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Fitch Rates Maryland's $900MM GOs 'AAA'; Outlook Stable

NEW YORK--(BUSINESS WIRE)--Fitch Ratings assigns an 'AAA' rating to the following state of Maryland (the state) general obligation (GO) bonds, state and local facilities loan of 2014, second series, consisting of:

--$100 million second series A tax-exempt bonds (negotiated);

--$400 million second series B tax-exempt bonds (competitive);

--$400 million second series C tax-exempt refunding bonds (competitive).

The par amount of the second series C refunding bonds is subject to change.

The negotiated sale of the second series A bonds will take place beginning on July 18, with the competitive sale on the second series B and C taking place on July 23.

In addition, Fitch affirms the ratings on the following obligations of the state:

--$8.4 billion in outstanding state GO bonds at 'AAA';

--$19.3 million in Maryland Transportation Authority parking lease revenue bonds, series 2005 at 'AA+';

--$16.9 million in Maryland certificates of participation, series 2011A at 'AA+';

--$171.1 million in Maryland Stadium Authority bonds at 'AA'.

The Rating Outlook is Stable.

SECURITY

The bonds are general obligations to which the state's full faith and credit are pledged.

KEY RATING DRIVERS

CONSERVATIVE FINANCIAL OPERATIONS: Financial operations are conservative, and the state maintains a well-funded rainy day fund. The state took repeated action during the course of the last recession to address projected budget gaps, including raising tax revenues, cutting spending, and using rainy day and other balances.

STRONG DEBT MANAGEMENT: Debt oversight is strong and centralized, and the debt burden is moderate. The state has policies to maintain debt affordability, and the constitution requires GO and transportation bonds to amortize within 15 years.

PENSION FUNDING REFORMS: Pension funding levels have deteriorated, although the state has undertaken extensive reforms to pensions and other post-employment benefits to improve funding levels.

BROAD ECONOMY: The state has a diverse, wealthy economy, benefiting from its proximity to the nation's capital.

RATING SENSITIVITIES

CONTINUATION OF CURRENT PRACTICES: Sound fiscal management practices and the consistent maintenance of fiscal flexibility (including budgetary reserves) provide the state with significant ability to respond to near-term economic or fiscal conditions, such as federal budget reductions, in a manner consistent with the 'AAA' rating.

CREDIT PROFILE

The 'AAA' rating on Maryland's GO bonds reflects its sound financial operations, a wealthy, diversified economy and strong management of debt. The state's economy has long benefited from proximity to the nation's capital, although the prospect of federal budget austerity poses a degree of uncertainty for the state's large federal agency presence and associated private contracting. Despite this risk and the generally slow pace of economic recovery, the state's diverse and wealthy service-oriented economy remains a source of credit strength.

The state's approach to fiscal management has been consistently conservative both through the last recession and during the recovery, with the state relying on spending cuts, revenue increases and the use of non-recurring resources to maintain balance. Maryland retains ample fiscal flexibility, including a well-funded rainy day fund. Although pension funded ratios are weak, the state has undertaken multiple reforms to return to full funding over time.

WEALTHY, DIVERSE ECONOMY

Maryland's economy is wealthy and diverse, and continued to expand in recent years despite the drag posed by federal austerity, which remains an ongoing risk to state economic performance. May 2014 employment rose 0.7% year-over-year, compared to 1.8% nationally.

Job gains in May were spread across multiple sectors, including in construction and professional and business services, although federal government employment continued a decline that began almost two years ago. The state's unemployment rate, at 5.6% in May 2014, was well under the 6.3% national average during the same period. Measured on a per capita basis, Maryland's 2013 personal income ranks fifth among the states, at 122% of the U.S. level. Personal income has grown consistently in the state over the last four quarters, albeit below the pace of the nation, with the first quarter of 2014 rising 1.9%, compared to 3.5% for the U.S.

The state's March 2014 economic forecast anticipates gradually improving annual performance in 2014 and beyond, after the very slow pace of growth recorded in 2013. However, growth expectations for 2014 in the March forecast were lowered by the state from the growth levels expected in the previous economic forecast, in December 2013. Employment in 2014 is now expected to grow 1.2%, compared to 1.5% in the previous forecast, while personal income is expected to grow 3.6%, down from 4.6% in the previous forecast. Rates of growth in 2015 generally mirror past expectations, with employment rising and personal income rising 1.8% and 5.1%, respectively.

CONSERVATIVE FINANCIAL OPERATIONS

Financial operations are conservatively maintained, with the state consistently demonstrating a strong commitment to budgetary balance through the downturn and the slow recovery that has followed. The state has maintained flexibility in the form of its rainy day fund (RDF), which remained funded at or near 5% of general fund revenues through the downturn, as well as its practice of responding quickly to changing budgetary circumstances through repeated spending cuts, fund balance transfers and revenue increases.

As of June 30, 2014 (the end of fiscal 2014), the general fund ending balance is estimated to be $127 million (0.8% of general fund revenues), and the RDF balance is expected to be $763.5 million (5% of general fund revenues). Revenue forecast expectations during the course of the year were trimmed modestly, and April 2014 personal income tax revenues underperformed expectations due to the ongoing impact on state tax filings of the 2013 federal tax changes.

Through May 2014, general fund revenues are 0.5% under forecast, although remain 0.8% ahead of prior year figures. Consistent with recent years, the state's general fund spending plan incorporated only modest changes, including holding back a portion of a planned pension contribution overpayment as a cushion against possible federal sequestration cuts. Higher than expected Medicaid spending needs have emerged as an additional budget risk since implementation of federal health reform, although consistent with its conservative practices, the state has responded quickly to identify spending reversions.

The fiscal 2015 adopted budget assumes a general fund balance at June 30, 2015 of $83.5 million (0.5% of general fund revenues) and a fully funded RDF at $795 million (5% of general fund revenues). General fund revenues are expected to rise 5.6%, to $16 billion, primarily reflecting the gradual forecast improvement in economic conditions. The budget shifts additional transfer tax revenue to the general fund and extends the reduced pension contribution overpayment first enacted with the fiscal 2014 budget, intended to help the state achieve structural balance. Spending, including adjustments for deficiencies and reversions, rises 3.1%, to nearly $16.1 billion. The state has already begun pursuing additional reversions and spending cuts in the new fiscal year in response to the Medicaid spending needs noted earlier.

STRONG DEBT MANAGEMENT

The burden of Maryland's total tax-supported debt is moderate, and its strong and centralized debt management remains a credit strength. Fitch calculates net tax-supported debt as of March 31, 2014 of approximately $11.8 billion, or 3.7% of 2013 personal income, including the new money portion of the current sale. More than two-thirds of tax-supported debt is GO bonds. GO and transportation bonds are constitutionally required to mature within 15 years, ensuring rapid amortization. Debt affordability guidelines include holding tax-supported debt at or below 4% of personal income.

The funding of pensions deteriorated over much of the last decade, with June 30, 2013 system-wide funded ratios for state employees at 63.3% and teachers at 67.1% on a reported basis. Using Fitch's more conservative 7% discount rate assumption (compared to the 7.7% used by the system in 2013), the employees and teachers plans would be funded at 58.8% and 62.3%, respectively. On a combined basis, net tax-supported debt and the portion of pension liabilities attributable to the state are estimated by Fitch at about 10.7% of 2013 personal income, above the states' median of 6.1%.

Despite pensions being a comparative credit weakness, the state has taken multiple steps to reduce their burden and improve sustainability over time. These include lowering benefit accruals, requiring higher state contributions to accelerate funded ratio improvement and shifting the normal cost of teacher pensions to local government. In 2015 the state will also begin phasing out a previous funding methodology that had resulted in annual pension contributions below an actuarially-calculated level over the last decade. Additionally, changes in 2011 to other post-employment benefits are estimated to have reduced the state's OPEB liability to $9.2 billion, from $15.9 billion as of June 30, 2011; the state's total unfunded OPEB liability as of June 30, 2013 is $8.8 billion.

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 IHS Global Insight.

Applicable Criteria and Related Research:

--'Tax-Supported Rating Criteria', dated Aug. 14, 2012;

--'U.S. State Government Tax-Supported Rating Criteria', dated Aug. 14, 2012.

Applicable Criteria and Related Research:

Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015

U.S. State Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686033

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=838382

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Contacts

Fitch Ratings
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Douglas Offerman
Senior Director
+1-212-908-0889
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Eric Kim
Director
+1-212-908-0241
or
Committee Chairperson
Marcy Block
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or
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elizabeth.fogerty@fitchratings.com