Fitch Rates Prince George's County, MD's $248.3MM GOs 'AAA'; Outlook Stable

NEW YORK--()--Fitch Ratings has assigned an 'AAA' rating to the following Prince George's County, Maryland (the county) limited tax general obligation (LTGO) bonds:

--$248.27 million GO consolidated public improvement bonds, series 2014A and 2014B.

The bonds are expected to sell competitively on Sept. 16, 2014. Series 2014A proceeds will finance various capital improvements. Series 2014B proceeds will currently refund various series of bonds for level debt service savings.

In addition, Fitch affirms the following ratings:

--$1.2 billion of outstanding county LTGO bonds at 'AAA';

--$7 million of outstanding county unlimited GO (ULTGO) bonds, series 2004A at 'AAA';

--$66.1 million of outstanding Maryland National Capital Park and Planning Commission (M-NCPPC) GO bonds at 'AAA'.

The Rating Outlook is Stable.

SECURITY

The LTGOs are secured by the county's full faith and credit, subject to limitations of section 812 and 813 of the county charter. Section 812 limits the real property tax rate to $0.96 per $100 of assessed value (AV). Section 813 requires that certain taxes and fees may not be increased without voter approval.

The ULTGO bonds, series 2004A are secured by the county's full faith, credit and taxing power. The bonds are payable from two unlimited, dedicated ad valorem tax levies in the areas with projects being financed with the proceeds of the bonds: one on all taxable property within the Washington Suburban Transit District (WSTD) and the second on all taxable property within the stormwater management district (SMD). These bonds mature Oct. 1, 2014.

The M-NCPPC bonds are general obligations of both the commission and the county, to which the full faith and credit of each is pledged. The bonds are payable in the first instance from proceeds of limited annual ad valorem taxes that the county is required to levy in the Maryland-Washington Metropolitan District in the county (the metropolitan district) pursuant to state law.

KEY RATING DRIVERS

ROBUST AND GROWING ECONOMY: The county benefits from its central location in the national capital region and its well-developed transportation infrastructure, attracting a strong base centered upon vital government operations and higher education. Prospects for continued growth are strong. Wealth indicators equal or exceed national averages.

RESERVE LEVELS REMAIN STRONG: The county has maintained a reduced but healthy fund balance as reserves were utilized over the past several years due to cost pressures mostly related to public safety and aggressive revenue budgeting.

CONSTRAINED REVENUE RAISING CAPACITY: Real property and income tax rate limitations restrict the county from increasing its two primary revenue sources. However, future growth prospects offset these limitations.

MODEST DEBT BURDEN: Debt levels are expected to remain moderate over the next few years. Manageable carrying costs coupled with rapid amortization enhance the debt position.

SIZABLE UNFUNDED PENSION LIABILITY: Pensions are underfunded despite the county fully funding its annual retirement contribution (ARC). Annual costs currently represent a manageable portion of total county spending.

PARITY ULTGO AND LTGO RATINGS: Fitch currently does not distinguish between the county's ULTGO and LTGO ratings due to the county's strong financial flexibility.

RATING SENSITIVITIES

BUDGETARY BALANCE: Failure to improve financial performance by adhering to structurally balanced budgets and stabilizing reserves would likely result in negative rating action.

CREDIT PROFILE

Prince George's County benefits from its location adjacent to Washington, D.C. The 2013 population of 890,081 has grown faster than the state's and nation's since the last census in 2010. The population increased 8% between 2000 and 2010.

ROBUST ECONOMY WITH EXPANSION POTENTIAL

The county's own broad commercial base complements Washington D.C.'s diverse employment opportunities. Within the county, indispensable governmental bureaus and higher education, including Joint Base Andrews and the University of Maryland, provide economic stability.

Expansion continues on the over $2 billion mixed-use National Harbor project along the Potomac River, including the $100 million Tanger Outlets at National Harbor. A $925 million MGM-branded casino is expected to open at National Harbor in 2016, adding 4,000 permanent jobs. The county has $4 billion in other development projects in its pipeline that will add to the county's robust economy.

The unemployment rate routinely hovers around that of the state and national averages. The June 2014 unemployment rate of 6.5% is notably less than the 7.5% of the prior year; employment trends have continued to remain positive. County wealth levels are below those of the wealthy region but above national indices.

HINTS OF HOUSING MARKET STABILIZATION

The county's estimated market value declined 26% between fiscal 2010 and 2013 to $79.9 billion. Estimated 2014 market value shows a modest 1% decline while the projected fiscal 2015 value shows a 1.4% increase, the first increase in four years. The current trend is expected to be reversed given permit activity and projects under construction. Also, housing values have continued to increase over the past two years and are expected to increase 2.7% over the next year.

The statewide triennial assessment process helps even out annual volatility in tax base performance. The county is somewhat constrained on upside potential given the adopted homestead limitation on annual assessment growth on certain owner-occupied residential property of no more than 2%.

HEALTHY RESERVES DESPITE SPENDING PRESSURES

County reserves are healthy, in spite of revenue raising restrictions and expenditure pressures. The county cannot increase either the real property tax rate or income tax rate due to county charter and state legislative provisions, respectively.

The county used nearly all of a budgeted $24.6 million (1.52% of general fund spending) of fund balance during fiscal 2013. Reserves were mostly utilized for nonrecurring purposes, including an $8 million police arbitration settlement, a $10 million retirement incentive for school district employees, a $4 million contribution to the worker's compensation fund to address the fund's deficit balance, $5 million in employee bonuses, and $4 million for capital projects.

The fiscal 2013 unrestricted fund balance equaled a healthy 12.5% of spending. These reserves incorporate an operating reserve at the policy level of 2% of spending. The county's fully-funded 5% contingency reserve is available for emergencies, despite its designation as restricted fund balance. Inclusive of this reserve, the available fund balance increases to $338.5 million or a strong 21% of general fund spending.

FISCAL 2014 ESTIMATED RESULTS WELL BELOW BUDGET

The originally adopted fiscal 2014 budget was balanced with a modest $5.6 million appropriation of fund balance. Due to a projected decline in income tax revenue, the county's second largest revenue source at 33% of budgeted revenue, and negative variances in spending relative to budget, the county is projecting a sizable $60.6 million operating deficit (3.74% of projected spending).

Fiscal 2014 estimated income tax revenues represent a 2.6% decrease from fiscal 2013 actuals, which the county attributes to sequestration and formulaic distribution changes at the state level that were not budgeted. Expenditures exceeded the budget by an estimated $54.4 million due to $4.8 million in addition snow related costs, a one-time $7.5 million liability payment to the housing authority, $24 million in public safety overtime for crime-mitigation initiatives, and approximately $20 million in higher pension costs and additional funding to the workers' compensation fund to address the $87.2 million fund deficit. Management reports that additional spending for public safety was expected to be offset with favorable income tax budget variances.

REVENUE PERFORMANCE CONTINUES TO LAG BUDGET

The adopted fiscal 2015 budget is approximately a 3% increase ($45.3 million) over the prior year's adopted budget (or approximately a 1% decline from estimated actual 2014 spending) and was balanced with a modest $4.2 million appropriation of fund balance. Public safety and education account for 78% of the general fund budget. The largest budget increase was $26.6 million for public safety to fund crime reduction initiatives, cost of living and merit increases and additional staffing. The county's contribution to the board of education increased a modest $6.5 million. Property and income taxes makeup over 75% of general fund revenues; property tax revenues are budgeted to increase due to an improving housing market and income tax revenues are budgeted to increase 2.9% from projected actual fiscal 2014 levels.

Early forecasts show a $12.8 million revenue shortfall (income taxes, transfer taxes, and recordation taxes). To offset declines, the county is preparing a cost reduction plan that may include holding funding to the Community College, reducing funding to the crime reduction initiative by canceling/postponing public safety recruitment classes and implementing a hiring freeze on non-critical positions.

The maintenance of the county's 'AAA' rating assumes that the county will promptly address estimated revenue shortfalls and expenditures overages with recurring solutions to achieve structural balance over the short term. Inability to implement a plan to address the imbalance will likely result in negative rating action.

WELL-MANAGED DEBT PROFILE

Overall tax-supported debt, excluding GO bonds issued to finance the self-supporting solid waste system, equals a moderately low $2,719 on a per capita basis and 3.1% of market value. Amortization is rapid with roughly 65% of principal retired within 10 years. County debt service costs are expected to rise due to new issuances although remain under the policy level of 8% of certain expenditures. The county has demonstrated the ability to limit debt issuances if needed to maintain low debt levels and ensure financial flexibility.

The six year fiscal 2015 - 2020 CIP totals $3.2 billion. Approximately one-third of the plan is devoted to education. Other notable expenditures include storm water at 20%, followed by public works at 14%. County tax-supported debt will fund about 50% of the total program. The county expects that actual issuances will be about $180 million - $350 million annually. Debt ratios will modestly increase as annual expected issuances are greater than the amount amortized annually. The current issue is the first new money issuance this fiscal year.

UNDERFUNDED PENSION SYSTEMS

The majority of county employees participate in the statewide local government retirement pension plan, the State Retirement and Pension System of MD, a cost-sharing multi-employer defined benefit plan. The funding of the state's pension funding ratio has deteriorated in recent years, with June 30, 2013 funding for the state employees at a weak 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. Pension and health care reforms already enacted are expected to slow the growth of the state's pension liability and direct additional contributions from localities to the pension system over time to improve funding ratios.

The county maintains four single-employer defined benefit pension plans for public safety employees as well as a number of supplemental plans. These plans combined are funded at a weak 52%, which equates to 49% when utilizing Fitch's more conservative discount rate assumptions. The county recently made several plan modifications to reduce the rate of growth in its liability which included increasing the vesting timeframe, modifying the retirement eligibility and increasing employee contribution rates for new employees. Pension payments are at or near 100% of the ARC, including contributions to the state plan, totaling a moderate 6.5% of fiscal 2013 total governmental fund spending.

The county has not budgeted an increase in its fiscal 2014 other post-employment benefit (OPEB) contribution, in contrast to its previous plan to increase its payments by 3% - 5% annually. The fiscal 2014 ARC is estimated at $82.8 million, equivalent to about 5.2% of spending. The county contributed $29.5 million. The county's timeline for complete funding is open-ended.

LIMITED TAX BONDS HAVE ADDITIONAL SOURCES OF REPAYMENT

The 'AAA' rating for the county's limited tax GO bonds is based on the GO ad valorem tax pledge subject to the county charter limitations. Debt issued for certain facilities will be payable first from amounts available and appropriated for such purposes but these payments do not form the basis for the rating given the strength of the county's credit quality. The revenue sources for school facility and renovation debt consist of a school facilities surcharge and a sales and use tax on communication services, providing in fiscal 2014 $24.3 million and $34 million, respectively.

Debt issued for mass transit facilities will be payable from a separate ad valorem tax collected for the county on behalf of the Washington Suburban Transit Commission. A direct ad valorem tax within the stormwater district services the district's debt. Net income of the self-supporting solid waste management system funds the associated debt service.

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

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

U.S. Local Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=869354

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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
Michael Rinaldi
Senior Director
+1-212-908-0833
or
Committee Chairperson
Amy Laskey
Managing Director
+1-212-908-0568
or
Media Relations
Elizabeth Fogerty, New York, +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
Michael Rinaldi
Senior Director
+1-212-908-0833
or
Committee Chairperson
Amy Laskey
Managing Director
+1-212-908-0568
or
Media Relations
Elizabeth Fogerty, New York, +1-212-908-0526
elizabeth.fogerty@fitchratings.com