News Column

Fitch Rates Anne Arundel, MD's $36.9MM Special Obs 'AA+'; Outlook Stable

May 1, 2014

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings assigns the following ratings to Anne Arundel County, Maryland's (the county) special obligation bonds:

--$23.6 million special obligation refunding bonds (Arundel Mills project), series 2014 at 'AA+';

--$11.6 million special obligation refunding bonds (National Business Park project), series 2014 at 'AA+';

--$1.7 million tax increment refunding bonds (Nursery Road project), series 2014 at 'AA+'.

Bond proceeds will refund a portion of the county's outstanding special obligation bonds. The bonds are scheduled to sell via competition on May 14th.

In addition, Fitch affirms the following ratings:

--$1 billion outstanding GO bonds at 'AA+'.

A complete list of ratings being affirmed is provided at the end of this release.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by separate county guaranty agreements to which the county's full faith, credit, and taxing power are irrevocably pledged. The pledge is subject to the county charter's limitation on annual revenue increases from taxes levied on existing property after July 1, 1993. The charter limits such revenues from increasing annually more than the Consumer Price Index or 4.5%, whichever is less.

KEY RATING DRIVERS

RATING CONTINGENT UPON COUNTY'S PROFILE: The rating reflects the underlying credit characteristics of the county.

RETURN TO STRUCTURAL BALANCE: County financial operations are structurally balanced after past reliance upon reserves and other one-time revenues.

ADEQUATE RESERVE POSITION: Fitch believes that fund balance levels will be adequate after the expected attainment of policy levels, an increase from the very weak position of a few years ago.

SOLID REVENUE-RAISING CAPACITY: The county's low income tax rate provides revenue-raising flexibility. A charter-imposed cap on property tax growth somewhat limits the county's ability to raise revenue, although a substantial taxable assessed valuation cushion bolsters the consistency of property tax collections.

VITAL EMPLOYMENT BASE: A considerable and strong economic base, concentrated in the governmental and military sectors, shows excellent prospects for continued development and expansion. Wealth levels are well above average.

LOW DEBT BURDEN: Overall debt levels are moderately low and amortization is rapid, consistent with the county's conservative debt policies. Long-term obligations do not pressure the credit.

RATING SENSITIVITIES

SUFFICIENCY OF RESERVE LEVELS: Fitch will continue to monitor the county's success in maintaining structural balance and adequate reserves.

CREDIT PROFILE

Anne Arundel County is located 13 miles east of Washington, D.C., bordered by the Chesapeake Bay on the east and Baltimore County on the north. Annapolis, the state capital and county seat, is located in the county. Fitch rates the city's GO bonds 'AA+' with a Negative Outlook.

DISTRICTS' RATINGS LINKED TO COUNTY'S GO PLEDGE

Each series of bonds is payable from that district's tax increment revenues. Special tax revenues generated by the Arundel Mills project and National Business Park project can be used to pay those bonds. The county has entered into three guaranty agreements whereby it covenants to appropriate annually sufficient funds to pay the year's debt service obligations.

Should tax increment revenues and special tax revenues prove insufficient to service the debt, the county will fund the appropriations by levying ad valorem taxes, subject to charter limitations on the county's taxing power. The county's obligation is an unconditional full faith and credit pledge and is the basis for the rating on the bonds.

All three districts leverage the county's strong commercial base and have demonstrated tax base resiliency as well as sound to ample debt service coverage. The Arundel Mills District includes the 1.6 million square foot Arundel Mills Mall as well as the state's largest gaming venue. Coverage benefited recently from a notable tax base increase. Coverage of maximum annual debt service is a sound 3.0 times (x).

The National Business Park district has 3.5 million square feet of Class A office space, with plans for continued development. MADS coverage is sound at 3.9x. The Nursery Road Development District is the only one to show tax base decreases, albeit modest ones, in the past few years. The low debt service requirements have generated ample MADS coverage of 29.0x.

VIBRANT GOVERNMENT AND MILITARY-BASED ECONOMY

Government and defense related contractors coupled with the robust employment opportunities in the Baltimore-Washington corridor anchor the county's strong economy. The county contains significant federal installations, including the National Security Agency (NSA), Fort Meade, and the U.S. Naval Academy. Ft. Meade's regional economic impact is expected to increase to an estimated $5 billion annually. The fort's presence has driven significant development in the area, including the fully leased 3.5 million square feet of office space in the National Business Park.

The county is Maryland's top-ranking tourist destination, benefiting from $3.3 billion in annual tourist spending. Maryland Live, a gaming and entertainment center, opened recently and is now one of the county's leading employers. Baltimore-Washington International Thurgood Marshall Airport, located in the county, supports the broad economic base. The county's unemployment rate tracks well below state and national averages, and remained low at 5.1% in December 2013. Per capita income is well above both the state's and nation's.

ATTAINMENT OF BUDGETARY BALANCE; REBUILDING OF RESERVES

A return to a structurally balanced budget and adequate reserve levels has enhanced the county's financial profile. Fiscal 2013 concluded with a $36.2 million operating surplus, equal to 3% of spending. One-time revenue use was quite low and the county would have generated a surplus even without its use. The improved financial operations contrasted positively with the heavy reliance upon one-time revenues and reserves from other funds to balance the general fund budget in the past few fiscal years.

Fiscal 2013 benefitted from 6.9% revenue growth from the prior year. Property and income taxes, which combined account for nearly 80% of county revenues, continued to demonstrate sustained improvement. Recordation and transfer taxes rebounded with better housing market performance after relatively flat returns from fiscal 2009-fiscal 2012. Actual collections exceeded the budget by a notable 35.1%, the first positive variance since fiscal 2008. Fitch considers conservative revenue forecasting as prudent financial management, especially given the volatile history of these taxes and results that until fiscal 2013 had been below budget for a number of years.

The year concluded with an unrestricted fund balance, including the county's revenue stabilization fund (RSF), equal to a satisfactory 9.4% of spending, adjusted for bond proceeds. This level compares favorably to the fiscal 2009 available fund balance equal to 2.6% of spending, adjusted for bond proceeds. The $23 million RSF, which constituted 20.3% of the unrestricted fund balance, had recovered somewhat from the $17.1 million of fiscal 2010 but was around half of the county's policy level. The RSF is included in the county's unrestricted fund balance calculations.

EXPECTATION OF LOWER BUT ADEQUATE RESERVES

The fiscal 2014 budget achieves balance with a minimal use of one-time impact fees, which Fitch believes do not compromise structural budget integrity. The budget includes a $61 million fund balance appropriation earmarked for one-time expenses, which Fitch views as a fiscally prudent use of reserves. Anticipated uses include a $20.3 million reallocation of uncommitted balance to the RSF, which would result in nearly full funding of the RSF. Additionally, the county projects spending $25.2 million on pay-as-you-go capital projects, which Fitch regards as a source of flexibility.

County management reports that they do not anticipate using the full fund balance appropriation in fiscal 2014, which Fitch accepts given preliminary indications of positive revenue variances. Nevertheless, reserves are projected to decline. The current rating incorporates Fitch's expectation that the county will operate over time with fund balance levels that fluctuate somewhat but include a fully funded RSF along with some additional reserves. Fitch views projected fiscal 2014 reserve levels as adequate given the historical volatility of reserves and the revenue flexibility afforded primarily by the leeway under the income tax cap, an economically-sensitive revenue source. A commitment to structural balance and a fully funded RSF is a key rating consideration going forward.

The fiscal 2015 budget is still under consideration. Preliminarily, the county will appropriate a lower level of fund balance than in fiscal 2014 and will again restrict its use to one-time projects. The county is considering a contribution to the RSF, with the possibility of aligning the fund with the $48 million policy. Preliminary assumptions incorporate pay-as-you-go capital funding at levels comparable to those of the past two years.

MEASURABLE FINANCIAL FLEXIBILITY

Fitch view positively the flexibility embodied in the county's income tax rate, which at 2.56% is among the lowest in the state. The county estimates that it could generate around $100 million were it to raise the rate to the 3.2% state cap. The Homestead Tax Credit, which limits annual growth in property assessments, provides stability to property taxes. Sufficient margins exist to protect the collections, even if there were to be a notable decline in the tax base. Lastly, the county has been able to budget $15 million-$25 million annual pay-as-you-go capital financing since fiscal 2013.

LOW DEBT LEVELS

The county's debt levels remain moderately low, well within conservative debt affordability targets. Overall net debt equals $2,042 per capita and 1.5% of market value, excluding self-supporting water, sewer, and solid waste debt. Debt service costs in fiscal 2013 equaled a moderate 8% of expenditures, despite the above-average amortization at 64.9% of principal retired within 10 years.

The county's $1.9 billion six-year capital improvement plan (CIP) for fiscal years 2014-2019 assumes tax-supported debt issuance within the parameters of the county's prudent debt affordability criteria. Nearly $900 million of the CIP consists of projects to be funded by the self-supporting enterprise systems or a dedicated fee. Tax-supported debt service costs are expected to escalate mildly but not exceed 10% of revenues.

AFFORDABLE LONG-TERM OBLIGATIONS

Fitch does not believe that long-term obligations will pressure the credit, even as the county assumes the increased cost of funding teachers' pensions due to a funding shift from the state to local governments. County employees excluding teachers participate in one of four single-employer defined benefit plans, all in separate trust funds administered by the county's pension system. The county's annual contributions total a manageable 4.1% of government spending. The county is considering lowering its investment rate of return by .25% to 7.75%, which would raise the annual required contribution (ARC). Calculations that use Fitch's assumption of a 7% investment rate of return result in a just-satisfactory funded ratio of approximately 69%.

Pension requirements increased in fiscal 2013 by a modest $11.5 million due to a state-mandated contribution for teachers' pensions. The additional requirement is incorporated in annual school funding costs as opposed to an escalation of the pension ARC. Fitch expects the county will continue to successfully absorb the new obligation, which will equal $18.7 million in fiscal 2016.

Effective fiscal 2014, the county will augment its annual OPEB appropriation, with the goal of achieving full ARC funding within five years. Fully funding the OPEB ARC in fiscal 2013 coupled with debt service and pension payments would have resulted in total carrying costs equivalent to a manageable 19.9% of spending. Fitch believes that through sound financial management the county can implement the increased contributions without undue pressure.

Fitch affirms the following GO bonds at 'AA+':

--GO bonds series 1987; 1996; 1998;

--GO general improvement bonds series 2005;

--GO consolidated general improvement bonds (Taxable-Build America) series 2010;

--GO consolidated general improvement bonds series 2004; 2006; 2007; 2009; 2010; and 2014;

--GO consolidated general improvement refunding bonds series 2003; 2005; 2006; and 2009;

--GO consolidated water and sewer bonds (Taxable-Build America) series 2010;

--GO consolidated water and sewer bonds series 2003; 2004; 2006; 2007; 2009; 2010; and 2014;

--GO consolidated water and sewer refunding bonds series 2005, 2006, 2009, and 2003;

--Consolidated general improve bonds series 2008;

--Consolidated water and sewer bonds series 2005; and 2008;

--(Arundel Mills Project) special obligation refunding bonds series 2004;

--(Consolidated Golf Course Projects) GO bonds series 2005;

--(National Business Park Project) special obligation refunding bonds series 2004;

--(Nursery Road Project) tax increment financing bonds series 2004.

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, and the 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

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

Barbara Ruth Rosenberg

Director

+1-212-908-0731

Fitch Ratings, Inc.

One State Street Plaza

New York, NY 10004

or

Secondary Analyst

Michael Rinaldi

Senior Director

+1-212-908-0833

or

Committee Chairperson

Amy Laskey

Managing Director

+1-212-908-0568

or

Media Relations

Elizabeth Fogerty, +1 212-908-0526

elizabeth.fogerty@fitchratings.com

Source: Fitch Ratings


For more stories on investments and markets, please see HispanicBusiness' Finance Channel



Source: Business Wire


Story Tools






HispanicBusiness.com Facebook Linkedin Twitter RSS Feed Email Alerts & Newsletters