NEW YORK--(BUSINESS WIRE)--Fitch Ratings assigns an 'AAA' rating to the following Charles County, Maryland (the county) general obligation (GO) bonds:
--$21.6 million GO refunding bonds of 2015 (tax-exempt);
--$9.4 million GO refunding bonds of 2015 (taxable).
The proceeds are being used to refund certain outstanding GO bonds for upfront debt service savings. The competitive sale is scheduled for March 24th.
In addition, Fitch affirms the following ratings:
--$292.5 million in outstanding GO debt at 'AAA'.
The Rating Outlook is Stable.
The bonds are GO bonds to which the full faith and credit and unlimited taxing power of the county are pledged.
KEY RATING DRIVERS
STABLE RESERVE LEVELS: The county maintains satisfactory fund balance levels given the stability of operations and other areas of financial flexibility. The county has ample property and income taxing capacity.
HEALTHY DEBT PROFILE: A low debt burden, affordable capital needs, sound debt affordability policies and a rapid amortization rate underpin the county's healthy debt profile.
OTHER LONG-TERM LIABILITIES ARE EASILY MANAGED: Costs for retiree obligations are low and do not pressure operations.
NARROW YET STABLE AND WEALTHY ECONOMY: The economy benefits from the presence of a naval research facility as well as a location proximate to the employment centers of Washington D.C. and northern Virginia. Employment and wealth indicators are sound.
EXISTING RESERVES PROVIDE ADEQUATE FINANCIAL CUSHION: The rating is sensitive to shifts in fundamental credit characteristics, including the county's strong financial management practices and healthy reserve levels. The Stable Outlook reflects Fitch's expectation that such shifts are unlikely over the next review cycle.
Charles County, with a 2013 population of 152,864, is located less than 45 minutes from the myriad employment opportunities in Washington D.C. and northern Virginia. The county's population has increased 27% since 2000, outpacing the region, state and nation.
STABLE FINANCIAL OPERATIONS
Over the past four years the unrestricted fund balance has remained stable. At the close of fiscal year 2014 the general fund unrestricted fund balance stood at $38.6 million or 11.4% of total general spending, which is essentially equivalent to the levels of the prior four years. General fund liquidity is solid with $96.8 million in cash and investments in fiscal year 2014, equivalent to roughly 105 days of operating expenses.
The adopted fiscal 2015 budget is 4.6% higher than the 2014 adopted budget. The budget keeps the property tax and income tax rates constant and includes a $3.2 million fund balance appropriation. The fund balance appropriation mostly includes the use of restricted bond premium earned in fiscal 2013. Despite the expected decline in overall reserves, the unrestricted fund balance will remain stable compared to prior years. The county prepares a multiyear financial forecast to identify and address future fiscal challenges which Fitch views as a positive. The forecast shows modest use of fund balance. Management expects to close any gaps that would result in the fund balance reserve declining below the policy with revenue enhancements or spending cuts.
Fitch views the county's margin under the state income tax rate cap as an important measure of financial flexibility given that income tax accounts for 30% of the general fund revenue base. Income tax revenues have increased annually between 2008 and 2014, but include a rate increase during fiscal 2014. The county estimates it could generate $6.2 million in additional annual revenue if the income tax was levied at the maximum rate of 3.2%, up from the current rate of 3.05%.
ECONOMY ANCHORED BY MILITARY PRESENCE
Charles County's close proximity to D.C. and northern Virginia employment centers is a key economic driver. The favorable regional employment opportunities mitigate the narrower local economy, anchored by several key military installations. The naval research and development center at Indian Head which employs (civilian and military) 3,200 and has an annual payroll and defense contracts of approximately $560 million. A large 21% (approximately 16,000) of the county's labor force consists of directly employed civilian employees of the federal government. The county hopes to leverage the base's technological research to attract tenants to its planned Indian Head Science and Technology Park. A number of office and industrial parks are in various stages of development, and the county has historically maintained a vacancy rate below regional averages.
Competitive Power Ventures (CPV) is constructing a state-of-the-art 725-megawitt (MW) combined-cycle natural gas-fired power plant in the county. The $775 million capital investment has generated $4.3 million in one-time recordation tax revenue and a modest annual PILOT payment of $1.3 million to $3.5 million over the 21-year PILOT agreement, once the project is complete. Additionally, the county receives a $2 million payment per year from CPV during construction. The plant is expected to be operational in fiscal 2017.
The county's unemployment rate trends comfortably below state and national averages, measuring 4.9% in December 2014. Wealth indicators are well above state and national averages.
MODEST TAX BASE GROWTH EXPECTED
The county's estimated market value declined 17% between fiscal years 2010 and 2013 to $17.1 billion. Market value decreased 2% in fiscal 2014 and growth was flat in fiscal 2015. The Zillow housing market forecasts show a modest increase over the next year.
The county benefits from a statewide triennial assessment process that smoothes annual volatility in tax base performance. The county is somewhat constrained on upside potential given the adopted homestead limitation on annual assessment growth on most owner-occupied residential property to no more than 7%.
FAVORABLE DEBT PROFILE
Charles County's prudent debt policies support a modest tax supported debt burden even as the county has met capital needs related to its strong population growth over the last decade.
Overall debt equals just 1.2% of market value, or $1,316 per capita. The county's policy caps debt service at 8% of general fund operating revenues; fiscal 2014 debt service expenditures accounted for 5.6% of total governmental spending. Amortization is rapid with 82% retired in 10 years.
Fitch expects the county's debt burden to remain manageable. The fiscal 2015-2019 governmental capital improvement plan totals approximately $200 million. The plan is nearly 63% debt-funded and 37% state funded. Given the rapid amortization, the additional debt is not expected to impact the debt burden.
OTHER LONG-TERM LIABILITIES COSTS ARE LOW
Fitch does not expect long-term liabilities related to retirement benefits to pressure future operations. The county provides pension benefits to its employees through two single employer defined benefit plans and annually contributes on an actuarially-determined basis. As of July 1, 2014, the general employees' plan was well funded at 96% and the sheriffs' plan was funded at 81%. Using Fitch's more conservative 7% discount rate, funding levels were 89% and 75%, respectively. The aggregate unfunded actuarial accrued liability (UAAL) totaled $84.5 million or a very low 0.50% of market value.
The county also provides other post-employment benefits (OPEB) to its retirees. The county funded its OPEB cost for fiscal 2014 on a pay-go basis and the UAAL associated with OPEB totaled $156 million or 0.9% of market value. The county plans to fully fund the ARC by 2029. Carrying costs for debt service, pension (including teachers' pension costs) and OPEB totaled a low 10.8% 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, Zillow.
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