NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned a rating of 'AA+' to the following general obligation (GO) bonds to be issued by Anne Arundel County, Maryland (the county):
--$191,400,000 consolidated general improvements series 2015;
--$77,600,000 consolidated water and sewer series 2015;
--$59,025,000 consolidated general improvements refunding series 2015;
--$34,830,000 consolidated water and sewer refunding series 2015;
--$16,025,000 consolidated golf course projects refunding series 2015.
The bonds will be sold competitively on March 25. Proceeds will finance a variety of general government capital projects and refund certain outstanding bonds of the county for debt service savings.
In addition, Fitch affirms the 'AA+' rating on the $916.2 million of outstanding consolidated general improvements bonds, $341.7 million of outstanding consolidated water and sewer bonds, and $28.3 million of outstanding special obligation and tax increment bonds (details at the end of this release).
The Rating Outlook is Stable.
All bonds are ultimately backed by the county's full faith, credit, and taxing power, subject to the county's 1993 charter limitation on annual revenue increases from taxes levied on existing property. The charter limits such revenues from increasing annually more than the lesser of the Consumer Price Index (CPI) or 4.5%.
KEY RATING DRIVERS
VERY STRONG ECONOMIC BASE: Significant credit strength is derived from Anne Arundel County's economic and employment position. The county is in close proximity to two major employment markets in Washington D.C. and Baltimore. Wealth levels are considerably higher than national benchmarks and growing at a healthy pace. Growth in county employment is also strong. Fitch views favorably the significant presence of the federal government as the key driver of regional economic activity.
RESERVES SATISFACTORY, CONSTRAINED BY CODE: Current unrestricted general fund reserves are viewed as satisfactory, calculated by Fitch at roughly 8% of spending in fiscal year 2014. The county's code establishes limits on reserve accumulation which we view as fairly restrictive, considering the general fund's dependence on income taxes for operations and a cap on annual property tax levy growth.
IMPORTANT REVENUE-RAISING CAPACITY: Important revenue raising capacity is retained given the county's low income tax rate, tempering the risk associated with the cap on the annual property tax levy. Income taxes generate approximately 35% of total general fund revenue. The strong area economy has supported fairly steady growth in income tax receipts.
AFFORDABLE LONG-TERM LIABILITIES: Debt metrics are expected to remain moderate despite the expectation of higher debt issuance to fund certain education and public safety capital needs. Pension funding levels are adequate and the aggregate unfunded actuarial accrued liability (UAAL) represents a manageable burden relative to the county tax base. The county continues to make progress towards full funding of the actuarial required contribution (ARC) for its other post-employment benefit (OPEB) liability, and total carrying costs for debt, pension, and OPEB consume an affordable share of the total spending.
FISCAL STABILITY: The rating is most sensitive to changes in the county's financial position. Management's ability to account for changing economic conditions and variability in key revenue streams without weakening reserves will be a key rating factor over time.
STRONG CREDIT QUALITY SUPPORTED BY VIBRANT REGIONAL ECONOMY
The county's sound credit quality is supported by the strength of its economic profile. Among the county's chief economic assets is its favorable location along the Washington D.C.-Baltimore corridor. The two metro areas combine to form one of the largest labor markets in the country with more than 4.4 million non-farm jobs in 2014. The federal government remains the ultimate driver of economic activity in the region, a fact which is viewed by Fitch as having a positive influence on long-term credit performance. Fort Meade is located in Anne Arundel County and is estimated to employ approximately 13% of the county's work force. The fort is home to several critical military installations, including the U.S. Cyber Command, National Security Agency, and the Defense Information Systems Agency. Annapolis is the state capital and the Anne Arundel County seat. Annapolis is home to the U.S. Naval Academy and is among the county's main tourist attractions along with Maryland Live! Casino, and Arundel Mills Mall. The county ranks first in the state in terms of leisure-related economic impact.
These strengths and others translate to favorable employment, population, and income metrics for the county that ultimately benefit its revenue performance. The county has consistently posted an annual unemployment rate below that of the state and nation since 2000 and its December 2014 rate was a low 4.6%. The county has also gained jobs at rate more than double the Maryland and national average since 2005. Growth in median household income (MHI) has been solid over the last five years, and at $87,430 is the equivalent of 119% and 116% of the Maryland and U.S. standards, respectively. The county's population continues to expand at a steady pace, reaching an estimated 555,743 in 2013.
COUNTY CODE RESTRICTS RESERVES
At the close of fiscal year 2014 the general fund unrestricted fund balance stood at $100.4 million, which Fitch estimates is equivalent to 8.1% of total spending. Fitch views the unrestricted fund balance level as satisfactory, but somewhat low compared to similarly rated U.S. counties. Liquidity across the primary government is solid with $430.9 million in cash and investments in fiscal year 2014, equivalent to roughly three months of operating expenses. There are no major fund deficits outside of the general fund.
The unrestricted fund balance includes $44.6 million allocated to the revenue reserve fund (RRF) established by county code. The RRF is designed to offset revenue shortfalls in any given budget year, but may not exceed 10% of the prior 3-year average of revenue derived from the income tax, real property transfer tax, recordation tax, and investment income of the general fund. The RRF is budgeted to total $48.8 million in fiscal year 2015, which would equal the statutory cap. Unrestricted fund balance in excess of the RRF is required by internal policy to be appropriated for pay-go or other non-recurring expenses.
GENERAL FUND IN STATE OF BUDGETARY BALANCE
General fund operations have demonstrated improved stability since fiscal year 2010, coinciding with an improvement in the economy and return to positive revenue growth. In fiscal 2014 the general fund registered an operating surplus, after transfers, equal to $3.7 million - a slim 0.3% of spending. The fiscal 2015 general fund budget is balanced operationally; the budget appropriates $36.4 million of existing reserves that helps fund $10.8 million for contingencies, $23 million for pay-as-you-go capital, $3.3 million to the RRF, and $10 million to pre-fund the county's OPEB liability. Management projects a small $3.5 million reduction in the total general fund balance by year-end.
STABLE PROPERTY TAX PERFORMANCE
Property taxes are the single largest revenue source for the general fund at 48% of the total. Management's overall revenue flexibility is somewhat constrained by a limit on annual property tax levy growth equal to the lesser of the CPI or 4.5%. New construction is excluded from the cap, and building permits related to new construction have averaged $750 million in value or 0.9% of assessed value (AV) over the past 5 years. Special district tax revenue is also excluded from the cap - surplus revenue from these funds will contribute close to $30 million to the general fund budget in fiscal year 2015.
The county approved tax rate increases of 3.4% for fiscal years 2012 and 2013 and 1% for fiscal year 2014 to help counter recessionary declines in AV and to maximize revenue under the cap. With subsequent improvement in the tax base the county has taken action to reverse a portion of these increases with a negligible impact on total revenue. The county has instituted a fairly conservative 2% cap on AV increases in accordance with state law, resulting in a considerable homestead credit 'bank' of $8.6 billion (11.2% of the current tax base) that would offset the impact of future declines in property values on AV.
SIGNIFICANT INCOME TAX CAPACITY
The county has considerable capacity to increase income tax revenue. The county's income tax rate of 2.56% is well within the statutory cap of 3.2% and the third lowest income tax rate in the state behind Worcester County (1.25%) and Talbot County (2.4%). The county last increased its income tax from 2.49% in fiscal year 2012. The county estimates it could generate $109.4 million in additional annual revenue if the income tax was levied at the maximum rate. Income taxes have grown at a CAGR of 4.1% since fiscal year 2001, with only three years of fairly modest declines: 0.9% in fiscal year 2003, 1.8% in fiscal year 2009 and 2.4% in fiscal year 2010.
The Supreme Court is hearing a case with regard to the right of Maryland counties to tax income earned by residents in other states. The county estimates its potential annual revenue loss from an adverse ruling to be $8 million, which is only about 0.6% of annual general fund revenue. The county could also be liable for $20 million in back claims. Fitch does not believe an adverse ruling would have a negative long-term impact on the county' credit quality, based on our view of the county's overall budget flexibility and existing available resources.
MANAGEABLE LONG-TERM LIABILITIES
Overall debt levels are moderately low at 1.7% of market value or $2,333 per capita. These debt ratios consider overlapping obligations of the city of Annapolis but exclude county GO debt credited with self-support from water, sewer, and solid waste utility operations. The county is proposing modifications to its existing debt affordability guidelines to accommodate planned issuances for school and public safety construction. The revised debt guidelines and projected debt metrics are expected to remain at moderate levels. Debt service will reach almost $190 million next year, or a moderately high 14% of spending, following the current bond sale. However, approximately $50 million of this amount is related to utility operations serviced from non-general fund user fees and charges. Debt service declines in fairly rapid fashion thereafter, providing some capacity for future obligations.
The county administers single employer benefit plans for pension and OPEB. The aggregate funded ratio for the pension plans was reported at 78% as of January 1, 2014; the Fitch-adjusted funded ratio, revising the projected investment rate of return to 7% from 7.5%, is slightly lower at 74%. The Fitch-adjusted unfunded actuarial accrued liability is approximately $545 million or 0.7% of AV, which Fitch views as reasonably affordable. The county fully funds the actuarial required contribution (ARC) each year; the ARC for fiscal year 2015 is $65.3 million or 4.5% of governmental fund spending.
Significant healthcare reforms implemented in 2014 lowered the county's OPEB liability by $350 million and the OPEB ARC by $33 million. These changes are viewed as strong positives by Fitch. The county also continues to ramp up OPEB funding with the goal of reaching the full ARC by fiscal year 2019; the county will make a $20.7 million contribution to pre-fund its OPEB liability in fiscal year 2015 ($10 million from the general fund and $10.7 million from the healthcare internal service fund). Total carrying costs (debt service plus benefit contributions) totaled a manageable at about 16% of governmental spending (exclusive of the utility-supported component of debt service).
Fitch affirms the following GO bonds at 'AA+':
--GO bonds, series 1996 and 1998;
--GO general improvement bonds series 2005;
--GO consolidated general improvement bonds (Taxable-Build America) series 2010;
--GO consolidated general improvement bonds series 2004; 2006; 2007; 2009; 2010; and 2014;
--GO consolidated general improvement refunding bonds series 2003; 2005; 2006; and 2009;
--GO consolidated water and sewer bonds (Taxable-Build America) series 2010;
--GO consolidated water and sewer bonds series, 2003; 2004; 2006; 2007; 2009; 2010; and 2014;
--GO consolidated water and sewer refunding bonds series, 2003, 2005, 2006, and 2009;
--Consolidated general improvement bonds series 2008;
--Consolidated water and sewer bonds series 2005 and 2008;
--(Arundel Mills Project) special obligation refunding bonds, series 2004;
--(Arundel Mills Project) special obligation refunding bonds, series 2014;
--(Consolidated Golf Course Projects) GO bonds series 2005;
--(National Business Park Project) special obligation refunding bonds series 2004;
--(National Business Park Project) special obligation refunding bonds series 2014;
--(Nursery Road Project) tax increment financing bonds series 2004
--(Nursery Road Project) tax increment refunding bonds series 2014.
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, and IHS Global Insight.
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