Fitch Rates Howard County, MD GO Bonds 'AAA'; Outlook Stable
NEW YORK--(BUSINESS WIRE)--Fitch Ratings assigns an 'AAA' rating to the following Howard County, Maryland (the county) general obligation (GO) bonds:
--$120.4 million consolidated public improvement (CPI) project and refunding bonds, 2014 series A (tax-exempt bonds);
--$1.5 million consolidated public improvement bonds, 2014 series B (taxable bonds);
--$20.8 million metropolitan district project and refunding bonds, 2014 series A.
The bonds are expected to sell competitively on March 18th. Proceeds from the CPI bonds will be used to permanently finance $100 million in outstanding commercial paper bond anticipation notes, finance certain capital projects and refund approximately $18.5 million in bonds outstanding for debt service savings. Proceeds from the metropolitan district bonds will fund the costs of water and sewer capital projects and refund approximately $5.8 million in bonds outstanding for debt service savings.
In addition, Fitch affirms the following ratings:
--Approximately $869.4 million GO bonds at 'AAA'.
The Rating Outlook is Stable.
The consolidated public improvement and metropolitan district bonds are secured by the county's full faith and credit pledge and its unlimited taxing power.
KEY RATING DRIVERS
STRONG FINANCIAL MANAGEMENT: Prudent management and planning are evidenced in the county's stable financial performance and solid reserves, which temper risk associated with income tax volatility to the credit profile.
STABLE AND WEALTHY ECONOMIC BASE: Low levels of unemployment and robust income indicators reflect the quality of the local labor force, the county's favorable location along the Baltimore-Washington, D.C. corridor, and the extensive presence of the federal government and its contractors.
MODERATE DEBT PROFILE: Howard County continues to adhere to good debt management guidelines, which have allowed overall debt levels and amortization to remain moderate.
CARRYING COSTS ARE LOW: Carrying costs including debt service, pension and other post-employment benefits (OPEB) are low but expected to increase modestly as the county issues additional debt and the state shifts a portion of the burden of teacher pension costs to the counties.
CONTINUED STRONG FINANCIAL POSITION: The rating is sensitive to shifts in fundamental credit characteristics including the county's strong financial management practices. The 'AAA' rating and Stable Rating Outlook reflect Fitch Ratings' expectation that such shifts are unlikely.
Howard County, Maryland is 251 square miles in area and is home to approximately 299,430 residents. The county is located between Baltimore, Maryland and Washington, D.C.
HEALTHY RESERVE LEVELS
Financial operations are strong and reserve levels are expected to remain healthy, given year-to-date fiscal 2014 performance. Positive fiscal year-end 2013 results reflected a third consecutive year of growth in income tax revenue, the county's second largest revenue source at 41% of the general fund. The unrestricted general fund balance increased to $133.7 million or a healthy 15% of general fund spending, resulting from a $21.8 million operating surplus which compared favorably to the conservative budgeted drawdown of $21.8 million.
The fiscal year 2014 general fund budget is 7.9% ($71 million) more than the fiscal year 2013 budget and includes a $46.3 million fund balance appropriation. The budget funds a $19.3 million increase for pay-as-you-go capital, $21.8 million in education ($2.6 million attributable to the shift in teachers' pension costs) and $9.6 million for public safety.
Year-to-date operations show strong positive variances of $24.6 million, driven by strong income tax performance. If expenditures continue to track close to budget the county would record a $19.9 million operating deficit. The county historically has realized positive expenditure variances as well, so Fitch believes a much more modest use of fund balance is likely.
DEEP ECONOMIC BASE
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 and defense build-up at Fort Meade, a major driver of long-term regional growth and Maryland's top employer. The fort is already a home base to all five military services and the National Security Agency and was recently named the headquarters for the new U.S. cyber-security center. Activity at the fort currently contributes $2.5 billion annually to the county's economy in contracts and wages.
The education and healthcare sectors, led by John Hopkins University Applied Physics Laboratory, play a pivotal role in the economy, lending additional stability to that provided by the government sector. The county's December 2013 unemployment rate of 4.0% is well below the state and national average.
FAVORABLE DEBT PROFILE
Debt levels are moderate overall for the county at $3,488 per capita and 2.3% of market value, net of self-supporting GO debt for water and sewer projects. Amortization is average at 59% within 10 years.
Fitch expects the county's debt burden to remain manageable. The county has adopted a fiscal 2015 - 2019 capital improvement plan (CIP) totaling $1.6 billion, including water and sewer projects. The county's education system remains the emphasis of the CIP, accounting for $570 million. The county plans to issue approximately $120 million in bonds annually over the next several years, which should not have a material impact on the debt burden.
Long-term liabilities related to employment benefits are not expected to pressure future operations. The county provides pension benefits to its employees through single-employer defined benefit plans and annually contributes 100% of the annual required contribution. As of July 1, 2012 the general employees' plan was well funded at 89.3% and police and fire employees' at a weaker 76.5%. Fitch estimates the funded ratios at 80% and 69%, respectively, using Fitch's more conservative 7% discount rate. The aggregate unfunded actuarial accrued liability (UAAL) totaled $95 million or a very low 0.21% of market value.
Beginning fiscal 2013, the state began shifting teachers' pension costs to local governments over a four-year phase-in process. The state is expected to offset the majority of the costs with increases in various revenue streams such as income tax, indemnity mortgage recordation tax and local income reserve relief. The cost to the county for fiscal 2014 is $12.5 million.
The county also provides other post-employment benefits (OPEB) to its retirees. The county funded its OPEB cost for fiscal 2013 on a pay-go basis and made a contribution to pre-fund, bringing the funded ratio to 3.6%. County management expects to begin fully funding the OPEB ARC by 2020, although prior prefunding targets have not been met. The UAAL associated with OPEB totals $717.2 million or 1.6% of market value. Carrying costs for debt service, pension and OPEB totaled a low 13.3% of fiscal 2013 governmental fund spending.
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, Real Estate Business Intelligence.
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