NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned a rating of 'AAA' to the following Montgomery County, MD (the county) general obligation (GOs) bonds:
--$340 million consolidated public improvement bonds of 2016, series A;
--$96 million consolidated public improvement refunding bonds of 2016, series B.
The bonds are scheduled for negotiated sale on November 30. Proceeds from the series 2016A bonds will be used to fund various capital projects. Proceeds of the series 2016B bonds will be used to refund a portion of the county's outstanding Consolidated Public Improvement Bonds of 2011, series A.
The Rating Outlook is Stable.
The GOs are payable from the full faith, credit, and unlimited taxing power of Montgomery County.
KEY RATING DRIVERS
ANALYTICAL CONCLUSION: The 'AAA' rating reflects the county's stable economic underpinnings, strong gap-closing capacity, and low long-term liability burden. A demonstrated capacity to absorb the constraints of a recessionary revenue environment and the fiscal decision-making to proactively restore and enhance the county's financial cushion and operations support the assignment of a 'AAA' rating.
Economic Resource Base
Montgomery County borders Washington D.C. and northern Virginia. As such, the county's employment base has a significant presence of the U.S. government and contractors within the information, intelligence, biotechnology, and high-tech manufacturing industries. While employment growth has slowed it has continued to increase, and unemployment remains low. The county remains one of the wealthiest in the country.
Revenue Framework: 'aaa' factor assessment
The property and income taxes that support the county are expected to continue to yield moderate revenue growth given rebounding housing prices and steady income tax revenue growth. The county's independent legal ability to raise revenues is limited by county charter to the rate of inflation but can be exceeded on an unlimited basis with an unanimous vote by the council.
Expenditure Framework: 'aa' factor assessment
The county has the proven ability to reduce spending during an economic downturn, and Fitch expects spending to grow in line with revenues over time
Long-Term Liability Burden: 'aaa' factor assessment
The county's combined debt and unfunded pension liability burden is low. Additional debt plans are affordable and should not notably impact ratios given rapid amortization of outstanding debt.
Operating Performance: 'aaa' factor assessment
Strong operating results have materially enhanced the county's reserve position following weakened reserves subsequent to the recession. The county's multi-year financial plan shows a further strengthening of reserves in line with the county's strengthened reserve policy.
SOUND CREDIT PROFILE: The rating is sensitive to shifts in fundamental credit characteristics including the county's modest long-term liability burden, strong financial management practices, adequate reserves, and diversified economy. The Stable Outlook reflects Fitch's expectation that such shifts are unlikely.
Federal government employment is led by the U.S. Department of Health and Human Services (over 30,000 employees) and U.S. Department of Defense (DOD) (DOD; over 13,000 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 county relies on a combination of property tax and income tax revenues, which equate to 36% and 44% of general fund revenues, respectively in fiscal 2015. Property tax revenue has fluctuated reflecting sharp declines in AV after the recession, flat AV growth over the past several years and charter restrictions on property tax revenue growth. Zillow's one-year forecast shows a 1.9% increase. Income tax revenue growth reflects the growth of the local and regional economy.
Historical growth of general fund revenues exceeds U.S. CPI and GDP. Given projected development trends and steady positive employment trends revenue growth prospects are sound.
The county's independent legal ability to raise revenues is limited by county charter to the rate of inflation but can be exceed on an unlimited basis with an unanimous vote by the council. The county also has the ability to implement an excise tax without voter approval.
The county maintains healthy expenditure flexibility with affordable spending associated with fixed carrying costs.
The county has proactively maintained spending growth in line with revenue growth historically, which is expected to continue given its expenditure flexibility.
According to the state maintenance of effort mandate, education spending (58% of general fund spending) cannot decline from year to year without approval from the state. In response to weakened income and property tax revenues following the recession, the county was granted approval to reduce spending on education. To balance operations management also reduced the workforce, made cuts to health and retiree benefits and implemented hiring freezes.
Although most of the county's full-time employees are unionized, the county council does possess the ability to reject economic terms affording ample flexibility in salaries.
Long-Term Liability Burden
The long-term liability burden, including debt and pension obligations, is low at about 6% of personal income. There is some pressure from future bond issuance plans, but given the average pace of debt amortization debt levels are expected to remain moderate.
The county's defined benefit plan is funded at an adjusted 87% and is closed to non-public safety employees as of 1994. The majority of county employees participate in a defined contribution plan. A limited number of employees participate in the state pension plan, which has reported improving pension funded levels.
OPEB claims are paid on a pay as you go basis, and future liabilities are pre-funded. The unfunded actuarially accrued liability is approximately $1 billion or 2% of personal income.
The county's financial resilience comes from a combination of expenditure cutting in response to weakened revenues and timely adjusted revenue projections which has resulted in a sound, increased reserve cushion. An unaddressed moderate economic decline scenario shows an operating reserve cushion that declines below the 'aaa' financial resilience assessment. However, Fitch expects that in the event of such an actual revenue decline, the county would maintain reserves at a significantly higher level through active revenue and expenditure management.
The county's budget management demonstrates a strong commitment to bolstering its reserve cushion in preparation for the next downturn. The county's multi-year plan shows that the general fund and reserve stabilization fund (RSF) is expected to increase to 10% BY2020. The county maintains a healthy unrestricted fund balance (8.1% of general fund expenditures and transfers out at fiscal 2015 year-end). The county maintains the RSF in the restricted section of fund balance. At year-end 2015, the total available fund balance equaled a healthy 15.4% of spending.
The fiscal 2016 budget was elementally flat compared to fiscal 2015 at over $3.1 billion. The total budget included a modest use of reserves of $22 million (less than 1% of the budget) and a reduction in the real property tax rate in accordance with the charter limit on property tax revenues generated. Estimated year-end operating results show an estimated $37 million (at about 1% of budget) deficit which includes $82 million of pay-go capital spending.
The fiscal 2017 budget is a 5% increase over fiscal 2016. The budget includes a 3.9 cent tax rate increase, the first increase above the charter since 2009. The main driver of the budget increase was a 6.2% increase to Montgomery County Public Schools. The budget also includes a $16.2 million contribution to the unrestricted general fund balance and $25.6 million to the reserve stabilization fund.
Date of Relevant Rating Committee: April 26, 2016
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.
U.S. Tax-Supported Rating Criteria (pub. 18 Apr 2016)
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