Fitch Rates Montgomery County, MD's $321MM GOs 'AAA'; Outlook Stable
NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned the following ratings to Montgomery County, Maryland (the county) general obligations (GO) bonds:
--$295 million consolidated public improvement bonds of 2013, series A
--$26.1 million consolidated public improvement refunding bonds of 2013, series B 'AAA'.
In addition, Fitch affirms the following bonds:
--$2.2 billion GO bonds at 'AAA'.
The Rating Outlook is Stable.
The GOs are secured by the full faith, credit, and taxing power of Montgomery County.
KEY RATING DRIVERS
COMMITMENT TO RESERVE RESTORATION: Strong operating results in fiscal years 2011 and 2012 materially enhance the county's reserve position following sizable draws that occurred from fiscal years 2008-2010. Fitch believes reserves will continue to improve in line with the county's plans.
BALANCED FISCAL PLAN: The county has adopted a multi-year fiscal plan that balances current resources against spending and continues to address other critical operating priorities relating to fund balance replenishment, pay-as-you-go capital, and other post-employment benefits (OPEB).
EXCELLENT ECONOMIC PROFILE WITH SOME VULNERABILITY TO FEDERAL CUTS: The stable regional economy is anchored by the extensive presence of the federal government and related contracting employment, marked by consistently low rates of unemployment, a highly skilled labor force, and very high income metrics.
DEBT REMAINS MODERATE: Debt ratios are expected to remain at a moderate level despite some pressure from future bond issuance plans to fund the county's capital improvement program (CIP). The county has prudently managed its exposure to other long-term liabilities related to pension and OPEB.
The rating is sensitive to shifts in fundamental credit characteristics, including the county's strong economy. Federal budget cuts under sequestration could result in a softening of the regional economy given the notable direct and indirect federally funded employment. However, Fitch does not currently expect the impact to be severe enough to alter the county's credit fundamentals.
Montgomery County borders Washington, D.C. and northern Virginia. The county's population increased 11% in the last decade and the estimated 2012 population of 1,004,709 is a 3% increase since 2010.
ECONOMIC PERFORMANCE REMAINS VERY STRONG BUT MAY BE PRESSURED BY FEDERAL
Montgomery County continues to exhibit a very impressive economic profile. The county has gained employment each year since 2009. Consequently the July, 2013 unemployment rate is low at 5.3%, well below those of the U.S. (7.7%) and Maryland (7.0%).
The county remains one of the wealthiest in the country with per capita money income and median household income at 170%-180% of the national benchmark. Favorable wealth characteristics are fueled by the highly educated workforce (almost 57% of the adult-aged population holds a bachelor's degree or higher compared to 28% for the nation) and the significant presence of the U.S. government and contractors within the information and intelligence, biotechnology, and high-tech manufacturing industries.
Federal government employment is led by the U.S. Department of Health and Human Services (26,460 employees) and U.S. Department of Defense (DoD; 12,020 employees). Concerns with respect to budget cuts at the DoD are somewhat tempered by the nature of defense operations within the county, which center on the Walter Reed National Military Medical Center and the U.S. Army Research Laboratory. The Walter Reed Army Medical Center was relocated from its prior location in Washington D.C. to the campus of the National Naval Medical Center in Bethesda in November 2011, a move that is expected to generate visitor and outpatient traffic to the facility (benefiting private enterprise). Although, recent reports show a significant percentage of civilian employees will be affected by furloughs.
The National Capital Planning Commission has approved a plan to build a new federal intelligence campus in Montgomery County that will serve as home to 3,000 employees of the Office of the Director of National Intelligence, and notable investments for new facilities for the National Cancer Institute, Nuclear Regulatory Commission, and the National Institute of Allergy and Infectious Diseases.
SHARP IMPROVEMENT IN RESERVES IN FYs 2011 AND 2012
Sound operating surpluses led to increased reserves (the sum of the revenue stabilization fund and the unrestricted general fund balance) by $295.3 million since fiscal 2010 to $409.8 million in fiscal 2012. The fiscal 2012 reserves are equivalent to 15% of general fund spending and transfers out. Fiscal 2012 operating results were particularly strong, adding $212 million to the revenue stabilization fund (RSF) and unrestricted general fund balance. Estimated fiscal year-end 2013 results reflect a $33.7 million increase to the RSF and $27.6 million to the unrestricted fund balance, mainly due to strong income tax performance.
The county's fiscal policy is more conservative than Fitch's standard measure of fund balance. It compares the sum of the RSF and the unassigned portion of the general fund balance to adjusted governmental revenues. The county's fiscal policies were enhanced in June 2010, requiring a minimum reserve equal to 5% of revenue, building up to 10% by fiscal 2020. The fiscal plan estimates a reserve level equal on a budgetary basis to 9.1% of adjusted governmental revenues at year-end fiscal 2013.
FISCAL PLAN ADDRESSES KEY PRIORITIES
The county's fiscal plan for FYs 2014-2019 addresses a number of key initiatives. The fiscal plan matches recurring revenue against recurring spending, and while the adopted FY 2014 budget does propose a larger $60.2 million use of existing reserves (for non-operating purposes) the county forecasts adding more than $140 million to the revenue stabilization fund over the plan period.
The $4.2 billion tax-supported adopted fiscal 2014 budget funds a total of $84 million in pay-as-you-go capital (increasing to $120 million by the end of the plan), restoring a source of future expenditure flexibility and softening demands on long-term debt issuance. The fiscal 2014 budget prudently dedicates $142.6 million to OPEB costs, a $31.7 million year-over-year increase. The county projects full funding of the actuarial required contribution for OPEB by fiscal 2015. Eligibility requirements and the cost-sharing formula for retiree health benefits were changed in 2011 which should help control OPEB costs over time. The budget also funds the first wage increase in three years, which is projected to cost $32 million in fiscal 2014.
The fiscal plan also fully funds additional costs associated with legislation adopted by the state in 2012 related to the maintenance of effort (MOE) which provides a funding floor for the Montgomery County Public Schools (MCPS) and Montgomery College, and a shift in funding responsibility to the counties from the state for the normal cost for teacher pensions.
Additional revenues from the state are expected to offset most of the cost associated with the pension shift (the county estimates a net burden of approximately $10 million in fiscal 2016). The fiscal 2014 budget includes $55.5 million in additional funding to schools.
SEQUESTRATION IMPACT ON BUDGET EXPECTED TO BE MINIMAL
Fitch expects the county's operations will be modestly affected from direct federal revenues losses given identified revenues subject to sequestration represent less than 1% of total governmental revenues. Similarly, the recent federal shutdown should not notably affect revenue collections, especially given that workers will be compensated for lost wages.
Indirect effects from sequestration cuts are expected to have some impact on the county's economy, given that approximately 14% of the labor force works directly for the federal government. Additionally, the county generates 44% of its revenue from income taxes, which will be affected by furloughs due to sequestration. Fitch believes the county has solid spending reduction flexibility to offset any impact, as evidenced by the reduction of expenditures during the recession which included cuts in capital spending and staff reductions.
DEBT TO REMAIN AFFORDABLE DESPITE SIZABLE ANNUAL ISSUANCES
Net direct and overlapping debt of almost $2.9 billion equates to $2,834 per capita or a low 1.6% of market value. Tax supported debt service is budgeted at $313 million in fiscal 2014 or approximately 7.5% of the adopted fiscal 2014 tax-supported budget. Amortization is rapid at 65.7% in ten years. These key debt metrics are considered generally positive by Fitch.
The current issuance will refinance $295 million of bond anticipation notes and $27.7 million of long-term debt. In the short-term, the county will issue an additional $300 million of commercial paper as well as $37 million of taxable limited obligation certificates. The remaining debt issuances during 2013 are expected to be modest refundings.
Other long-term obligations related to pensions and OPEB are moderate
and well managed. The county's defined benefit pension plan is
satisfactorily funded at 76.7%, or an estimated 72.6% (adjusted by Fitch
to assume a 7% investment rate of return) and the Fitch-adjusted
estimate of unfunded actuarial accrued liability of $1.08 billion is
equal to 0.6% of market value.
The county's total pension contribution for fiscal 2013 (inclusive of payments made to a defined contribution plan, the state plan, and length of service award program) will total $134.2 million or approximately 4% of non-capital governmental fund spending. The pension plan was closed to new non-public-safety hires on Oct. 1, 1994. Recent revisions affecting cost-of-living-adjustments and employee contribution rates reinforce management's commitment to pension cost control.
The county established a trust to begin prefunding its OPEB costs in 2007. OPEB costs will equal less than 3% of the tax supported budget in fiscal 2013 and are projected by the county to remain less than 4% by the time the county ramps up to full funding of the OPEB actuarial required contribution in fiscal 2015. Prefunding so far has been modest.
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, and the National Association of Realtors.
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
U.S. Local Government Tax-Supported Rating Criteria