion of these cuts is reflected in the current job figures as sequestration and broader defense spending cuts have been anticipated for some time.
Fitch believes the county has solid spending reduction flexibility, as evidenced by the curtailment of expenditures during the recession which included the reduction in capital spending, furloughs and hiring freezes.
FAVORABLE DEBT PROFILE
Debt levels are moderate overall for the county at $3,322 per capita and 2.2% of market value, net of self-supporting GO debt for water and sewer projects. Amortization is above average at 62% within 10 years, inclusive of GO-supported utility debt.
Fitch expects the county's debt burden to remain manageable. The county has adopted a fiscal 2014 - 2018 capital improvement plan (CIP) totaling $1.4 billion, excluding water and sewer projects. The county's stellar education system remains the emphasis of the CIP, accounting for $1.1 billion. The county plans to issue approximately $100 million in bonds annually over the next several years, excluding debt for the water and sewer system, which should not have an impact on the debt burden.
Long-term liabilities related to employment benefits are not expected to pressure future operations. The county provides pension benefits to its employees through single-employer defined benefit plans and annually contributes 100% of the annual required contribution (ARC). As of July 1, 2011 the general employees' plan was well funded at 83% and police and fire employees' at a weaker 68.7%, using Fitch's more conservative 7% discount rate. The aggregate unfunded actuarial accrued liability (UAAL) totaled $61.2 million or a very low 0.23% of market value.
Beginning fiscal 2013, teachers' pension costs will be shifted 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. The cost to the county for fiscal 2013 is $9,821,066. The budget includes $5,814,000 in additional revenue to offset the cost shift from anticipated changes in recordation tax and income tax laws.
The county also provides other post-employment benefits (OPEB) to its retirees. The county funded its OPEB cost for fiscal 2012 on a pay-go basis and made a contribution to pre-fund. County management expects to fully fund the OPEB ARC by 2020, although prior prefunding targets have not been met. The UAAL associated with OPEB totals $628 million or 1.4% of market value. Carrying costs for debt service, pension and OPEB totaled a low 13.3% of fiscal 2012 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.
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