News Column

Fitch Rates Worcester County, MD's $48.3MM GOs 'AA'; Outlook Stable

February 26, 2014

Fitch Ratings assigns an 'AA' rating to the following general obligation (GO) bonds of Worcester County, Maryland (the county):

--$48.3 million consolidated public improvement bonds, series

The proceeds of the 2014 series (tax-exempt) bonds will be used to finance school renovations and additions as well as improvements to the county's water and wastewater systems. The bonds will be offered by the county at a competitive sale on March 18.

In addition, Fitch affirms the following ratings:

--$67.6 million in outstanding county GO bonds at 'AA'.

The Rating Outlook is Stable.

SECURITY

The bonds are general obligations of the county for which its full faith and unlimited taxing power are pledged.

KEY RATING DRIVERS

SEASONAL TOURISM-BASED ECONOMY: The tourism sector remains a significant economic driver, vulnerable to economic cycles and contributing to seasonal employment fluctuations. Despite its tourism dependence, the county's economy has historically demonstrated resilience during periods of economic stress.

HISTORICALLY STRONG FISCAL MANAGEMENT: Prudent management decisions and adherence to fiscal policies has yielded solid reserve levels despite revenue declines experienced in recent years. The county also maintains a high level of revenue flexibility.

LOW DEBT BURDEN: The county's debt burden is expected to remain low to moderate, given its manageable capital needs.

CARRYING COSTS ARE LOW: Carrying costs including debt service, pension and other post-employment benefits (OPEB) are low but expected to increase modestly as the county issues additional debt and the state shifts a portion of the burden of teacher pension costs to the counties.

RATING SENSITIVITIES

The rating is sensitive to shifts in fundamental credit characteristics including the county's stable tourism- based economy and strong financial management practices. The Stable Outlook reflects Fitch's expectation that such shifts are highly unlikely.

CREDIT PROFILE

Worcester County is located on Maryland's eastern shore and encompasses the entire Atlantic seaboard of the state. The county, a prime tourist destination, boasts many public beaches, a boardwalk, golf courses, and convention facilities. Visitation for 2012 totaled over eight million, compared to an annual population of 51,578.

FAVORABLE OPERATIONS DESPITE CHALLENGING REVENUE ENVIRONMENT

Financial operations are characterized by prudent budgetary management, maintenance of sound reserves, compliance with formal reserve policy, and comprehensive long-range planning.

Property taxes are the main revenue source, representing 70 percent of the total. Revenue performance has been strained over the last five years, declining an average of 1.8 percent per year due to taxable assessed valuation (TAV) reductions. The county has prudently cut spending at a faster pace (3.2 percent per year on average) to maintain robust reserves. Expectations for fiscal 2015 TAV are for a slight decrease with positive growth resuming in fiscal 2016 which Fitch believes is reasonable given the recent fluctuations in housing values.

The fiscal 2013 unrestricted fund balance improved to $56.7 million or 34 percent of spending. The county's formal reserve fund balance policy is equal to 10 percent of budgeted expenditures.

The fiscal 2014 budget was adopted with a modest $1.7 million (1 percent of spending) general fund balance appropriation and no property tax rate increase. The county has conservatively budgeted fiscal 2014 income tax receipts at 4 percent below fiscal 2012 actuals. The budget funds a 2 percent cost of living adjustment for county employees. Year-to-date operations show positive variances in income and recordation transfer tax revenue which should reduce the appropriated use of reserves. Fitch believes the county will continue to make prudent fiscal decisions to maintain healthy reserve levels despite a challenged revenue climate.

SIGNIFICANT REMAINING REVENUE CAPACITY

The county's property tax rate is the second lowest in the state at $0.77 per $100 of AV in fiscal 2013. The property tax rate and levy are not subject to limitation. The county's income tax rate (1.25 percent) is the lowest in the state. Increasing the income tax rate to the cap would generate an additional $19.8 million, or a meaningful 12.8 percent of 2013 spending, although no such increase is under consideration.

TOURISM-DRIVEN LOCAL ECONOMY

Worcester County encompasses the entire Atlantic coastline of Maryland, serving as home to Ocean City, a prime tourist destination. Despite a weakened national economy, tourism-generated revenues have continued to increase year-over-year.

A $45 million gaming facility at the Ocean Downs harness-racing track opened in January 2011 adding 200 full- and part-time jobs. With the affirmative vote on table games during the November 2012 election, an additional expansion of the casino is expected.

Tourism and hospitality is the leading employment sector at 37 percent. Top employers include several hotel and restaurant establishments including the Harrison Group (4 percent of employment) and O.C. Seacrets (2 percent of employment). County unemployment rates exhibit a pattern similar to that of tourist arrivals. Unemployment rates averaged 15.4 percent from January- April 2013, the traditional off-season for tourism, and dropped to an average of 8.1 percent from May-September, the onset of the holiday season when tourist arrivals began to increase.

The county's population continues to grow, with 11 percent growth in full-time residents between 2000 and 2010 and flat growth since 2010. The population also continues to age, which puts less strain on education spending, the county's largest expenditure (46 percent). The county's wealth metrics are mixed, as evidenced by a county median household income at 109 percent of the national average but 79 percent of the state's high average. However, additional wealth flows into the county during the summer months from tourists and second-home-owners.

FAVORABLE DEBT PROFILE

Overall debt levels are moderate at roughly $3,802 per capita and low at 1.3 percent of market value, and amortization is rapid with 75 percent of outstanding principal repaid in 10 years. Debt service costs accounted for an affordable 5.8 percent of fiscal 2013 spending, well within the county's 10 percent policy.

The county's fiscal years 2014-2018 capital improvement plan totals just $142.6 million. Major projects include $87.5 million for schools and $28.5 million for public works. The county expects to issue approximately $82.6 million in GO bonds to fund the program, which will not materially impact existing debt ratios. The county's pay-go program funds 19 percent of the plan.

MODEST PENSION AND OPEB COSTS

Long-term liabilities related to employment benefits are not expected to pressure future operations. The county provides pension benefits to its employees through the State of Maryland Employees Retirement and Pension System.

State pension funding levels have deteriorated to 59 percent using Fitch's 7 percent return assumption, although the state has undertaken extensive pension and OPEB reforms. The county contributes 100 percent of the state required payment but annual contributions are likely to increase as the state plan is only funding 67 percent of the actuarially required contribution. The county's current payment accounts for 4.3 percent of total governmental fund spending.

A portion of teachers' pension costs were shifted from the state to local governments starting in fiscal 2013 and will be phased-in over four years. The state is expected to offset the majority of the costs with increases in various revenue streams, such as income tax, indemnity mortgage recordation tax, and local income reserve relief. While the state has estimated the net cost to the county at $1.26 million in fiscal 2016, the county's multi-year projections prudently do not include the receipt of any offsetting revenues for the $2 million in additional costs.

The county also provides OPEB to its retirees. During fiscal 2013, the county contributed $3 million for county and board of education employees (1.7 percent of spending). The trust as of July 1, 2013 had a balance of $62.2 million. The funded ratio for employees of the general government was 56.7 percent.

Additional information is available at 'fitchratings.com'.

((Comments on this story may be sent to newsdesk@closeupmedia.com))


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