Fitch Rates Charles County, MD's GOs 'AAA'; Outlook Stable

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

--$39 million consolidated public improvement bonds of 2014.

Bond proceeds are being used to finance certain public buildings, facilities and grounds in the county. The bonds will sell via competitive sale Sept. 16.

In addition, Fitch affirms the following ratings:

--$315 million in outstanding GO debt at 'AAA'.

The Rating Outlook is Stable.

SECURITY

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 REASONABLE RESERVE LEVELS: The county has maintained a reduced but healthy fund balance as reserves were utilized over the past several years for capital and operating needs.

AMPLE LEGAL TAX RATE FLEXIBILITY: The county's taxing capacity under the income tax cap as well as the unlimited property tax rate provides additional financial flexibility.

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.

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.

OTHER LONG-TERM LIABILITIES ARE EASILY MANAGED: Costs for retiree obligations are low and do not pressure operations.

RATING SENSITIVITIES

REDUCTION IN RESERVES: The rating is sensitive to a shift in fundamental credit characteristics, and in particular the stability of financial operations in the near term. Reserve levels remain adequate considering the county's other strengths; however, Fitch is moderately concerned about the recent history of operating deficits and use of reserves for operations, a practice that is not viewed as sustainable at the 'AAA' rating level.

CREDIT PROFILE

Charles County, with a 2013 population of 152,864, is located less than 45 minutes from the myriad employment opportunities in Washington D.C. and northern Virginia. The county's population has increased 27% since 2000, outpacing the region, state and nation.

SOUND RESERVE LEVELS

Financial operations are strong and reserve levels are expected to remain healthy despite some drawdown based on year-to-date fiscal 2014 performance. The county has gradually drawn reserves that were accumulated during the economic boom of the last decade, largely to fund capital and other one-time needs.

In fiscal 2013, the general fund incurred a modest operating surplus of $2.9 million (0.9% of spending) due to conservatively budgeting expenditures. The 2013 unrestricted general fund balance is $39.7 million or 11.8% of spending.

MODEST USE OF FUND BALANCE EXPECTED FOR FISCAL 2014

The adopted fiscal 2014 budget was a 3.8% increase ($12.4 million) from fiscal 2013 and included a property tax rate increase, and an increase to the income tax rate, to offset a third consecutive decline in the tax base and to fund increased school spending, pay salary increases and new public safety positions. Projected fiscal year-end results show a higher $4.7 million use of reserves due to unforeseen storm-related costs ($2.2 million) and additional pay-go capital spending. Total fund balance is expected to remain healthy at 12.7% of estimated fiscal 2014 spending.

TAX RATE FLEXIBILITY

The adopted fiscal 2015 budget is 4.6% higher than the 2014 adopted budget. The budget keeps the property tax and income tax rates constant, includes a $643,700 increase to the contingency reserve, increases the appropriation from fund balance from last year by $272,900 to $3.2 million and includes the receipt of $3.5 million in additional recordation tax from CPV. Management has confirmed since budget adoption the receipt of $4.3 million in recordation taxes from CPV. The budget funds the opening of a new high school, expansion of the state's attorney's office and an increase in debt service costs. Fitch believes that the county should be able to recover most, if not all, of the appropriation from fund balance given several conservative revenue assumptions including the additional recordation tax revenue from CPV and the additional contingency reserves in the fiscal 2015 budget and a historic trend of actual operating results coming in under-budget.

Fitch views the county's margin under the state income tax rate cap and a regionally competitive property tax rate as important measures 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. The favorable employment location mitigates the more narrow local economy anchored by several key military installations, including a naval research and development center at Indian Head which employs 3,032 and has an annual civilian payroll of approximately $340 million. A larger 20% (approximately 14,000) of the county's labor force consists of directly employed civilian employees of the federal government. 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.

CPV is constructing a state-of-the-art 725-megawitt (MW) combined-cycle natural gas-fired power plant in the county. The project is a $775 million capital investment and is expected to generate 350 to 400 temporary jobs and 25 permanent jobs. Aside from the one-time $4.3 million in recordation tax revenue, the plant is expected to generate an annual PILOT payment of $1.3 million to $3.5 million over the 21-year PILOT agreement.

The county's unemployment rate trends comfortably below state and national averages, measuring 5.5% in May 2014. Wealth indicators are well above state and national averages.

TAX BASE GROWTH EXPECTED

The county's estimated market value has declined 15% between 2010 and 2013 to $17.6 billion. Estimated 2014 and 2015 values show a more modest decline of 2.5% and 0.3% respectively. The current trend is expected to be reversed with the construction of CPV's $775 million natural gas power plant this fall. Also, housing market forecasts show a modest increase over the next year.

The county benefits from a statewide triennial assessment process that smoothes annual volatility in tax base performance. The county is somewhat constrained 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%.

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 1.33% of market value, or $1,495 per capita. The county's policy caps debt service at 8% of general fund operating revenues; fiscal 2013 debt service expenditures accounted for 5.8% of total governmental spending. Amortization is rapid with 85% retired in 10 years.

Fitch expects the county's debt burden to remain manageable. The fiscal 2015-2019 capital improvement plan totals $418 million. The plan is nearly 78% debt-funded. Utility projects, account for the bulk costs at over one-half. Given the self-supporting nature of the utilities the additional debt will not affect the county's debt ratios.

Fitch does not expect long-term liabilities related to retirement 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, 2013, the general employees' plan was well funded at 90% and the sheriffs' plan was funded at 76%. Using Fitch's more conservative 7% discount rate, funding levels were 83% and 70%, respectively. The aggregate unfunded actuarial accrued liability (UAAL) totaled $61.2 million or a very low 0.40% of market value.

The county also provides other post-employment benefits (OPEB) to its retirees. The county funded its OPEB cost for fiscal 2013 on a pay-go basis and the UAAL associated with OPEB totaled a manageable $154 million or 0.9% of market value. Carrying costs for debt service, pension and OPEB totaled a manageable 9.8% of governmental fund spending.

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, Virginia Employment Commission.

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=858034

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Contacts

Fitch Ratings
Primary Analyst
Evette Caze
Director
+1-212-908-0376
Fitch Ratings, Inc.
33 Whitehall St.
New York NY 10004
or
Secondary Analyst
Michael Rinaldi
Senior Director
+1-212-908-0833
or
Committee Chairperson
Douglas Offerman
Senior Director
+1-212-908-0889
or
Media Relations
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

Sharing

Contacts

Fitch Ratings
Primary Analyst
Evette Caze
Director
+1-212-908-0376
Fitch Ratings, Inc.
33 Whitehall St.
New York NY 10004
or
Secondary Analyst
Michael Rinaldi
Senior Director
+1-212-908-0833
or
Committee Chairperson
Douglas Offerman
Senior Director
+1-212-908-0889
or
Media Relations
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com