NEW YORK--(BUSINESS WIRE)--Fitch Ratings assigns an 'AAA' rating to the following general obligation (GO) bonds of Frederick County, Maryland (the county):
--$55,810,000 GO public facilities bonds, series 2011A;
--Approximately $16.6 million GO public facilities refunding bonds, series 2011B.
The bonds will be offered through a competitive sale on July 21. Proceeds of the series 2011A bonds will fund various capital projects of the county. Proceeds of the series 2011B bonds will advance refund certain outstanding GO bonds of the county for debt service savings without extending final maturity.
In addition, Fitch affirms the 'AAA' rating on approximately $555 million of outstanding GO bonds.
The Rating Outlook is revised to Stable from Negative.
RATING RATIONALE:
--The Outlook revision to Stable reflects the county's commitment to address structural imbalances through expenditure cuts and without material reliance on one-time resources. The revision also considers additions to fund balance in fiscal 2010 and 2011 greater than previously projected, improving the county's overall financial flexibility.
--The 'AAA' rating reflects the county's history of sound financial management and conservative budgeting, above-average wealth, education, and employment indices, and adherence to conservative debt targets within a comprehensive debt affordability model.
--Additional credit strengths include adequate revenue raising flexibility, as the county maintains tax rates below neighboring jurisdictions and state maximums although implementation over the near term may be constrained by economic and political considerations.
--The county fully funds the actuarial required contribution (ARC) for other post-employment benefits (OPEB), which represents a possible source of flexibility during periods of budgetary stress.
KEY RATING DRIVERS:
--Continued commitment to adopting a structurally balanced budget.
SECURITY:
The bonds are secured by the county's full faith and credit and unlimited taxing power.
CREDIT SUMMARY:
General fund results for fiscal 2010 and 2011 (unaudited) surpassed prior expectations, resulting in a notable improvement in the county's overall financial flexibility. Actual results for fiscal 2010 yielded a net surplus of $4.8 million or 1.1% of spending, whereas prior projections anticipated a draw of approximately $12 million. Actual spending finished well below budget, a consistent pattern noted by Fitch. Estimated results for fiscal 2011 depict a net surplus of $16.2 million, compared to the budgeted use of $13.2 million in reserves. Revenues are expected to exceed the budget by approximately $15.3 million in fiscal 2011, marking the first time since fiscal 2007 that actual revenues met or exceeded the budget. The favorable revenue results are driven by the performance of the county's local income tax, which had been projected to drop by nearly 8% year-over-year.
The surplus results recorded in fiscal years 2010 and 2011 improve the unreserved fund balance to an estimated $69.3 million or 16.4% of spending. The adopted budget for fiscal 2012, which began on July 1, appropriates $20.8 million in existing fund balance, of which, approximately $4 million to $5 million is necessary to support general operations. The budget appropriates $6.7 million for pay-go capital and approximately $8.6 million to pre-fund OPEB. The budget also funds a $1.1 million deposit to the bond rating enhancement reserve, which had been nearly depleted after reaching a peak balance of $5 million in fiscal 2008.
Expenditure savings commensurate with prior performance are achievable, according to county management, which would limit the use of fund balance in fiscal 2012 to approximately $10 million. Based on these projections, Fitch expects the general fund unreserved fund balance to remain equal to 10% to 13% of spending.
In fiscal 2012 the county funds 100% of the $19.3 million government-wide OPEB ARC. This is unusual, as most local governments fund only the pay-go amount. The budget conservatively lowers projected operating revenue by 0.9% from estimated fiscal 2011 results while increasing spending by approximately $10.8 million or 2.5% from the prior year budget largely as a result of the non-operating appropriations noted above. The budget furthers efforts to eliminate a structural deficit, calling for a 7% workforce reduction and relinquishing operation of a pre-school program to a federal contractor for savings of approximately $7.3 million on a combined basis.
The budget reflects $3.2 million in transfers from the Board of Education. The overall reliance on transfers is lowered from $10.4 million in the fiscal 2011 budget. The county contends the budget maintains all necessary services, including education, health, and public safety, despite the measures taken to reduce spending. Fitch notes that spending actions taken in fiscal 2012 follow similar reductions in personnel and modifications to health and pension benefits in preceding years.
The county performs an ongoing review of actual-to-budget results, culminating in a formal quarterly report to the board of commissioners. The county also performs multi-year financial projections, which continue to show gaps in recurring operating revenue relative to recurring operating appropriations. However, the forecasted deficits have lessened in severity as a result of spending actions taken in the last several fiscal periods. The preliminary fiscal 2013 deficit of approximately $14 million (excluding one-time uses) represents 3% of projected spending. The forecast reflects less than 1% growth in operating revenue (and no tax or fee increases) and increases total appropriations by 1.9% from fiscal 2012. Expenditure forecasts have been higher than actual results historically, as noted previously.
Fitch also notes the county has the resources to eliminate future gaps through various tax raising measures that would not fully comprise its revenue flexibility. Frederick County's real property tax rate ($0.936 per $100 in assessed value [AV]) and income tax rate (2.96% compared to the 3.2% statutory limit) each remain very competitive when compared to neighboring counties. These two sources account for more than 90% of general fund revenue.
Frederick County remains among the fastest growing counties in Maryland, with a 2.4% annual increase in the population to 233,385 in 2010, and additional expansion of 22% forecast through 2020. The population forecast is supported by the availability of developable land, competitively priced housing stock, and reasonable proximity (approximate one hour drive time) to three international airports and employment opportunities in the Baltimore, Maryland and Washington D.C. metro areas. The regional economy experienced relatively light job loss during the recession, buoyed by the significant presence of the federal government. The county has experienced employment growth of 0.4% on a compound annual basis from 2002-2011, easily surpassing the rate of growth for the state and nation during the same period. More recent job growth has driven the county's rate of unemployment down to 5.9% in April after peaking at 7.5% in February 2010.
Fort Detrick, which is located in Frederick County, is the home of the National Cancer Institute and the U.S. Army Medical Research Institute of Infectious Diseases and the leading medical research laboratory for the nation's biological defense program. According to the county, the Fort Detrick campus is responsible for 9,200 private sector employees, in addition to $2 billion in current construction projects with an additional $1 billion scheduled over the next two years. The presence of Fort Detrick has also fueled growth in the high-wage bioscience and advanced technology sectors. Other large private sector employers within the county include Frederick Memorial Healthcare System, Bechtel, and SAIC. Per capita income levels have exhibited strong recent growth, and are parallel to the state and 129% of the U.S. average.
Overall debt levels remain fairly low, at $2,683 per capita and 2.3% of market value. The county aggressively repays debt, with approximately 68% of outstanding principal scheduled for retirement within 10 years. As a result, fiscal 2012 tax-supported debt charges consume a slightly elevated 11.6% of budgeted spending. Debt ratios are not expected to change materially - the county's fiscal 2012-2017 capital improvement program (CIP) calls for the issuance of approximately $238 million in GO bonds thru 2017, which essentially mirrors the amount of outstanding debt that will be repaid within the same period. The CIP totals $414.5 million which is more than $200 million lower than the fiscal 2010-2015 CIP. Education projects continue to account for the bulk of the program at nearly 50% followed by transportation and roads 20% and general government 15%. The county doe not have exposure to variable rate or short-term debt or derivatives.
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, LoanPerformance, Inc., IHS Global Insight, and Property and Portfolio Research.
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria', dated Aug. 16, 2010;
--'U.S. Local Government Tax-Supported Rating Criteria', dated Oct. 08, 2010.
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=548605
U.S. Local Government Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=564566
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