Fitch Affirms Easton, MD's $12MM ULTGOs at 'AA'; Outlook Stable

NEW YORK--()--Fitch Ratings has affirmed the following rating for Easton, Maryland (the town):

--Approximately $11.9 million outstanding unlimited tax general obligation (ULTGO) bonds at 'AA'.

The Rating Outlook is Stable.

SECURITY

The full faith, credit, and unlimited taxing power of the town of Easton is irrevocably pledged to the payment of debt service.

KEY RATING DRIVERS

STRONG RESERVES MITIGATE CHARTER RESTRICTION: The town has maintained its general fund reserves in recent fiscal periods, yielding a considerable degree of financial cushion. Ample reserves mitigate concerns over the charter restriction on property tax revenue for operations; the rate levied for debt repayment is unlimited.

NARROW ECONOMY: The town's economic base is somewhat limited, with employment concentrated in healthcare and retail. Historically the town's economy has been weaker than the county's, with wealth metrics trending below the county's.

LOW DEBT; ADEQUATELY FUNDED PENSIONS: Overall debt levels are low and expected to remain so given the town's modest capital needs. Total carrying costs are moderate, and likely to stay at current levels.

RATING SENSITIVITIES

STRUCTURAL BALANCE: The town maintains a strong liquidity position and reserve levels supported by structural balance. A shift in financial performance, especially given the charter-tax limitation, could pressure the rating. The Stable Outlook reflects Fitch's expectation that such changes are unlikely.

CREDIT PROFILE

The town is located in Talbot County (ULTGO bonds rated 'AAA' with a Stable Outlook by Fitch), approximately 70 miles east of Washington, DC, in Maryland's Eastern Shore region. The region is known for its shorelines and waterways, to which Easton has relatively little access. The town's population totaled 16,598 in 2012 and the economy is narrow with stable employers in healthcare, retail, and tourism activity.

LIMITED ECONOMY

Roughly 44% of the county's population resides in the town, which tends to provide the majority of services for county residents. Resident employment in the county (the closest proxy available) remains below the 2006 peak, down another 0.1% between 2011 and 2012. Year to date through August is slightly positive with employment up 0.5% from a year prior and unemployment down to 6.4% from 7.3%.

The county is underperforming the state but unemployment has consistently remained below the national average in recent years. Year-over-year performance for August places the nation at 7.3%, down from 8.2% compared to the county's 6.4% and 7.3% for the same period. Top employers continue to show stability, representing healthcare, retail and other services. Shore Health System remains the top employer for the town and region with greater than 1,600 employees.

BALANCED FINANCIAL PERFORMANCE DESPITE CHALLENGES

Fitch views positively the town's strong financial performance despite economic challenges, supported by an ongoing commitment to conservative financial management policies including monthly reporting to the town council. The most credit-significant policy is the set-aside of between two and four months budgeted spending before general appropriations are established. Any balance remaining at year end above the four-month maximum is classified as committed in the general fund.

The state reassesses one-third of its property each year in accordance with Maryland law. The latest revaluation, effective fiscal 2013, contained Easton and reported a sizeable 10.5% decline in taxable assessed value (TAV).

The town retains $850,000 of banked homestead tax credit, down from $35 million at last review. Since fiscal 2011 the town has absorbed the majority of homestead tax credit to offset declines in TAV. The remaining banked homestead tax credit, at 0.04% of TAV, provides a nominal buffer against potential future revaluation declines. The Maryland Department of Assessment and Taxation (SDAT) indicates that declines in future revaluations would be unlikely and the town believes a combination of new construction and potential future annexations will lead to an increase in the tax base at the time of the next revaluation.

Fitch views such projections cautiously. While stabilization appears reasonable given the severity of the last downturn and the inherent lagged effect of the triennial assessment, area employment continues to decline and investment activity to date has not effectively offset contractions in TAV. The town is leveraging its limited shoreline exposure with the recent expansion of the mixed-use Waterside Village.

Fiscal 2012 resulted in a general fund operating deficit after transfers of approximately $104,000 (0.6% of budget), reducing unrestricted fund balance to $9.38 million, or a still high 54% of spending. Unaudited results for fiscal 2013 portend an operating surplus after transfers of $548,000, or 3.9% of fiscal 2013 spending.

The 2014 budget is balanced with no use of fund balance. The budget projects a 10.5% decrease in real property tax revenue, reflecting the TAV decline. The reduction is offset by an increase in building permits and new revenue from State Highway and Streets grants, totaling 11.8% of budget, up from 1.1% the prior year. Management reports that the town is performing in line with budget for the first few months of fiscal 2014. Management's projections for breakeven results appear sound given the town's history of conservative budgeting practices.

STRONG RESERVES MITIGATE CHARTER LIMITATION

The town's unrestricted fund balance provides ample cushion to offset revenue inflexibility. Property tax revenues account for 70.5% of general fund income. The town charter limits the operational property tax rate to $0.55 per $100 of assessed valuation (AV); the rate levied for repayment of debt service is unlimited. While the town has left the operational tax rate unchanged for the past few years at $0.52, it is nearing the cap. The town's proximity to the charter limit constrains revenue-raising capacity, should AV decline in future fiscal periods.

STRONG LONG-TERM LIABILITY PROFILE

The town's overall debt burden is low at roughly $1,099 per capita and 0.9% of TAV. The burden is expected to remain low over the next few years given the town and county's limited capital plans.

Pension and other-post employment benefits (OPEB) represent a manageable burden. The town fully funds the actuarial required contribution (ARC) for its defined benefit pension plan for sworn employees and defined contribution pension plan for all other employees. The town's pension plans consume approximately 10.35% of governmental fund spending. OPEB benefits are funded on a pay-as-you-go basis and this amount equaled 85% of the OPEB ARC in fiscal 2012. On a combined basis, the town's pension and OPEB unfunded actuarial accrued liability (UAAL) approximates $17.7 million or a manageable 0.8% of market value.

Additional information is available at 'www.fitchratings.com'.

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.

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

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=810219

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Contacts

Fitch Ratings
Primary Analyst
George M. Stimola
Analyst
+1-212-908-0770
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
Barbara Ruth Rosenberg
Director
+1-212-908-0731
or
Committee Chairperson
Jessalynn K. Moro
Managing Director
+1-212-908-0608
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526 (New York)
elizabeth.fogerty@fitchratings.com

Sharing

Contacts

Fitch Ratings
Primary Analyst
George M. Stimola
Analyst
+1-212-908-0770
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
Barbara Ruth Rosenberg
Director
+1-212-908-0731
or
Committee Chairperson
Jessalynn K. Moro
Managing Director
+1-212-908-0608
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526 (New York)
elizabeth.fogerty@fitchratings.com