Fitch Affirms Howard County, MD's GOs and IDR at 'AAA'; Outlook Stable

NEW YORK--()--Fitch Ratings has affirmed the following Howard County, MD ratings:

--$1.27 million general obligation (GO) bonds at 'AAA';

--Issuer Default Rating (IDR) at 'AAA'.

The Rating Outlook is Stable

SECURITY

The GO bonds are payable from the county's full faith and credit pledge and its unlimited taxing power.

KEY RATING DRIVERS

The 'AAA' long-term IDR and GO ratings reflect the county's strong growth prospects, low long-term liability burden, healthy reserves, and broad budgetary tools.

Economic Resource Base

Howard County is a wealthy Baltimore-Washington, D.C. suburban enclave with a diverse economy of its own. As of 2015, the county's population was 313,414; growth has averaged approximately 1.8% annually.

Revenue Framework: 'aaa' factor assessment

Revenues have been rising at a pace above both the rates of inflation and U.S. GDP growth and Fitch expects this trend to continue. The county has the independent legal ability to raise property tax revenues in an unlimited amount.

Expenditure Framework: 'aa' factor assessment

Education drives the county's spending needs and any reduction would require approval from the state. As such, the county's ability to make spending cuts when needed is somewhat limited. Carrying costs related to debt and pensions are moderately low.

Long-Term Liability Burden: 'aaa' factor assessment

The county's liability burden is low. Future debt needs are manageable, and amortization of existing debt is rapid (65% in 10 years).

Operating Performance: 'aaa' factor assessment

Fitch expects the county to maintain a high level of fundamental financial flexibility throughout economic cycles based on its expenditure and revenue flexibility and conservative fund balance policy, which is supported by solid economic and revenue prospects.

RATING SENSITIVITIES

MAINTENANCE OF STRONG FINANCIAL PROFILE: The rating assumes the county's continued strong financial flexibility, revenue growth prospects and budget controls.

CREDIT PROFILE

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, located in nearby Anne Arundel County (rated 'AA+'/ Stable Outlook), is a major driver of long-term regional growth and Maryland's top employer. The fort, already a home base to all five military services and several federal agencies including the National Security Agency, has been named the headquarters for the U.S. cyber-security center. The county estimates that federal agencies located at Fort Meade employ approximately 12,500 county residents.

The education and healthcare sectors, led by John Hopkins University Applied Physics Laboratory, play a pivotal role in the economy and lend diversity to the notable concentration in government. While employment growth has slowed, the county continues to generate and retain jobs through its economic development efforts. The county's July 2016 unemployment rate of 3.6% is well below the state and national averages.

Economic development activities are focused on the redevelopment program of downtown Columbia. The program includes a hotel/conference center, and retail, residential and office space.

Revenue Framework

Property taxes are the largest revenue source for the county at 50% of general fund revenues followed by income taxes at 42%. Homes values are approximately 91% of the pre-recession peak of fiscal 2006 according to Zillow, and the fiscal 2017 budget projects a third consecutive taxable assessed value increase based on the rolling three-year reassessment cycle and new construction. Income tax revenues in fiscal 2017 are projected to increase for the seventh consecutive year.

The county's natural pace of general fund revenue growth has trended above inflation and U.S. GDP growth without any tax policy changes. Given ongoing economic development as well as positive housing trends, growth prospects are positive.

Property tax revenues or rate are not subject to a cap. The county has not increased the property tax rate in 16 years. The income tax rate was last increased in 2004 to the maximum rate of 3.2%.

Expenditure Framework

The county's largest expenditure is education at roughly 60% of general fund expenditures, followed by public safety at 12%.

Based on the county's history of structural balance and no immediate significant spending pressures, Fitch expects spending growth to remain in line with revenues.

According to the state's maintenance of effort (MOE) mandate, education spending cannot decline year-over-year without state approval. During fiscal 2015, the county provided $23.8 million above the MOE to the school board, which is an area of expenditure flexibility for the county.

Approximately 50% of the county's workforce is unionized with one- or two-year contracts. However, strikes are not permitted and arbitration is not binding on the county council's budget. Carrying costs associated with debt service, actuarially determined pension payments (including the normal cost for teachers' pensions) and other post-employment benefits (OPEB) actual contributions totaled 14% of fiscal 2015 governmental spending; debt service accounted for less than half of the total.

Long-Term Liability Burden

Overall net debt plus the county's unfunded pension liability equals a low 5.7% of personal income excluding self-supporting metropolitan district debt. The county rapidly repays its outstanding debt with 65% of principal retired within 10 years, leaving adequate capacity to fund future borrowing needs. The county's fiscal 2017-2021 capital plan totals $1.6 billion. While the plan is funded with $1 billion of bond proceeds, the county expects future borrowing to approximate $100 million annually, allowing it to maintain debt service costs at 10% of revenue or less. Fitch expects currently low debt levels to increase modestly but remain low relative to personal income.

The county provides pension benefits to its employees through two single-employer defined benefit plans, a general employees plan and a fire and police plan, and annually contributes 100% of the required contribution. As of July 1, 2015, the general employees' plan was funded at 94% and police and fire employees at 82%. Fitch estimates the funded ratios at approximately 89% and 78%, respectively, using Fitch's more conservative 7% discount rate compared to the county's rate of 7.5%. The aggregate adjusted net pension liability totaled $169.6 million or a very low 0.8% of personal income.

The county administers an OPEB trust fund that provides benefits for its retirees. As of the 2014 valuation the unfunded liability is $533.6 million or 2.5% of personal income and the plan is 9.2% funded. While not mandated, the county funds the normal OPEB costs for teachers, which totaled $6.5 million in fiscal 2015.

Operating Performance

Fitch assesses the county's inherent budget flexibility as superior given the county's strong legal ability to increase revenue and reduce expenditures. In response to a weak growth environment during the last recession, the county utilized reserves to balance operations. During the recovery the county rebuilt reserves to strong levels and the county has subsequently maintained healthy reserves. The unrestricted fund balance at fiscal year-end 2015 was $99.5 million or 10% of general fund spending, well above the county's 7% policy. Additionally, the county funds fire and rescue and recreation services outside of the general fund. When Fitch adds these reserves to the general fund's unrestricted balance, available fund balance increases to $118.7 million or 11.8% of spending at year-end 2015. Fiscal year-end 2015 general fund operations include approximately $17 million of pay-go capital spending. Excluding pay-go spending, reserves stay above the reserve safety margin throughout the scenario.

Based on historical results, Fitch would expect a moderate economic downturn to result in a modest decline in revenues in the first year of a downturn, followed by a prompt rebound. The county's financial position should remain solid throughout the economic cycle with the implementation of operational changes similar to those it instituted during the last recession.

The fiscal 2016 approved budget was balanced and represented a 1.5% decrease from the fiscal 2015 budget primarily due to a $43.7 million (2% of spending) decline in use of fund balance. Management estimates positive operating results at year-end mostly due to strong revenue performance. The fiscal 2017 budget is a 4.8% increase over fiscal 2016 and includes an $11 million fund balance appropriation while maintaining the tax rate. Some of the budget increases included $7.2 million above the MOE required level for education, an additional $3 million for county employee OPEB contributions over the pay-go amount, a 2% cost of living salary increase and $5 million for capital spending. Based on the county's multi-year financial forecast, Fitch expects operations to be balanced and reserve levels to remain above the county's 7% policy.

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

In addition to the sources of information identified in the applicable criteria specified below, this action was informed by information from Lumesis and InvestorTools.

Applicable Criteria

U.S. Tax-Supported Rating Criteria (pub. 18 Apr 2016)

https://www.fitchratings.com/site/re/879478

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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
Parker Montgomery
Analyst
+1-212-908-0356
or
Committee Chairperson
Barbara Ruth Rosenberg
Senior Director
+1-212-908-0731
or
Media Relations
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@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
Parker Montgomery
Analyst
+1-212-908-0356
or
Committee Chairperson
Barbara Ruth Rosenberg
Senior Director
+1-212-908-0731
or
Media Relations
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com