Fitch Rates Ocean City, MD's $18MM GOs 'AA-'; Outlook Stable

NEW YORK--()--Fitch Ratings has assigned an 'AA-' rating to the following general obligation (GO) bonds of Ocean City, Maryland (the city):

--$17 million GO municipal purpose bonds of 2015.

The bonds are expected to be sold competitively on Dec. 10, 2015. Proceeds will be used to finance certain costs of acquisition, construction and improvements to public projects.

In addition, Fitch has affirmed the following ratings:

--$71.3 million of outstanding GOs at 'AA-'.

The Rating Outlook is Stable.

SECURITY

GO bonds are general obligations secured by the full faith and credit and unlimited taxing power of the city.

KEY RATING DRIVERS

SEASONAL TOURISM-BASED ECONOMY: The tourism sector remains a significant economic driver, vulnerable to economic cycles and contributing to seasonal employment fluctuations.

HISTORICALLY STRONG FISCAL MANAGEMENT: Prudent management decisions and adherence to fiscal policies have yielded solid reserve levels despite a weakened but stabilized taxable base.

MANAGEABLE DEBT BURDEN: Debt levels are low as a percent of market value in contrast to the high per capita debt burden, which is indicative of a tourist-based economy with a smaller permanent population. Pension and other post-employment benefits (OPEB) obligations are well managed and do not stress financial flexibility.

RATING SENSITIVITIES

TOURISM BASED ECONOMY: The rating is sensitive to shifts in fundamental credit characteristics including the city's tourism based economy. The Stable Outlook reflects Fitch's expectation that such shifts are unlikely over the near to medium term.

CREDIT PROFILE

Ocean City is located along the Maryland coast in Worcester County (GO bonds rated 'AA'/Outlook Stable), approximately 135 miles from the city of Baltimore, Maryland and 150 miles from Washington D.C. Its status as a popular vacation area is evidenced by the average summer weekend population of 250,000 compared to a year-round residential population of approximately 7,000.

NARROW TOURISM-DRIVEN LOCAL ECONOMY

Tourism and hospitality is the leading employment sector at 37%. Top employers include several hotel and restaurant establishments including the Harrison Group and O.C. Seacrets. County unemployment rates exhibit a pattern similar to that of tourist arrivals. The Worcester county unemployment rates averaged 13.8% from January-April 2015, the traditional off-season for tourism, and dropped to an average of 7.7% from May-August.

The city's permanent population has remained flat over the last decade at approximately 7,000. The city's median family income is 103% of the national average but 74% of the state's high average. However, additional wealth flows into the county during the summer months from tourists and second homeowners.

Through local and state economic development efforts, Ocean City has tried to extend the visitor season beyond the summer months. The Ocean City Convention Center, a joint state and city project, attracts largely state and regional trade groups. A $14 million joint expansion project with the Maryland Stadium Authority was recently completed.

The state divides the county into three assessment groups, with annual reassessments rotating each year (thereby smoothing annual volatility in tax base performance). Nevertheless, assessed value declined a substantial 30% between 2009 and 2014. The assessed value for 2015 shows modest growth of 0.7%. The fiscal 2015 tax base is $8.7 billion and is diversified with no top taxpayer concentration.

HEALTHY FINANCIAL FLEXIBILITY

The city's financial condition is sound, with consistently healthy reserve levels and tax raising capacity. General operations are mostly funded by property taxes (53%). The property tax rate and levy are not subject to limitation providing ample revenue flexibility.

After several years of very modest operating deficits or essentially break-even results, the city reported a $2.4 million (3% of spending) net general fund operating surplus at year-end 2015. The general fund unrestricted fund balance increased to $17.6 million or a very healthy 22.6% of spending. General fund operations benefitted from general government spending which was 3% under budget and positive revenue variances mainly in property taxes and economically sensitive revenue such as room and food taxes.

The city has a fund balance policy to handle potential revenue shortfalls, cash flows for the peak employment in the summer season, and for emergencies. In 2012, the city council evaluated economic conditions and weather-related risks and prudently changed the general fund balance policy from 12% of general fund expenditures to 15%. Reserves remain in line with the policy.

The fiscal 2016 adopted budget is approximately a 5% increase over the fiscal 2015 budget and includes a modest $250,000 use of fund balance and a less than a half cent tax rate increase although the increase in the levy is essentially flat. The budget funds $2 million in pay-go capital projects and a 2% COLA.

LOW-RISK DEBT PROFILE

Ocean City's outstanding debt and future capital needs are driven by the necessity to ensure an infrastructure that can accommodate the needs of the tourist industry. Nearly all direct debt is secured by the city's general obligation pledge, although water and sewer debt is self-supporting. Overall tax-supported net debt, inclusive of county debt, is a low 1.3% of market value. As is commonly found in areas with low permanent populations but an abundance of second homes, debt per capita is an extremely high $15,751. Debt service equaled a low 6.5% of total governmental spending for fiscal 2015.

Future debt plans are limited. The fiscal 2016 - 2020 capital plan totals $136.1 million, including $47.3 million for the self-supporting water and wastewater fund. The city plans to issue GO debt ($11 million) for a new public works complex and fire station during 2018 but timing will ultimately depend on the receipt of federal funding. Historically, management has demonstrated a commitment to pay-go funding. The plan includes between $2 million and $6.6 million of pay-go contributions annually for general government purposes (3%-9% of budgeted spending).

Fitch views as positive the city's efforts to limit its pension and other post-employment benefit (OPEB) liabilities. The city closed its defined benefit plan for general employees to new employees in fiscal 2011 but the single-employer defined benefit plan for public safety employees remains open. General employees hired after 2011 participate in a mandatory defined contribution plan. Under GASB 68 the general and public safety plans are funded at an estimated 80% and 81% respectively using a 7% discount rate. On an adjusted actuarially determined basis as of April 2015, the plans are 88% and 84% funded. OPEB obligations as of July 2014 were 40% funded. For fiscal 2015, the city contributed $4.6 million (5.8% of spending) for pension costs and fully funded the OPEB ARC of $3 million (a manageable 4% of spending).

Additional information is available at 'www.fitchratings.com'.

Fitch recently published an exposure draft of state and local government tax-supported criteria (Exposure Draft: U.S. Tax-Supported Rating Criteria, dated Sept. 10, 2015). The draft includes a number of proposed revisions to existing criteria. If applied in the proposed form, Fitch estimates the revised criteria would result in changes to fewer than 10% of existing tax-supported ratings. Fitch expects that final criteria will be approved and published by Jan. 20, 2016. Once approved, the criteria will be applied immediately to any new issue and surveillance rating review. Fitch anticipates the criteria to be applied to all ratings that fall under the criteria within a 12-month period from the final approval date.

In addition to the sources of information identified in the applicable criteria specified below, this action was informed by information from CreditScope, IHS Global Insight, and Zillow Group.

Applicable Criteria

Exposure Draft: U.S. Tax-Supported Rating Criteria (pub. 10 Sep 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869942

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

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https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=995934

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=995934

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

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Contacts

Fitch Ratings
Primary Analyst
Evette Caze
Director
+1-212-908-0376
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Kevin Dolan
Director
+1-212-908-0538
or
Committee Chairperson
Amy Laskey
Managing Director
+1-212-908-0568
or
Media Relations:
Sandro Scenga, +1-212-908-0278
sandro.scenga@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Evette Caze
Director
+1-212-908-0376
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Kevin Dolan
Director
+1-212-908-0538
or
Committee Chairperson
Amy Laskey
Managing Director
+1-212-908-0568
or
Media Relations:
Sandro Scenga, +1-212-908-0278
sandro.scenga@fitchratings.com