Fitch Affirms Aberdeen, Maryland's Unlimited Tax GO Bonds at 'AA'; Outlook Stable

SAN FRANCISCO--()--Fitch Ratings has affirmed Aberdeen, Maryland's (the city) outstanding obligations as follows:

--$6.8 million unlimited tax general obligation (ULTGO) bonds, series 2011 at 'AA'.

The Rating Outlook is Stable.

SECURITY

The bonds constitute a general obligation of the city to which the city has irrevocably pledged its full faith and credit and unlimited taxing power.

KEY RATING DRIVERS

BALANCED OPERATIONS; HEALTHY RESERVES: Controlled spending combined with conservative budgeting has contributed to consistent general fund operating surpluses. Despite recent draws for one-time capital spending, general fund reserves remain strong.

MILITARY DOMINATES LOCAL ECONOMY: The local economy is centered around the Aberdeen Proving Grounds (APG). The APG has benefited from consolidation from other bases and a shift in investment to military research and development. Socioeconomic indicators are average with income levels comparable to that of the nation, but lower than Harford county (rated 'AAA' by Fitch) and the Baltimore MSA.

MODERATE LONG-TERM LIABILITY BURDEN: Current outstanding debt represents a moderate burden on city resources. Debt ratios are expected to improve due to the absence of future borrowing plans and rapid principal amortization. The city's pension plans are well funded, and other post-employment benefits (OPEB) liabilities are limited.

WEAK REAL ESTATE MARKET: The tax base has continued to experience declines; however, revenue loss has been offset by increases in other revenue sources.

RATING SENSITIVITIES

FINANCIAL CUSHION: Weakened reserves or consistent structural imbalance could put downward pressure on the credit. Given the concentrated and limited economy, upward rating action is unlikely.

CREDIT PROFILE

The city of Aberdeen is located about 30 miles northeast of Baltimore in Harford County (the county) and home to the U.S. Army's oldest active proving ground. Population in the city is over 15,000.

STRONG RESERVES, PLANNED USE OF FUND BALANCE

The city's financial performance has been consistently positive, with sound reserves providing a solid financial cushion, mitigating some of the risk related to the city's concentrated economy. Operating results also benefit from conservative budgeting and prudent cost management.

Management estimates fiscal 2015 will end with an unrestricted general fund balance of around $9 million (from almost $11 million two years ago), after two years of planned use of reserves for one-time capital spending. Operational results continue to outperform budgets with fiscal 2015 marking at least the tenth consecutive fiscal period of positive general fund operations (net of one-time uses), and general fund reserve level remains strong at 50% of spending plus transfers.

The city established a fund balance target of between 15% and 50% of general fund revenues in fiscal 2014, and has been in compliance with the policy by spending down accumulated reserves to below 50%.

NEW HOTEL TAX

The city began collecting hotel taxes in late fiscal 2015 to support the city's stadium fund operations, thereby reducing or eliminating the need for general fund transfers. In fiscal 2014, the general fund transferred $355,000 to the stadium fund.

This new revenue stream also allowed the city to lower its property tax rate by 2 cents per $100 of assessed value (AV) due to the reduced general fund burden. Overall, the net impact is expected to be positive, with estimated additional hotel tax revenue exceeding the forgone property taxes.

ECONOMIC BENEFITS FROM ABERDEEN PROVING GROUND

The APG provides over 16,000 civilian jobs. Recent army spending cuts resulted in less than 1% position eliminations, and the loss has been fully offset due to a new program at the APG.

APG drives economic activity within the city. APG has historically focused on lower-tech ordinance development and testing, but has recently been transitioning towards higher-tech military research and development. This transition has been spurred by the consolidation of several bases into the proving ground. As a result, Fitch believes the activity at APG bodes well for area employment stability.

The city's water and sewer system also serves APG. During fiscal 2015, the city collected $800,000 or 5% of total general fund revenue from APG user fees.

AVERAGE SOCIOECONOMIC INDICATORS

Outside APG, the local economy is fairly limited and focused largely on local government and retail. The city also benefits from its proximity to the more diverse employment opportunities of Baltimore, to which the city is connected by highway and the Maryland Area Regional Commuter (MARC) train line.

The city's median household income is equivalent to 76% of the state average, with an elevated poverty rate (14.2% vs. 9.8% state-wide). The indicators are closer to national averages, at 106% of the national average median household income and a comparable poverty rate.

Employment within the county (city data not available) continues to recover from losses during the recession, with year-over-year (yoy) increase of 1.8% as of May 2015. The county unemployment rate improved to 5.2% as of May 2015 from 5.7% a year ago, and is comparable to that of the state and nations.

WEAK HOUSING MARKET, LIMITED IMPACT ON TOTAL REVENUES

Total taxable value experienced a cumulative 12% decline since fiscal 2012, following several years of tax base growth, but is still 4% above the 2009 value. Meanwhile, the city's millage rate has been adjusted down to $0.66 per $100 AV in fiscal 2016 from $0.70 in 2009. Property tax is the largest component, making up about 60% of total general fund revenues. However, increases in other revenues were sufficient to completely offset the property tax revenue underperformance, resulting in increasing total general fund revenues over the last four years. In addition, the city retains the flexibility to adjust property tax rates in the absence of a statutory limit, should AV fall again.

It remains unclear if tax base recovery has started. Zillow records a 5.2% yoy decline in its home price index for the city, and forecasts further weakening. Meanwhile, a handful of major commercial projects are undergoing expansion or being constructed within the city, which may offset other tax base declines.

MODERATE DEBT PROFILE AND AFFORDABLE FIXED COSTS

Overall debt represented a moderate 3.5% of total market value and $3,250 per capita in fiscal 2014, and principal amortizes rapidly. The city does not plan on issuing debt in the near term; however, Fitch believes the lack of a formal capital planning document raises concerns over whether the city has fully anticipated their future capital needs.

The city's pension plans are well funded, and funding ratios may improve further as the city continues to pay at or above 100% of the annual required contribution (ARC). The closed city employee plan is 92% funded using its 5.25% investment return assumption, while Fitch estimates its police pension plan is 83% funded, using a more conservative 7% rate of return, versus the plan's assumed 7.25% rate. Other post-employment benefits (OPEB) are funded on a pay-go basis, although the unfunded liability amounts to less than 0.2% of the city's AV.

Total carrying costs for debt service, ARC and OPEB pay-go represented a moderate 18% of governmental spending in fiscal 2014. Carrying costs are expected to increase but remain moderate as principal is rapidly paid down and the ARC is likely to increase.

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, Underwriter, and Zillow.

Applicable Criteria

Tax-Supported Rating Criteria (pub. 14 Aug 2012)

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

U.S. Local Government Tax-Supported Rating Criteria (pub. 14 Aug 2012)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=990355

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=990355

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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Contacts

Fitch Ratings
Primary Analyst
Yueping Liu
Associate Director
+1-415-732-5629
Fitch Ratings, Inc.
650 California Street, 4th floor
San Francisco, CA 94108
or
Secondary Analyst
Evette Caze
Director
+1-212-908-0376
or
Committee Chairperson
Karen Ribble
Senior Director
+1-415-732-5611
or
Media Relations:
Sandro Scenga, +1 212-908-0278
sandro.scenga@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Yueping Liu
Associate Director
+1-415-732-5629
Fitch Ratings, Inc.
650 California Street, 4th floor
San Francisco, CA 94108
or
Secondary Analyst
Evette Caze
Director
+1-212-908-0376
or
Committee Chairperson
Karen Ribble
Senior Director
+1-415-732-5611
or
Media Relations:
Sandro Scenga, +1 212-908-0278
sandro.scenga@fitchratings.com