NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned an 'AAA' rating to the following Charles County, MD general obligation (GO) bonds:
--$79.25 million consolidated public improvement and refunding bonds of 2016.
The series 2016 bonds are expected to sell on a competitive basis Nov. 15, 2016. Proceeds of the bonds will be used to finance certain capital projects and to refund certain outstanding county GO bonds.
In addition, Fitch affirms the county's Issuer Default Rating (IDR) and approximately $351.8 million of outstanding GO bonds at 'AAA'.
The Rating Outlook is Stable.
SECURITY
The bonds are GO bonds to which the full faith and credit
and unlimited taxing power of the county are pledged.
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
Charles County is located less than 45
minutes from employment opportunities in Washington D.C. and northern
Virginia. With a 2015 population of 156,118 the county's population has
increased by an average annual rate of 1.3% over the past five years.
Revenue Framework: 'aaa' factor assessment
Revenues have been
rising at a pace above 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, although fixed carrying costs related to
debt and pensions are on the low end of the moderate range.
Long-Term Liability Burden: 'aaa' factor assessment
The county's
long-term liability burden is low. Future debt needs are manageable, and
amortization of existing debt is rapid.
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
Charles County's close proximity to Washington, D.C. and northern Virginia employment centers is a positive economic consideration. The favorable regional employment opportunities mitigate the narrower local economy, anchored by several key military installations. The naval research and development center at Indian Head employs approximately 3,245 (civilian and military). However, a larger 21% (approximately 16,000) of the county's labor force consists of civilian employees of the federal government.
Competitive Power Ventures (CPV) is constructing a 725-megawatt (MW) combined-cycle natural gas-fired power plant in the county. The $775 million capital investment will produce modest annual PILOT payment of $1.4 million to $3.8 million over the 23-year agreement once the project is complete. Additionally, the county receives a $2 million payment per year from CPV during construction and has thus far has received two payments. CPV also will be purchasing reclaimed water from the county with annual sales of $1.2 million to $2.2 million. The plant is expected to be operational December 2016.
While employment growth has slowed, the county continues to generate and retain jobs through its economic development efforts. The county's unemployment rate remained well below the national average through the great recession, and now approximates the U.S. level as the national rate has declined.
Revenue Framework
Property taxes are the largest revenue source for
the county at 58% of general fund revenues in fiscal 2015 followed by
income taxes at 32%. After four consecutive years (2011-2014) of
declines in assessed value (AV), the county has experienced three years
of continuous increases in AV. The fiscal 2017 budget projects a $18
billion estimated market value based on the rolling three-year
reassessment cycle and new construction. Income tax revenues have
continued to increase for over a decade. The fiscal 2017 budget projects
a modest decline due to a one-time increase in fiscal 2016.
The county's general fund revenue growth has trended well above inflation and U.S. GDP growth, increasing at a 10-year compound annual growth rate (CAGR) of 5.3% through fiscal 2014. The county has increased the property tax rate three times over the past 10 years; however, the 10-year AV CAGR is still strong at 5.7%. Revenue growth reflects solid gains in the county's assessable base due to new construction and appreciation. Income tax revenue growth has also been solid, increasing at a 10-year CAGR of 3.5% through fiscal 2014. Given ongoing economic development as well as positive housing trends, growth prospects are positive.
Property tax revenues and rates are not subject to a cap. The income tax rate was last increased in 2014 to 3.03% which is below the maximum rate of 3.2%.
Expenditure Framework
The county's largest expenditure is education
at roughly 51% of general fund expenditures, followed by public safety
at 26%.
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, which the state has granted during the recent recession to other communities.
Currently, the county's workforce is not unionized providing broad flexibility to manage labor-related costs. However, beginning October 2016, the county will negotiate pay and benefits with the fraternal order of police and the Charles County Correctional Officers Association, which Fitch does not believe will materially impact expenditure flexibility.
The county's fixed cost burden is affordable, with carrying costs for debt, pensions (including the normal cost for teachers' pensions), and other post-employment benefits (OPEB) equaling 12% of fiscal 2015 governmental expenditures, with debt service accounting for 6%. The 10-year principal amortization rate is rapid at over 80% of principal retired in 10 years.
Long-Term Liability Burden
Overall net debt plus the county's
unfunded pension liability equals a low 4.3% of personal income
excluding self-supporting enterprise fund debt, with about $211 million
of net direct debt. The county's fiscal 2017-2021 capital plan totals
$544 million, including enterprise fund projects. While the plan is
funded with $232 million of tax-supported bonds, Fitch expects liability
levels and debt service costs to remain low.
Fitch does not expect pension liabilities to pressure future operations. The county provides pension benefits through two single-employer defined benefit plans and contributes annually on an actuarially determined basis. As of July 1, 2015, the general employees' plan was well funded at 96% and the sheriffs' plan was funded at 71%. Using Fitch's more conservative 7% discount rate, funding levels are 90% and 66%, respectively. The aggregate adjusted net pension liability (NPL) totals an estimated $127 million or a low 1.6% of personal income.
The county also provides OPEB to its retirees. The county funded its OPEB cost for fiscal 2015 on a pay-go basis and the UAAL associated with OPEB totaled only $143 million.
Operating Performance
The county has maintained a high level of
financial resilience, with reserves comfortably above Fitch's safety
margin for a 'aaa' assessment, sufficient to weather the simulated
revenue decline in a moderate economic downturn scenario. The county
benefits from a statewide triennial assessment process that smooths
annual volatility in tax base performance. The county's superior level
of inherent budget flexibility is representative of solid spending
flexibility and unlimited revenue-raising authority. The unrestricted
general fund balance of $42.8 million in fiscal 2015 was a high 12% of
spending.
The county proved its financial resilience and strong budget management through the most recent recession by utilizing its revenue flexibility and increasing the real property tax rate and the income tax rate as well as occasionally using reserves to compensate for slower revenue growth. Operationally, the county implemented 10 furlough days, offered an early retirement incentive and reduced education spending to the minimum maintenance of effort level among other measures. Fitch expects the county to make similar changes as needed during a future economic downturn.
The fiscal 2016 budget was a 3.2% ($11.1 million) increase over fiscal 2015. The budget included a $4 million fund balance appropriation, which consisted mostly of a bond premium from prior years. The budget also included revenue from a new transfer tax which was projected to generate approximately $4.7 million. The new revenue stream was implemented to address increased school funding and to reduce the stormwater remediation fee. Preliminary general fund operating results show a $19.2 million operating surplus (5% of fiscal 2016 budget), which was mostly due to income and recordation taxes exceeding expectations.
The fiscal 2017 budget is a 2.7% ($9.8 million) increase over fiscal 2016 and includes a $4 million fund balance appropriation while maintaining the real property tax rate. Some of the budget increases included $4.4 million in additional funds for public education, $3.7 million for public safety and $3.4 million for debt service. Based on the county's multi-year financial forecast, Fitch expects operations to be balanced and reserve levels to remain above the county's 8% minimum reserve 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
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1013524
Solicitation
Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1013524
Endorsement
Policy
https://www.fitchratings.com/regulatory
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTPS://WWW.FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.
Copyright © 2016 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch's factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third- party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch's ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed.
The information in this report is provided "as is" without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. All Fitch reports have shared authorship. Individuals identified in a Fitch report were involved in, but are not solely responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees generally vary from US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In certain cases, Fitch will rate all or a number of issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 (or the applicable currency equivalent). The assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of the United Kingdom, or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers.
For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd holds an Australian financial services license (AFS license no. 337123) which authorizes it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001