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

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

--$232.36 million consolidated public improvement (CPI) project and refunding bonds, 2015 series A;

--$41.5 million metropolitan district project and refunding bonds, 2015 series A.

The bonds are expected to sell competitively on April 8. Proceeds from the CPI bonds will be used to permanently finance $100 million in outstanding bond anticipation notes in the form of a line of credit refund approximately $100 million in bonds outstanding for debt service savings. Proceeds from the metropolitan district bonds will permanently finance $28 million in outstanding bond anticipation notes in the form of a line of credit and refund approximately $15.2 million in bonds outstanding for debt service savings.

In addition, Fitch affirms the following ratings:

--Approximately $1.1 billion GO bonds at 'AAA'.

The Rating Outlook is Stable.

SECURITY

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 financial performance and healthy reserves, which temper risk to the credit profile associated with income tax volatility.

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 proximity to the federal government and the extensive presence of 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.

CARRYING COSTS ARE LOW: Carrying costs including debt service, pension and other post-employment benefits (OPEB) are low 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

CONTINUED STRONG FINANCIAL POSITION: The rating is sensitive to shifts in fundamental credit characteristics including the county's strong financial management practices. The 'AAA' rating and Stable Rating Outlook reflect Fitch's expectation that such shifts are unlikely.

CREDIT PROFILE

Howard County, Maryland is 251 square miles in area and is home to approximately 304,580 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.

Positive fiscal year-end 2014 operating results reflected a fourth consecutive year of growth in income tax revenue, the county's second largest revenue source at 41% of the general fund. After transfers, which were mostly to the capital projects fund, the year ended with a $7.4 million deficit. The unrestricted balance of $126.3 million was equal to a solid 13.2% of general fund spending. The county's policy is to maintain an unassigned fund balance of at least 7% of operating expenditures, which it has exceeded.

The fiscal year 2015 general fund budget is 6% ($57.7 million) more than the fiscal year 2014 budget and includes a $43.7 million fund balance appropriation, the bulk of which is for one-time spending. The county has appropriated similar fund balance amounts in recent years' budgets and historically has unspent the budget.

Year-to-date results show income tax revenues below budget but offset by mid-year spending reductions and a hiring freeze. Use of the appropriated fund balance would bring the unrestricted fund balance down to approximately $82.6 million or 8.2% of budgeted fiscal 2015 spending, which is adequate given the county's overall credit profile. The county prepares a multi-year financial forecast to identify and address future fiscal challenges which Fitch views as a positive. The forecast shows balanced operations without the use of fund balance, mostly by reducing the use of one-time spending.

The county relies mostly on property tax revenues (48%) for general fund operations. The county's property tax rate and levy are not subject to statutory or charter limitation or cap, but it is high for the region. Income taxes account for 41% of general fund revenues. The county's income tax rate is at the 3.2% cap.

DEEP ECONOMIC BASE

The county is among the wealthiest in the nation, featuring a highly educated workforce. Residents are employed throughout a deep and diverse economy, led by the federal government. Fort Meade is a major driver of long-term regional growth and Maryland's top employer, located in Anne Arundel (rated 'AA+', Stable Outlook). The fort is already a home base to all five military services and the National Security Agency and was recently named the headquarters for the new U.S. cyber-security center. Activity at the fort currently reportedly contributes $2.5 billion annually to the county's economy in contracts and wages.

The education and healthcare sectors, led by John Hopkins University Applied Physics Laboratory, play a pivotal role in the economy and lend additional stability to the government sector. While employment growth has slowed, the county continues to generate and retain jobs through its economic development efforts. The county's December 2014 unemployment rate of 3.9% is well below the state and national averages.

Economic development activities are focused on the redevelopment of downtown Columbia, the further leveraging of the county's proximity of Fort Meade, and manufacturing and retail development. Jovian Concepts, a cyber-security company, has acquired office space in Columbia and will add 45 new jobs. NAFCO, a seafood distributor, is investing $12 million in a new seafood processing facility, creating 50 new jobs.

FAVORABLE DEBT PROFILE

Debt levels are moderate overall at $3,810 per capita and 2.56% of market value, net of self-supporting GO debt for water and sewer projects. Amortization is average at 58% within 10 years.

Fitch expects the county's debt burden to remain manageable. The county has adopted a fiscal 2015-2019 capital improvement plan (CIP) totaling $1.7 billion, including approximately $250 million of water and sewer projects. The county's education system remains the emphasis of the CIP, accounting for approximately $850 million. The plan is mostly debt funded ($1 billion). Given amortization and projected tax base growth, Fitch expects debt ratios to increase but remain in the moderate range. The current plan would essentially double the current debt burden; however, management will limit additional debt to 10% of spending.

OTHER LONG-TERM LIABILITY COSTS ARE LOW

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, 2014, the general employees' plan was well funded at 91% and police and fire employees' at a weaker 79%. Fitch estimates the funded ratios at approximately 85% and 73%, respectively, using Fitch's more conservative 7% discount rate. The aggregate adjusted unfunded actuarial accrued liability (UAAL) totaled $198 million or a very low 0.3% of market value. Fitch notes that the county reduced its rate of return assumption to 7.75% during fiscal 2014 and has prudently further reduced the assumption to 7.5% during fiscal 2015.

The county also provides other post-employment benefits (OPEB) to its retirees. The county funded its OPEB cost for fiscal 2014 on a pay-go basis and made a contribution ($12 million) to pre-fund the liability, bringing the funded ratio to a modest 4%. County management expects to begin fully funding the OPEB ARC by 2020. The UAAL associated with OPEB totals $717.2 million or 1.6% of market value. Carrying costs for debt service, pension (including teachers' pension costs) and OPEB totaled a low 13.7% of fiscal 2014 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=981661

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Contacts

Fitch Ratings, Inc.
Primary Analyst
Evette Caze
Director
+1-212-908-0376
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Michael Rinaldi
Senior Director
+1-212-908-0833
or
Committee Chairperson
Steve Murray
Managing Director
+1-212-908-0568
or
Media Relations
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings, Inc.
Primary Analyst
Evette Caze
Director
+1-212-908-0376
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Michael Rinaldi
Senior Director
+1-212-908-0833
or
Committee Chairperson
Steve Murray
Managing Director
+1-212-908-0568
or
Media Relations
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com