Fitch Rates Harford County, MD's GO Bonds 'AAA'; Outlook Stable

NEW YORK--()--Fitch Ratings assigns an 'AAA' rating to the following Harford County, Maryland bonds:

--$40 million general obligation consolidated public improvement bonds, series 2014.

The proceeds of the bonds will be used to fund certain capital improvements for general county projects and water and sewer projects. The bonds will sell competitively on March 11

In addition, Fitch affirms the following ratings:

--Approximately $426.5 in outstanding general obligation bonds (GOs) at 'AAA'.

The Rating Outlook is Stable.

SECURITY

The bonds are general obligations of Harford County, MD, the payment of which the full faith and credit and unlimited taxing power of the county are pledged.

KEY RATING DRIVERS

SATISFACTORY FINANCIAL PROFILE: Financial operations are characterized by a conservative approach to budget development, timely spending adjustments, and steady compliance with the county's internal reserve policy equal to 5% of spending.

ECONOMY ANCHORED BY MILITARY PRESENCE: Historically low unemployment and above average income indicators relative to the nation reflect the high 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.

ABERDEEN PROVING GROUND (APG) EXPANSION: The continued APG expansion should prove beneficial over the intermediate to long term, particularly with respect to attracting higher-wage employment opportunities.

LOW DEBT BURDEN: Harford County continues to adhere to good debt management guidelines, which have allowed overall debt levels to remain moderate to low. Future needs, according to the capital improvement plan, are affordable and should not negatively affect debt ratios. Debt amortization is moderate.

CARRYING COSTS ARE AFFORDABLE: Carrying costs including debt service, pension and other post-employment benefits (OPEB) are affordable but expected to increase modestly as the county issues additional debt and the state shifts a portion of the burden of teacher pension costs to the counties.

RATING SENSITIVITIES

FUTURE REDUCTION IN ACTIVITY AT APG: A reduction of mission at APG would negatively affect the county's economy and potentially put downward pressure on the rating.

CREDIT PROFILE

The County is located 20 miles north of the City of Baltimore and abuts the Chesapeake Bay to the east. Three interstate highways (I-95, U.S. Route 40 and U.S. Route 1) and three rail lines (Amtrak, CSX and Maryland Rail Commuter) connect residents and businesses in the county with the U.S. Eastern Seaboard. The county's estimated 2013 population of 248,622 represents a 1.6% increase from the 2010 U.S. Census figures.

STRONG RESERVE LEVELS

Fiscal 2013 ended with a general fund net deficit of $9.4 million compared to a budgeted $20.4 million use of fund balance against a total spending plan of approximately $494.5 million (1.6%). Expenditures included $20 million for various capital projects. The county's unrestricted fund balance remains healthy at $84.9 million or 15% of spending.

The county adopted a budget for fiscal 2014 that was balanced with a $22 million fund balance appropriation. The county historically appropriates the use of fund balance but due to conservative budgeting underspends the appropriation. In addition to increased funding for public safety and teachers' pension costs, the budget also funds $17.2 million in pay-go capital funding and a $6.7 million payment into the OPEB trust from assigned fund balance. Year-to-date revenues are performing better than budget which is expected to reduce the use of fund balance. Currently county management is projecting a $15.4 million operating deficit which would reduce the unrestricted balance to $69.5 million or a still healthy 14% of spending.

Typical of Maryland counties, property and income taxes produced approximately 50% and 38%, respectively, of fiscal 2013 general fund revenue. Property tax revenues declined in fiscal 2013, reflecting a decline in taxable assessed value; however collections remain very strong in excess of 99%. Due to improvement in employment and the economy, income tax revenues have increased annually over the past three fiscal years. Estimated year-end fiscal 2014 collections are 5.4% more than fiscal 2013 actuals and 1.4% over budget. The county last increased the income tax rate to 3.06% in 2001, which remains below the 3.2% maximum rate allowed by state law.

GROWING ECONOMIC BASE ANCHORED BY MILITARY PRESENCE

The Aberdeen Proving Ground (APG), located in Harford County, is a 72,000-acre complex historically operated as a test and evaluation facility for the U.S. Army. APG has evolved considerably following the Base Realignment and Closure Act of 2005 (BRAC). The post is considered a 'megabase' by the U.S. Army, and a leader in science and technology, cyber-security, chemical and biological defense, and medical research for the joint services.

APG is by far the single most influential enterprise in the local economy. APG accounts for approximately $1.8 billion in economic activity within the state of Maryland and $1.1 billion within Harford and neighboring Cecil County, and there are approximately 22,000 military and civilian jobs on and off post (nearly double the figure prior to BRAC). According to the county, employment at APG is expected to remain flat through 2017. The potential for additional private sector and higher wage employment opportunities in support of APG's expansion is viewed favorably by Fitch. A number of office and technology business parks are already under construction in both in the county and on APG.

The county's manufacturing and distribution sectors remain strong and continue to expand. During 2013, Sephora's $50 million expansion project added 200 new jobs and doubled the company's distribution center in the county. Clorox will be constructing a $71 million 945,720 square foot distribution facility to be completed during the summer of 2014. Acer Exhibits, an exhibit manufacturer, is expanding its presence with the county with a $3 million capital investment.

Harford County's rate of unemployment as of December 2013 was 5.4% compared to 5.7% in Maryland and 6.5% nationally. The county's wealth levels are strong with per capita income and median household income at 124% and 152% of the national average.

TAX BASE EXPECTED TO STABILIZE WITHIN THE NEAR TERM

Like all Maryland municipalities, the county benefits from a triennial assessment practice and a homestead credit which smoothes annual volatility in tax base performance. The county's current homestead percentage of 105% means that assessments on certain owner-occupied residential property may not increase by more than 5% in any given year (growth in excess of 5% is credited, or 'banked', and can be used to offset future tax base declines).

The benefit of this approach is reflected in the continued expansion of the county's taxable assessed value (TAV) through fiscal 2011 despite pressure on property values. TAV declined 7.6% between fiscal 2011 and 2014. Fitch notes that the county has the ability to adjust its property tax rate to temper the financial impact of future TAV declines. Harford County has not increased the real property tax rate since 1982, and rates are competitive compared to neighboring counties.

AVERAGE DEBT PROFILE

The county's long-established development zone has directed utility and other necessary infrastructure to well-defined zones, limiting expensive extensions to more rural areas, and the county has a history of solid pay-as-you-go capital financing. Harford County's debt ratios are therefore expected to remain moderately low in spite of growth related needs fueled by the APG expansion. With this issue, overall debt totals approximately $2,219 per capita and % of market value. Debt service expenditures for fiscal 2013 accounted for an average 9.5% of spending.

The capital improvement plan totals $783 million for fiscal 2015 - 2019. Approximately $282 million will be funded with GO debt, which is not expected to affect debt ratios given the above average rate of principal amortization. Pay-go general fund spending accounts for $305 million of the plan. The majority of the projects included in the plan are related to education.

Long-term liabilities related to employment benefits are not expected to pressure future operations. The county provides pension benefits to its employees through three plans: the State Retirement and Pension System of Maryland, the Volunteer Length of Service Award Program for volunteer fire and rescue squads' personnel, and the Sheriff's Office Pension Plan. The county annually contributes 100% of the annual required contribution (ARC). The county's 2013 contribution equaled a low 3.4% of total governmental fund spending.

As of the last actuarial study, the Volunteer Length of Service Award Program (LOSAP) and the Sheriff's Office Pension Plan maintained funded ratios of 75% and 62%, respectively, after adjusting the rate of return to 7%. The county also provides OPEB to its retirees. The county continued to fully funded its OPEB ARC for fiscal 2013, which accounted for 2.3% of governmental fund spending. As of July 1, 2012, the UAAL associated with OPEB totaled $124 million or less than 1% of market value.

Beginning fiscal 2013, teachers' pension costs were 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 2014 is $7 million.

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, 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

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=822263

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Contacts

Fitch Ratings
Primary Analyst:
Evette Caze, +1-212-908-0376
Director
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst:
Andrew Hoffman, +1-212-908-0527
Analyst
or
Committee Chairperson:
Karen Krop, +1-212-908-0661
Senior Director
or
Media Relations:
Elizabeth Fogerty, New York, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

Sharing

Contacts

Fitch Ratings
Primary Analyst:
Evette Caze, +1-212-908-0376
Director
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst:
Andrew Hoffman, +1-212-908-0527
Analyst
or
Committee Chairperson:
Karen Krop, +1-212-908-0661
Senior Director
or
Media Relations:
Elizabeth Fogerty, New York, +1 212-908-0526
elizabeth.fogerty@fitchratings.com