Fitch Rates $750MM Maryland GOs 'AAA'; Outlook Stable

NEW YORK--()--Fitch Ratings assigns an 'AAA' rating to the following state of Maryland general obligation (GO) bonds, state and local facilities loan of 2014, first series, consisting of:

--$450 million first series A tax-exempt bonds (competitive);

--$50 million first series B taxable bonds (competitive)

--$250 million first series C tax-exempt refunding bonds (competitive).

The par amount of the first series C refunding bonds is subject to change. The bonds will be sold via competitive sale on March 5.

In addition, Fitch affirms the 'AAA' rating on approximately $8.2 billion in outstanding state GO bonds.

The Rating Outlook is Stable.

SECURITY: General obligations to which the state's full faith and credit are pledged.

KEY RATING DRIVERS

CONSERVATIVE FINANCIAL OPERATIONS: Financial operations are conservative, and the state maintains a well-funded rainy day fund (RDF). The state took repeated action during the course of the recession to address projected budget gaps, including raising tax revenues, cutting spending, and using rainy day and other balances.

STRONG DEBT MANAGEMENT: Debt oversight is strong and centralized, and the debt burden is moderate. The state has policies to maintain debt affordability, and the constitution requires GO and transportation bonds to amortize within 15 years.

PENSION FUNDING REFORMS: Pension funding levels have deteriorated, although the state has undertaken extensive reforms to pensions and other post-employment benefits.

BROAD ECONOMY: The state has a diverse, wealthy economy, benefiting from its proximity to the nation's capital.

RATING SENSITIVITIES

CONTINUATION OF CURRENT PRACTICES: Sound fiscal management practices and the consistent maintenance of fiscal flexibility, including in the form of budgetary reserves, provide the state with significant ability to respond to near-term economic or fiscal conditions, such as federal budget reductions, in a manner consistent with the 'AAA' rating.

CREDIT PROFILE

The 'AAA' rating on Maryland's GO bonds reflects its sound financial operations, a wealthy, diversified economy and strong management of debt. The state's economy has long benefited from proximity to the nation's capital, although the prospect of near-term federal budget austerity poses a degree of uncertainty for the state's large federal agency presence and associated private contracting. Despite this risk and the generally slow pace of economic recovery, the state's diverse and wealthy service-oriented economy remains a source of credit strength. The state's approach to fiscal management has been consistently conservative both through the last recession and during the recovery, with the state relying on spending cuts, revenue increases and the use of non-recurring resources to maintain balance. Maryland retains ample fiscal flexibility, including a well-funded RDF. Although pension funded ratios are weak, the state has undertaken multiple reforms to return to full funding over time.

ECONOMY

Maryland's economy is wealthy and diverse, and continued to expand in recent years despite the drag posed by federal austerity, which remains an ongoing risk to state economic performance. December 2013 employment rose 1.4% year-over-year, compared to 1.7% nationally. Job gains were spread across multiple sectors, including construction and professional and business services, although federal government employment continued to slip. The state's unemployment rate, at 6.1% in December 2013, was well under the 6.7% national average during the same period.

Measured on a per capita basis, Maryland's 2012 personal income ranks fifth among the states, at 123% of the U.S. level. Personal income grew in the third quarter of 2013 by 2.4% year-over-year, below the 3.6% national pace of growth for the same period. The state's December 2013 economic forecast anticipates the economy gradually accelerating from the slower pace of recovery of recent years. The forecast estimates annual personal income grew 1.9% in 2013, and is expected to grow 4.6% in 2014 and 5.1% in 2015. Employment growth, which the state estimates was 0.9% in 2013, is forecast to accelerate to 1.5% in 2014 and 1.8% in 2015.

FINANCES

Financial operations are conservative, with the state consistently demonstrating a strong commitment to budgetary balance through the downturn, including through repeated spending cuts, fund balance transfers and revenue increases. The state has also maintained flexibility in the form of its RDF, which remained funded at or near 5% of general fund revenues through the downturn. As of June 30, 2013, the RDF balance was $700 million (4.7% of general fund revenues).

The adopted budget for fiscal 2014 continued to maintain the state's fiscal flexibility in the form of a well-funded RDF, now forecast at $763 million (5% of general fund revenues) at fiscal year-end. As with recent budgets, the state incorporated only modest changes to general fund spending, including holding back a portion of a planned pension contribution overpayment as a cushion against federal sequestration cuts. Outside the general fund, the state adopted a variety of revenue measures to increase resources for transportation capital, including applying sales taxes to gasoline and providing for inflation increases for existing levies and user fees; the plan is expected to generate nearly $668 million for transportation annually by fiscal 2018, after full phase-in.

The revised fiscal 2014 plan released with the fiscal 2015 executive budget in January makes only modest changes to the fiscal 2014 budget and assumes the year ends with a general fund balance of $84.7 million, 0.6% of general fund receipts, in addition to the RDF. Although the fiscal 2014 revenue forecast has been trimmed since the budget was first adopted, actual general fund revenues year-to-date through December 2013 are 1.6% higher than previous year collections and just ahead of revised forecast expectations.

The fiscal 2015 executive budget proposal assumes that the general fund balance at June 30, 2015 will fall to $36.9 million, 0.2% of general fund receipts. General fund revenues are expected to rise 5.6%, to $16.1 billion, primarily reflecting the gradual forecast improvement in economic conditions. The proposal shifts additional transfer tax revenue to the general fund and makes permanent the reduced pension contribution overpayment first enacted with the fiscal 2014 budget, intended to help the state achieve structural balance. Spending rises 4.7%, to $16.4 billion, after reversions and other reductions. The fiscal year is forecast to end with a fully funded RDF at $800 million, equal to 5% of general fund receipts.

LONG-TERM LIABILITIES

The burden of Maryland's total tax-supported debt is moderate, and its strong and centralized debt management remains a credit strength. Net tax-supported debt as of Dec. 31, 2013, equals approximately $11.5 billion, or 3.6% of 2012 personal income, including the new money portion of the current sale. More than two-thirds of tax-supported debt is GO bonds. GO and transportation bonds are constitutionally required to mature within 15 years, ensuring rapid amortization. Debt affordability guidelines include holding tax-supported debt at or below 4% of personal income.

The funding of pensions deteriorated over much of the last decade, with June 30, 2013 system-wide funded ratios for state employees at 63.3% and teachers at 67.1% on a reported basis. Using Fitch's more conservative 7% discount rate assumption (compared to the 7.7% used by the system in 2013), the employees and teachers' plans would be funded at 58.8% and 62.3%, respectively. On a combined basis, net tax-supported debt and the portion of pension liabilities attributable to the state are estimated by Fitch at about 11.3% of 2012 personal income, higher than the median of Fitch-rated states.

Despite pensions being a comparative credit weakness, the state has taken multiple steps to reduce the burden of pensions. These include reducing benefit accruals, requiring higher state contributions in order to accelerate funded ratio improvement and shifting the normal cost of teacher pensions to local government. In 2015 the state will also begin phasing out a previous funding methodology that had resulted in annual pension contributions below an actuarially-calculated level over the last decade. Additionally, changes in 2011 to other post-employment benefits are estimated to have reduced the state's OPEB liability to $9.2 billion, from $15.9 billion as of June 30, 2011; the unfunded liability as of June 30, 2013 is $8.1 billion.

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

In addition to the sources of information identified in the Tax-Supported Rating Criteria, this action was additionally informed by information from IHS Global Insight.

Applicable Criteria and Related Research:

--'Tax-Supported Rating Criteria', dated 14 Aug. 2012;

--'U.S. State Government Tax-Supported Rating Criteria', dated 14 Aug. 2012.

Applicable Criteria and Related Research:

Tax-Supported Rating Criteria

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

U.S. State Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686033

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=820927

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Contacts

Fitch Ratings, Inc.
Primary Analyst
Douglas Offerman, +1-212-908-0889
Senior Director
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
Eric Kim, +1-212-908-0241
Director
or
Committee Chairperson
Laura Porter, +1-212-908-0575
Managing Director
or
Media Relations
Elizabeth Fogerty, New York
+1-212-908-0526
elizabeth.fogerty@fitchratings.com

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Contacts

Fitch Ratings, Inc.
Primary Analyst
Douglas Offerman, +1-212-908-0889
Senior Director
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
Eric Kim, +1-212-908-0241
Director
or
Committee Chairperson
Laura Porter, +1-212-908-0575
Managing Director
or
Media Relations
Elizabeth Fogerty, New York
+1-212-908-0526
elizabeth.fogerty@fitchratings.com