Fitch Rates Montgomery College's (MD) Series 2015A Lease Rev Ref Bonds 'AA'; Outlook Stable

NEW YORK--()--Fitch Ratings assigns an 'AA' rating to approximately $27.2 million of Montgomery County Revenue Authority (MCRA) transportation fund lease revenue bonds (the bonds) series 2015A, issued on behalf of Montgomery College Foundation Inc. (the foundation) for the benefit of Montgomery College (MC or the college).

The fixed-rate series 2015A bonds are expected to sell via negotiation on or around June 1, 2015. Bond proceeds are being used to fund the cost of the parking facility project and related improvements on the Rockville campus and to fully advance refund the college's outstanding series 2008A transportation lease revenue bonds, in addition to paying costs of issuance.

At the same time, Fitch affirms the 'AA' rating on the series 2008A, series 2011A, series 2011B and series 2014A lease revenue bonds referenced at the end of this press release.

The Rating Outlook is Stable.

SECURITY

The series 2015A bonds are secured under a lease agreement with the foundation and payable solely from amounts generated from a transportation fee imposed on each enrolled credit and non-credit hour of instruction, in addition to a charge imposed on faculty and staff. The lease payments will be equal to the debt service payments on the bonds. The series 2015A bonds are additionally secured by a mortgage on the leased property. There is no debt service reserve fund.

KEY RATING DRIVERS

SUFFICIENT DEDICATED FEE: The established track record of the transportation fee and the board of trustees' demonstrated ability to raise such fee independently with no cap is viewed favorably. For fiscal 2015, the $5.00 fee based on 595,677 enrollment hours generated an estimated $2.98 million of revenue. Effective July 1, 2015, the fee will increase to $6.00.

SOUND COVERAGE: Post issuance, lease payment coverage is expected to remain sound. The college is required to charge a transportation fee sufficient to cover the lease payment by 1.1 times (x). Beginning in fiscal 2016, the lease payment is projected to increase to about $1.56 million, with projected coverage of about 2.4x.

CYCLICAL ENROLLMENT: The college is facing declining enrollment as the area economy improves, a trend seen nationwide, in addition to shifting high school demographics in the county. The college will require careful and responsive budgeting to maintain overall operating health.

COLLEGE'S WEAKENING CREDIT PROFILE: The rating incorporates the college's credit profile, including its strong market position and key role as a feeder for the University of Maryland System. Additionally, the college's role in the state of Maryland's education planning and economic development that drives significant operating and capital support from the state and Montgomery County (both rated 'AAA'/Stable Outlook). The consistent funding supports the college's low debt burden and reduces reliance on cyclical enrollment trends. Offsetting factors include the college's negative GAAP-based operating margins, appropriation fluctuations, shifting enrollment and economic cycles, weakening but adequate liquidity, driven by the county's requirement to use unrestricted fund balance in its operating budget.

RATING SENSITIVITIES

DECLINING ENROLLMENT: The rating is sensitive to material shifts in enrollment hours. Adverse shifts could diminish pledged revenues and impose stress on coverage levels. The college's inability to sufficiently offset enrollment losses by adequately setting rates to generate at least the projected coverage levels presented could lead to a rating downgrade.

OPERATING IMBALANCE: The college's inability to show incremental improvement in the operating deficit in fiscal 2016 will likely lead to a rating downgrade.

CREDIT PROFILE

In operation since 1946, the college is the second largest higher education institution in the state, after the University System of Maryland (USM; tuition revenue bonds rated 'AA+'/Stable Outlook), and is the primary state provider of two-year associate degrees and technical certificates. The college is a feeder of transfer students to USM, and a growing source of various training and continuing education programs underscoring its key role in the state. The institution, offering 75 associate degree programs and 60 certificate programs, operates three campuses located throughout the county in Takoma Park/Silver Spring, Rockville, and Germantown. Annual headcount enrollment at the college in fall 2014 is down 2.4% to 25,518 students.

STABILITY OF MANDATORY FEE

Transportation fees consist of fees imposed upon students based on enrolled credit hours or charges for non-credit courses, workforce development continuing education contributions, parking fees charged to faculty and staff, and parking fines and interest income generated by the Transportation Fees Fund. The transportation fee was initially collected in fiscal 2005 at the rate of $2.00 per student hour. The rate was raised to $4.00 in fiscal 2007 and then to $5.00 in fiscal 2014. Historically, the fee has provided a stable revenue source to support annual lease payments. For fiscal 2016, the college approved another $1 fee increase to $6.00 which, based on an estimated 581,234 enrollment hours, is expected to generate about $3.5 million of revenue. The college is also planning to increase the fee to $7.00 in fiscal 2017 which is expected to be approved in April 2016. The board of trustees of the college has the right to increase the fee without external approval and there is no maximum. The facility fee cannot be used by the college to fund operating costs and must first be used for the annual lease payment and then used for other capital improvements.

In addition to the student transportation fee, a parking fee is assessed on all full-time and part-time employees to support transportation-related expenses. The college will deposit and hold all transportation fees in a separate Transportation Fee Fund for the purpose of making base rent payments under the lease agreement. Remaining deposits can be utilized for additional transportation fee obligations and for payment to the county enabling students the unlimited use of the county ride-on bus system.

SOUND COVERAGE SUPPORTS NEW DEBT

Historical coverage levels have typically been sound and supported by growth in student hours and a $4.00 fee. A sharp decline in student hours in fiscal 2014 still provided slightly lower but adequate coverage at 2.19x, based on the $4.00 fee. Projected debt service coverage is higher in fiscal 2015 at 2.71x due to the increase in annual fees.

Management expects planned fee increases to offset the projected decline in enrollment hours between fiscal 2015 and fiscal 2018 (from 595,667 to 571,558). Enrollment projections also appear reasonable given the local area high school's declining graduation trend during the same period. In the event that enrollment hours fall below the projected levels, the board has the flexibility to increase the fee to an appropriate level which Fitch views favorably.

CYCLICAL ENROLLMENT

For fiscal 2014 (academic year 2013/2014), total enrollment hours (consisting of enrolled credit and non-credit hours) decreased 5.5% (35,349 credit hours) to 603,947. Enrollment hours in fiscal 2015 are projected to increase to 595,667, due to an increase in non-credit hours for workforce development and continuing education, followed by an expected incremental decline over several years. Economic recovery and declining high school graduates account for the projected drop in credit hours. According to management, a rebound in high school graduates expected in spring 2018 should drive growth in credit hours in fiscal 2019.

Some comfort is drawn from the college's key role in the state and its large and diversified enrollment base, with three campuses and close proximity to Washington D.C., somewhat insulating the college from more significant declines. The Takoma Park/Silver Spring Campus, with 19.5 acres, is located at the edge of the Washington, D.C. metroplex. The Rockville Campus, with 84.6 acres, is located north of D.C. and the Germantown Campus, with 232.6 acres, is 30 miles north of D.C. in the I-270 High-Tech Corridor.

Fitch recognizes that enrollment is cyclical across community colleges and improvements in the local area economy with improved job availability affect enrollment. Favorably, the college has created new programs and recruitment strategies for increasing enrollment and has also hired a consultant to evaluate its overall enrollment management strategy which includes different tuition pricing scenarios. Fitch will continue to monitor the college's declining enrollment and new enrollment strategies once the strategies become finalized. The college's inability to prudently budget and respond to the declining enrollment could negatively impact pledged revenues and pressure the rating.

STRONG COUNTY SUPPORT TEMPERS WEAK OPERATING PROFILE

The college's overall operating profile in fiscal 2015 (unaudited) is expected to be similar to fiscal 2014, with an operating deficit of 8.3% on a full accrual basis. Fitch notes that the margin calculation includes such things as other post-employment benefit (OPEB) obligation as an operating expense.

Weak operations are somewhat offset by strong county and state support. As planned, the college received a significant increase in county support totaling 18% for fiscal 2015, although operations remain imbalanced. The county's credit strength, including its large and affluent service area, together with its strong and consistent financial support to the college (under the state regulated County Maintenance of Effort) partially offset the college's weaker financial attributes, given the economic benefit the college provides the county.

The college's fiscal imbalance is largely due to weakening enrollment and a significant increase in operating expenses over fiscal 2014, which outpaced revenues and significantly exceeded budget. Management's inability to find a sustainable solution to control expenses and show progress toward restoring operating balance could result in a rating downgrade.

VERY LOW DEBT BURDEN

The majority of the college's recent capital projects have been funded by state and county appropriations, resulting in a very low debt burden. Pro forma maximum annual debt service (MADS) coverage from fiscal 2014 unrestricted operating revenues was 1.7x. Pro forma MADS includes the current transportation fee revenue bonds. Strong local support for capital projects has limited the college's need to issue additional revenue debt secured by the transportation fee allowing coverage on the bonds to remain adequate.

Fitch also rates and has recently affirmed the following ratings:

--$14.56 million tax-exempt and taxable lease revenue bonds (Montgomery College Goldenrod Building Acquisition) series 2011A and series 2011 B;

--$15.09 million lease revenue bonds (Montgomery Community College) series 2008 A;

--$22.3 million lease revenue refunding bonds (Montgomery College Arts Center) series 2014 (facility fee).

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Revenue Supported Criteria' (June 16, 2014);

--'U.S. College and University Rating Criteria' (May 12, 2014);

--'Fitch Rates Montgomery College (MD) Lease Revs at 'AA'; Outlook Revised to Stable', dated Oct. 24, 2014.

Applicable Criteria and Related Research:

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012

U.S. College and University Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=748013

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=985037

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Contacts

Fitch Ratings
Primary Analyst
Nancy Faingar Moore
Director
+1-212-908-0725
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Colin Walsh
Director
+1-212-908-0767
or
Committee Chairperson
Joanne Ferrigan
Senior Director
+1-212-908-0723
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526
Elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Nancy Faingar Moore
Director
+1-212-908-0725
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Colin Walsh
Director
+1-212-908-0767
or
Committee Chairperson
Joanne Ferrigan
Senior Director
+1-212-908-0723
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526
Elizabeth.fogerty@fitchratings.com