NEW YORK--(BUSINESS WIRE)--Fitch Ratings assigns an 'AA+' rating to the following Annapolis, Maryland (the city) general obligation (GO) bonds:
--$11.5 million public improvement bonds, 2015 series A
--$21.33 million public improvement refunding bonds, 2015 series B
The bonds are expected to sell competitively on April 28. Proceeds of the bonds are being used to finance certain projects of the city and to refund certain outstanding city general obligation bonds for debt service savings.
In addition, Fitch affirms the following ratings:
--Approximately $120.3 million GO bonds at 'AA+'.
The Rating Outlook is Stable.
SECURITY
The full faith, credit, and taxing power of the city are pledged for the payment of debt service.
KEY RATING DRIVERS
STABLE OPERATING ENVIRONMENT: The city has continued to prudently utilize its financial flexibility through expenditure cuts and timely tax rate increases to maintain fiscal balance.
PENSION ARC UNDERFUNDING ADDRESSED: The city has incrementally increased its funding of the police and fire pension plan and expects to reach full funding of the ARC by 2017.
MODERATE DEBT BURDEN: Overall debt levels are moderate and amortization is average. Debt servicing costs are expected to remain low given the city's limited capital needs.
STRONG ECONOMY: The city benefits from a wealthy tax base, with per capita and median income levels well above the national average. The economy also benefits from a stable employment base with a solid government presence enhanced by the military, tourism, and maritime industries.
RATING SENSITIVITIES
OPERATING STABILITY: The rating reflects Fitch's expectation that the city will maintain fiscal balance while not deferring pension costs beyond the planned period.
CREDIT PROFILE
Annapolis is located approximately 25 miles from both Baltimore and Washington, D.C. with an estimated 2013 population of 38,722.
POSITIVE OPERATING RESULTS
Fiscal 2014 marked the fourth consecutive fiscal year of positive operating results, with a $2.3 million operating surplus (4.8% of spending). The fiscal 2014 unrestricted general fund balance of $14.5 million equates to a healthy 21% of spending.
Fitch views the city's recent operating performance with some caution, as surplus results were aided by funding significantly less than the ARC to the police and fire pension plan.
The fiscal 2015 budget keeps the tax rate stable and includes an $812,967 addition to fund balance. The budgeted surplus would have been $560,992 with full funding of the pension ARC. Management expects to meet budget projections.
REVENUE RAISING FLEXIBILITY
The city derives approximately 60% of its revenues from property taxes. Property tax revenues have increased annually between fiscal 2008 and 2014, reflecting a flat tax base, timely tax rate increases and strong collection rates. Real property is assessed every three years. Assessed value declined 8% following the last reassessment in 2013. Growth has been modest at less than 1% over the past two years. The city's property tax rate and levy are not subject to limitation.
MODEST PENSION LIABILITY DESPITE ARC UNDERFUNDING
The city administers a single-employer defined benefit pension plan for police and fire employees, and all general employees are part of the state retirement plan (the State Retirement and Pension System of Maryland). The police and fire pension plan was overfunded prior to the recession. Investment losses in the downturn lowered the funded ratio, and the city was slow to absorb the resulting larger ARC, further eroding the pension's funded ratio.
After several years of suspending its pension contributions to the police and fire pension plan, the city contributed 3% of the ARC in fiscal 2012 followed by an increase to 38% of the ARC in fiscal 2014 and a budgeted 91% for fiscal 2015. The notable increase in funding is somewhat reflective of the decline of the ARC in 2013 and 2015, the latter of which was due to a reduction in the cost-of-living assumption. The city plans to increase contributions until full ARC funding is achieved in fiscal 2017. Fitch considers this practice of significantly underfunding the ARC to be exceptionally weak, particularly for a highly-rated issuer that exhibits notable sources of financial flexibility.
The funded ratio has improved to 89% from 83% in 2011 using Fitch's more conservative 7% discount rate assumption mostly due to the city changing its cost of living adjustment to a flat 2% from a varying percentage. The Fitch-adjusted unfunded actuarial accrued liability of approximately $19 million is low at 0.31% of market value. On a reported basis the plan is 94% funded, using a 7.5% discount rate assumption.
The city's contributions to the state pension system totaled a manageable $1.9 million in fiscal 2014. The funded ratio of the state's pensions has deteriorated in recent years, which could result in higher contributions for participants including the city over time. The city funds its other post-employment benefit (OPEB) on a pay-as-you-go basis. The payment was equal to $3 million (approximately 4% of total governmental fund expenditures) or 60% of the ARC in fiscal 2014. The OPEB UAAL was $50.5 million or 0.8% of taxable market value.
Total carrying costs for debt service, pensions and OPEB, assuming full funding of the city's pension ARC, are currently manageable at 19% of total governmental fund expenditures.
MODERATE DEBT BURDEN
The city's key debt metrics are moderate with net overall debt equivalent to 3.2% of market value or $5,166 per capita. The overall debt burden is heavily influenced by obligations of overlapping Anne Arundel County.
The city's fiscal 2016-2021 proposed general government capital improvement program (CIP) totals a modest $18 million. Maintenance of city facilities and infrastructure projects are the largest components of the CIP. Projects are financed through debt and operating pay-as-you-go financing. Debt levels are expected to remain moderate.
ECONOMIC STABILITY
The city is the capitol of Maryland and the seat of Anne Arundel County (GO bonds rated 'AA+'; Stable Outlook by Fitch).The local economy is anchored by federal, state and local government employment (approximately 25% of labor force), with added depth from tourism and maritime industries due to the city's location on the Chesapeake Bay. While government centers and the United States Naval Academy (USNA) generate significant year-round visitation, the marinas and the historic district attract leisure travelers from around the region.
Annapolis' population is highly educated with 45% of its residents having completed a bachelor's degree or higher, compared to 37% in the state and 29% nationwide. Annapolis' December 2014 unemployment rate remains low at 4.4%, reflecting the stable employment environment.
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.
Additional information is available at 'www.fitchratings.com'.
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=983099
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