Fitch Rates Calvert County, MD's GO Bonds 'AAA'; Outlook Stable

NEW YORK--()--Fitch Ratings has assigned a 'AAA' rating to the following general obligation (GO) bonds of Calvert County, Maryland (the county):

--$46.8 million consolidated public improvement and refunding GO bonds, 2016 series.

The bonds are expected to sell via competition on July 19. Bonds proceeds will be used to fund various school and public improvement projects and to advance refund the county's outstanding series 2008 and 2009 GO bonds for debt service savings.

In addition, Fitch affirms the following county ratings at 'AAA':

--Issuer Default Rating (IDR);
--$120.2 million of outstanding GO bonds.

The Rating Outlook is Stable.

SECURITY
The bonds are general obligations of the county backed by a pledge of its full faith, credit and unlimited taxing power.

KEY RATING DRIVERS

Fitch expects the county to maintain a healthy level of reserves despite multiple years of planned drawdowns for capital and operations. High budgetary flexibility is highlighted by ample revenue raising capacity and strong budget management during the downturn. The long-term liability burden will remain low.

Economic Resource Base
Calvert County is located in southern Maryland approximately 42 miles southeast of Washington D.C. and 64 miles south of Baltimore. The county is located on a peninsula bound on the east by the Chesapeake Bay and on the west by the Patuxent River with 110 miles of shoreline. The estimated 2015 population is 90,595.

Revenue Framework: 'aaa' factor assessment
Revenues have grown ahead of national economic expansion with very minimal tax rate increase. Property taxes are not subject to a cap, providing significant revenue raising flexibility.

Expenditure Framework: 'aa' factor assessment
Education drives the county's spending needs and reduction requires approval from the state. As such, the county's ability to make spending cuts when needed is somewhat limited. Carrying costs related to debt and pensions are low. Education spending has grown despite decreased enrollment over the last decade due to increased mandates from the state.

Long-Term Liability Burden: 'aaa' factor assessment
The county's liability burden is low. Future debt needs are manageable, and amortization of existing debt is rapid.

Operating Performance: 'aaa' factor assessment
The county has consistently maintained fund balances above their conservative reserve stabilization policy through strong revenue performance, prudent expenditure management and continued monitoring of annual multi-year forecasts.

RATING SENSITIVITIES
FINANCIAL FLEXIBILITY: The rating is sensitive to the county's demonstrated ability to maintain a high level of financial flexibility, including satisfactory reserves.

CREDIT PROFILE

Calvert County's unemployment rate was 3.7% in May 2016 and benefits from the proximity to larger regional employment centers in Washington D.C. and Baltimore. Per capita personal income is on par with the state and 12% above the national level. Approximately 63% of the county workforce commutes outside its boundaries as the county is a rural community with limited economic activity inside it beyond the two largest private sector employers. These two large employers, Exelon's Calvert Cliffs nuclear power plant and Dominion's Cove Point liquefied natural gas (LNG) facility, account for 16% of the county's property tax base. Dominion is just over halfway through a $3.8 billion expansion (the largest private project in Maryland's history) to add an exporting terminal to its plant that comes online in fiscal 2018 and will add 140 jobs.

Revenue Framework
Property taxes are the largest revenue source for the county at 60% of general fund revenues followed by income taxes at 31%. Taxable assessed values (TAV) are well below the pre-recession peak of fiscal 2010; however, the fiscal 2017 budget projects a third consecutive TAV increase based on the rolling three-year reassessment cycle and new construction. Income tax revenues in fiscal 2016 are projected to increase for the sixth consecutive year.

Exelon accounted for approximately 10% of fiscal 2015 general fund revenues ,and Dominion's Cove Point project will begin generating PILOT payments in fiscal 2018; the first of which is $40 million or 15% of fiscal 2015 general fund revenue adding to concentrated revenue sources. Dominion's significant capital investment along with the project's long-term contracts and the county's legal ability to raise property tax revenues somewhat offset concern over the increased revenue concentration.

The county's revenue performance net of tax policy changes over the last decade was ahead of both inflation and national economic expansion. Fitch expects future revenue growth to continue to exceed national expansion based on continued economic developments in assessed values and stable income growth.

Property tax revenues are not subject to a cap, and the tax rate is below average for the state. The property tax rate in the adopted fiscal 2017 budget is the first increase since 1987 at 9.52 mills for an increase of 6 cents or 7%. The income tax rate in the adopted fiscal 2017 rate was also increased, from 2.8% to 3%, and remains under the 3.2% income tax rate limit in Maryland.

Expenditure Framework
The county's primary general fund expenditure is education at just over half of spending, followed by public safety at 13%.

Spending is expected to continue to increase in line with revenue growth. The primary driver for the growing expenditures is the county's education spending. Despite decreased school enrollment in nine of the last 10 years, school spending increased significantly over the past decade due to increases in health insurance costs and changes at the state level that require the county to begin funding teacher pensions. Fitch expects the trend of increased school funding to continue due to the expectation for slight enrollment growth, the return of step increases that were postponed throughout the downturn, and the full funding of teacher pensions required in fiscal 2017.

There were no layoffs or furloughs during the recession, but the county did require departmental budget cuts. While county employees do not have union representation, the state's maintenance of effort mandate stipulates education spending cannot decline year-over-year without state approval. The county has begun using a service based budget to further manage and identify remaining expenditure flexibility outside the state mandated education expenses and that which would otherwise require service disruption to cut.

Fitch estimates the county's fixed carrying costs (debt service, other post-employment benefits (OPEB), and pension actuarially-required contributions) are a low 9.6% of spending. The county in fiscal 2015 made pension and OPEB contributions for the school board (a component unit of the county) of $3.6 million and $7.7 million, respectively, or an additional 4.3% of spending.

Long-Term Liability Burden
The county's long-term liability burden is low at 3.8% of personal income and is primarily debt. The county aggressively repays its outstanding debt with 80% retired within 10 years, leaving ample capacity to fund future borrowing needs. The county's fiscal 2017-2022 capital plan totals $240 million of which half is funded with bonds. Fitch expects currently low debt levels to increase moderately but remain low relative to personal income.

The county manages three single-employer defined benefit pension plans: one for general employees; another for the sheriff's department; and a third, smaller plan for the volunteer firefighters. The pension plan for general employees was closed in 1999 when new employees were moved to a defined contribution plan. The funded status of the pension plans on a combined basis is 86% as reported by the county and slightly less at 80% when calculated using a 7% rate of return assumption for plan assets. The combined net pension liability is very small at less than 1% of personal income.

The Board of Education of Calvert County, a component unit of the county with no taxing power, maintains pensions and OPEB plans for employees. The school board reported an $11.3 million (less than 1% of personal income) proportionate share of the net pension liability for the cost-sharing multiple employer plan managed by the state. In addition, the OPEB liability for the school board totals $211.8 million (4.4% of personal income) and has doubled since fiscal 2011.

Operating Performance
The county's strong financial resilience is based on Fitch's expectation that the county could use a combination of solid budget flexibility and large reserves to offset recessionary revenue declines. Fitch expects the county would maintain reserves above their reserve stabilization policy level at 8% of the operating budget during a downturn. In recent years, the county chose to spend down some of their excess reserves in expectation of significant PILOT revenues beginning in fiscal 2018 from the Dominion (IDR 'BBB+') expansion project. Dominion's construction is at or ahead of schedule for completion in fiscal 2018 at which time project revenues will average $50 million annually (about 20% of fiscal 2015 revenues) for the life of the 15-year agreement. Dominion's exporting contracts are fully subscribed at capacity in fixed 20-year contracts with investment-grade counterparties (see Fitch's May 2016 press release, 'Fitch Upgrades Dominion Resources' Remarketed Junior Sub Notes Rating to 'BBB'').

The county's strong commitment to financial flexibility is demonstrated by efforts to control costs, increase revenues and produce comprehensive annual multi-year forecasts. It deferred some capital needs and borrowed for others during the continued slow economic recovery in the county without deferring pension spending or any major budget decisions that would create future obligations.

The county's multi-year forecasts show previously postponed non-recurring expenditures such as contributions to the OPEB trust and transfers to the capital fund increase upon receipt of Dominion PILOT payments.

Fiscal 2015 ended with a general fund deficit of almost $8 million or 3.3% of spending and was larger than originally budgeted based on slower than expected income tax revenue. Unrestricted general fund reserves remained healthy at $44.9 million or 18.8% of spending. Year-to-date estimates for fiscal 2016 show a deficit of $5.6 million, as the original budget estimated. The deficit includes a $3.3 million operating deficit as well as approximately $2.3 million in pay-go capital spending. The unrestricted balance is expected to remain sound at $40.5 million or 16.9% of spending, well above the level Fitch considers adequate for a 'aaa' financial resilience assessment. The county indicates balanced budgets will be the policy going forward and adopted the fiscal 2017 with no use of fund balance.

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

In addition to the sources of information identified in Fitch's applicable criteria specified below, this action was informed by information from Lumesis and InvestorTools.

Applicable Criteria
U.S. Tax-Supported Rating Criteria (pub. 18 Apr 2016)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=879478

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Contacts

Fitch Ratings
Primary Analyst
Parker Montgomery
Analyst
+-1-212-908-0356
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Evette Caze
Director
+1-212-908-0376
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
Parker Montgomery
Analyst
+-1-212-908-0356
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Evette Caze
Director
+1-212-908-0376
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