News Column

Fitch Affirms Redevelopment Auth of Montgomery County, PA's County Gtd Revs at 'AA+'; Outlook Stable

April 28, 2014

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings affirms the 'AA+' rating on the following Redevelopment Authority of the County of Montgomery, PA (the authority) county guaranteed parking revenue bonds:

--$11.885 million county guaranteed parking revenue bonds, series of 2007 (taxable) (fixed rate);

--$6 million county guaranteed revenue bonds series of 2010 (taxable).

The Rating Outlook is Stable.

SECURITY

The bonds are limited obligations of the authority, secured by and payable from the Trust Estate granted by the authority and the Trustee under the Indenture, which includes the pledged project revenues. The bonds are also secured by the County Guaranty, which is a general obligation of Montgomery County (the county) for which the county has pledged its full faith, credit and taxing power.

KEY RATING DRIVERS

COUNTY GUARANTEE: The rating is based on the unconditional guarantee of Montgomery County, from which the bonds benefit.

STRONG SOCIOECONOMIC INDICATORS: Wealth and income levels are well above average. A large and diverse tax base and proximity to Philadelphia provide economic stability. Fitch expects the county will continue to grow with future development.

ANTICIPATED FINANCIAL STABILIZATION: After five straight years of substantial fund balance declines greatly reduced the county's financial flexibility, the county projects a small surplus for 2013 and further improvement in financial results in 2014 to help restore fund balance levels and eliminate the need for short-term cash flow borrowing.

PROPERTY SALES: The recent sale of two properties, including a nursing home, will bolster reserves and eliminate financially poorly performing, non-core assets.

LOW CARRYING COSTS: Pension funded ratios are strong and the county's liability related to other post-employment benefits is nominal. Overall carrying costs are very low.

RATING SENSITIVITIES

FUND BALANCE CHANGES: Failure to improve fund balance levels as expected would restrict the county's financial flexibility, leading to downward rating pressure. Conversely, achievement of projected fund balance growth and maintenance of those higher levels would restore financial flexibility, potentially leading to an upgrade in the medium term.

CREDIT PROFILE

The county is located 30 miles west of Philadelphia and is home to a population of approximately 800,000.

WEALTHY PHILADELPHIA SUBURB

The county's diverse tax base benefits from the presence of 17 hospitals, higher education institutions, service providers, and several large pharmaceutical companies including Merck, GlaxoSmithKline and Wyeth. Job growth and development continues to occur around the Pennsylvania Turnpike exchanges at King of Prussia, Plymouth Meeting, Fort Washington and Willow Grove given the easy highway access to several major highway systems. The county has recently seen an uptick in building permits and construction activity.

The county's property tax base stayed flat throughout the nationwide economic downturn with tax rates remaining well below neighboring counties. Taxpayer concentration is minimal. Wealth levels remain strong as reflected in per capita income levels at 148% of both the state and national levels. The county's unemployment rate of 5.1% in December 2014 remains well below that of the state and national rates of 6.2% and 6.5%, respectively.

SHARP DECLINE IN FUND BALANCE LEADS TO CASH FLOW BORROWING

The county's general fund balance declined significantly in recent years, mostly due to management's decision to hold tax rates constant and a decline in state funding. Property taxes and state funding are the county's primary revenue sources. As a result, historically high general fund balance levels of over 20% of spending have been reduced each year since 2007.

The 2012 budget was adopted without the use of fund balance due to a 17% increase in the property tax rate. However, the budget did not include a contribution to its well-funded pension plan. Fitch takes funding of pension actuarial required contributions (ARCs) into account when evaluating structural budget balance. Even without a pension payment, 2012 ended with a $6.9 million deficit, reducing the unrestricted general fund balance to $22.7 million or 5% of expenditures. The reduced fund balance level forced the county to access the short-term markets in the early part of 2012 for cash flow borrowing for the first time in many years.

The 2013 budget was balanced with no increase in tax rates. The county again had to use cash flow borrowing early in the year. While again not funding the ARC, the county made its first contribution to the pension system since 2007. Preliminary results show a $6.7 million increase in total fund balance. Had the county fully funded the ARC, there would have been a small decline in fund balance.

The county expects to have further growth in fund balance in 2014 as a result of the continued improvement in operations and the sale of two properties, including a nursing home. Both sales closed earlier this year and allowed the county to defease $20 million in debt, reduce its workforce by 20%, eliminate the operating loss at the nursing home, and net over $20 million towards the fund balance.

The budget includes another payment to the pension fund, though it again will likely be below the ARC, but only modestly. As a result, the county expects to finish the year with fund balance above its 10% target level. Because the closing of the property sales was slightly delayed, the county had to do another smaller short-term cash flow borrowing, but does not anticipate doing so again in the future.

MANAGEABLE DEBT LEVELS

Debt levels are estimated to be average on an overall basis, with debt per capita at approximately $3,768 and 3.2% of market value (MV). Underlying school district and town debt levels are approximate. Debt amortization is rapid with 71% of principal retired in 10 years. Future capital needs are manageable.

WELL-FUNDED PENSION

The county's pension plan funding is strong at a Fitch-adjusted rate of 87.5% as of Jan. 1, 2013, despite the county's decision not to fund its ARC for several years. The county has almost no obligation for other post-employment benefits (OPEB). Overall carrying costs for debt, pension ARC and OPEB were a low 9.8% of governmental spending in 2012 and are expected to decline further with the recent defeasance of debt and decline in employees from the property sales.

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, S&P/Case-Shiller Home Price Index, IHS Global Insight, Zillow.com, National Association of Realtors.

Applicable Criteria and Related Research:

--'Tax-Supported Rating Criteria' (Aug. 14, 2012);

--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 14, 2012).

Applicable Criteria and Related Research:

Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015

U.S. Local Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314

Additional Disclosure

Solicitation Status

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ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.



Fitch Ratings

Primary Analyst

Eric Friedman

Director

+1-212-908-9181

Fitch Ratings, Inc.

One State Street Plaza

New York, NY 10004

or

Secondary Analyst

Bernhard Fischer

Director

+1-212-908-9167

or

Committee Chairperson

Amy Laskey

Managing Director

+1-212-908-0568

or

Media Relations:

Elizabeth Fogerty, +1-212-908-0526 (New York)

elizabeth.fogerty@fitchratings.com


Source: Fitch Ratings


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