NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned an 'AAA' rating to the following Montgomery County, Maryland (the county) general obligation (GO) bonds:
--$156.3 million consolidated public improvement refunding bonds of 2015, series A.
The bonds are scheduled for competitive sale on March 26. Proceeds of the series A bonds will refund certain of the county's GO bonds for mostly upfront savings.
In addition, Fitch affirms the following:
--$2.7 billion GO bonds at 'AAA';
--$21 million certificates of participation (COPs), series 2007 and 2010 at 'AA+';
--$52 million taxable limited obligation certificates (facility and residential development projects), series 2010A and 2011 at 'AA';
--$46.3 million parking system project revenue bonds (Bethesda parking lot district) at 'AA';
--$29.3 million (metro garage projects) lease revenue bonds, series 2011 at 'AA';
--$41.5 million Maryland-National Capital Park and Planning Commission (MNCPPC) park acquisition and development GOs at 'AAA'.
The Rating Outlook is Stable.
SECURITY
The GOs are secured by the full faith, credit, and taxing power of Montgomery County.
The COPs, limited obligation certificates, lease obligations and lease revenue bonds are secured by payments subject to annual appropriation. A two-notch distinction is assigned where bondholder payments are not secured by a leasehold interest in essential governmental facilities. The series 2011 lease obligation (metrorail garage project) revenue bonds are secured by the county's obligation to replenish any reserve fund deficiency.
Parking system revenue bonds are special obligations of the county, payable solely from the net revenues of the Bethesda parking lot district (the district). District revenues include parking fees, parking violation fines, and revenues from the levy of a limited ad valorem tax assessed against certain commercial and industrial property within the district. The bonds are secured by a cash funded debt service reserve fund (DSRF).
KEY RATING DRIVERS
HEALTHY FINANCIAL FUNDAMENTALS: Montgomery County has a sophisticated management team that uses conservative budgeting and has established debt and reserve policies that have resulted in healthy reserve and liquidity levels.
SOLID OPERATING PERFORMANCE: Strong operating results in fiscals 2011 through 2014 have materially enhanced the county's reserve position. The county's multi-year financial plan shows a further strengthening of reserves.
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).
STRONG ECONOMIC CORE: 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. However, pension costs are expected to increase due to the shift of normal costs related to teachers' pension to the county.
REVENUE BOND RATING DISTINCTION: The ratings on the COPs and the limited obligation certificates are notched down from the county GO rating, reflecting risk to annual appropriation by the county. The differing ratings reflect the presence and essentiality of leased assets for various series of bonds as well as the value of the collateral relative to debt outstanding.
PARKING REVENUE BONDS COVERAGE REMAINS STRONG: Fiscal 2014 pledged revenues provided 2.7x coverage of annual debt service or 2.2x coverage of maximum annual debt service. The coverage includes revenue from pledged ad valorem taxes, which are currently levied at 30% of the statutory limit for real property.
RATING SENSITIVITIES
CONTINUED STRONG FINANCIAL POSITION: The rating is sensitive to shifts in fundamental credit characteristics, including the county's strong financial management practices. The 'AAA' GO rating and Stable Outlook reflect Fitch's expectation that such shifts are unlikely.
CREDIT PROFILE
Montgomery County borders Washington, D.C. and northern Virginia. The county's estimated 2013 population of 1,016,677 is projected to increase to 1,075,000 by 2020.
ECONOMIC PERFORMANCE REMAINS VERY STRONG
Montgomery County continues to exhibit a very impressive economic profile. The county has gained employment each year between 2010 and 2013, although the employment base declined slightly in 2014. The December 2014 unemployment rate is low at 4%, well below those of the U.S. (5.4%) and Maryland (5.3%).
The county remains one of the wealthiest in the country with per capita money income and median household income at 174%-185% 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 29% 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 (28,195 employees) and U.S. Department of Defense (DoD; 11,686 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 created 2,500 new jobs and increased annual visitors by 500,000. Currently, a new $300 million federal intelligence campus is under construction in Montgomery County that will serve as home to 3,000 employees of the Office of the Director of National Intelligence.
SHARP IMPROVEMENT IN RESERVES
Sound fiscal management has led to four consecutive operating surpluses. Fiscal 2014 operating results were strong reflecting a $91 million operating surplus (3% of spending). The unrestricted balance totaled $385.6 million or 12.8% of spending.
The county's fund balance policy compares the sum of the revenue stabilization reserve and the unassigned portion of the general fund balance to adjusted governmental revenues. The county's fiscal policies require a minimum reserve equal to 5% of revenue, building up to 10% by fiscal 2020. The county's fiscal plan shows reserves reaching 10% by 2020.
FISCAL PLAN ADDRESSES KEY PRIORITIES
The county's fiscal plan for fiscals 2015-2021 addresses a number of key initiatives. The plan matches recurring revenue against recurring spending, and while the adopted fiscal 2015 budget does propose drawing on fund balance for non-operating purposes, the county forecast adds more than $156.4 million to fund balance over the plan period.
The $4.3 billion tax-supported adopted fiscal 2015 budget funds a total of $89.4 million in pay-as-you-go capital, softening demands on long-term debt issuance. The fiscal 2015 budget fully funds the actuarial required contribution for OPEB and funds the second wage increase in four years for general government employees, which is projected to cost $25.8 million.
Year-to-date fiscal 2015 operations show unfavorable revenue performance compared to budget. Income tax receipts, recordation tax revenues and other taxes are projected to come in $33 million under budget. Furthermore, while expenditures are generally performing in line with budget, the county expects snow removal to cost an additional $15-20 million. As a result, the county has revised its projected use of reserves to $104.9 million. Despite the increased use of fund balance, forecast reserves remain sound and the county maintains the ability to cut costs and raise revenues.
DEBT TO REMAIN AFFORDABLE DESPITE SIZABLE ANNUAL ISSUANCES
Debt ratios are favorable at $3,531 per capita or a low 2% of market value. Debt service accounted for a low 7.5% of fiscal 2014 total governmental spending. Amortization is rapid at 66% in 10 years. These key debt metrics are considered generally positive by Fitch.
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 84.2%, or an estimated 80% (adjusted by Fitch to assume a 7% investment rate of return) and the Fitch-adjusted estimate of unfunded actuarial accrued liability of $843 million is equal to approximately 0.5% of market value.
The county's total pension contribution for fiscal 2014 (including payments made to a defined contribution plan, the state plan, and length of service award program) totaled $164 million or approximately 3.9% of governmental fund spending. The defined benefit pension plan was closed to new non-public-safety hires on Oct. 1, 1994.
The county established a trust to begin prefunding its OPEB costs in 2007, which Fitch views as a credit positive. OPEB costs accounted for 2.6% of total governmental spending in fiscal 2014 or 110% of the ARC. As of the June 2013 valuation date, OPEB was 14% funded. Carrying costs for debt service, pension (including teachers' pension costs) and OPEB totaled a low 15% of fiscal 2014 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, Virginia Employment Commission.
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=981339
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE '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.