News Column

Fitch Rates Baltimore County, MD's Refunding GOs 'AAA'; Outlook Stable

June 20, 2014

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has assigned the following ratings to Baltimore County, Maryland (the county) general obligation (GO) bonds:

--$26,020,000 metropolitan district bonds - 2014C refunding series, 'AAA';

--$48,870,000 consolidated public improvement bonds - 2014B refunding series, 'AAA'.

The bonds will advance refund portions of the outstanding metropolitan district and Baltimore county consolidated public improvement bonds for savings. A competitive sale is scheduled for June 25.

In addition, Fitch affirms the county's following ratings:

--Approximately $2.2 billion outstanding GO bonds at 'AAA';

--$117.9 million outstanding lease obligations at 'AA+';

--$200 million bond anticipation notes (BANs) at 'F1+'.

The Rating Outlook is Stable.

SECURITY

The GO bonds and BANs are secured by the county's pledge of its full faith and credit and its unlimited taxing power. The principal source of repayment for the BANs will be proceeds from the sale of additional BANs or bonds. The principal source of repayment for the metropolitan district bonds will be special assessments and charges levied against all property in the metropolitan district.

The lease purchase bonds are secured by purchase installments made by the county that are subject to appropriation and a security interest in essential leased assets.

KEY RATING DRIVERS

CONSIDERABLE ECONOMIC BASE: The broad and diverse economy benefits from the presence of federal installations, health care, financial services, and higher education. Highly structured development efforts, focusing on growth management and collaboration with surrounding jurisdictions, underscore excellent prospects for continued expansion.

HISTORICALLY STRONG FISCAL MANAGEMENT: Prudent management decisions and adherence to fiscal policies have helped maintain solid reserve levels.

FAVORABLE DEBT POSITION: Debt ratios are expected to remain moderate as future debt plans are affordable and principal amortization rates are average.

APPROPRIATION RISK AND ASSET ESSENTIALITY: The ratings for the lease obligations reflect appropriation risk and the essential nature of the assets subject to lien.

STRONG MARKET ACCESS: The 'F1+' short-term rating reflects the county's strong overall credit characteristics and expected market access.

RATING SENSITIVITIES

CONTINUED STRONG FINANCIAL POSITION: The rating is sensitive to shifts in fundamental credit characteristics including the county's strong financial management practices. The 'AAA' rating and Stable Outlook reflects Fitch's expectation that such shifts are unlikely.

CREDIT PROFILE

Baltimore County, with its population of 817,455, covers 612 square miles and surrounds the independent city of Baltimore.

DIVERSE AND ROBUST ECONOMY

The employment base is broad and deep. Federal installations, health care, financial services, and higher education predominate, with skilled manufacturing and technology becoming a growing sector and major focus of economic development. The county is home to several government agencies including the Social Security Administration and Medicare and Medicaid Services, which combined employ 16,000 people. However, federal employment represents only 5% of the total employment base limiting its exposure to any potential federal downsizing.

County unemployment of 5.6% in March 2014 is down from 6.7% the prior year and reflects the combination of an increase in jobs and a decrease in labor force during the period. Wealth indicators are in line with those of the affluent region and state, but exceed national averages.

Population growth is directed towards two areas anchored by major transportation networks, and preliminary engineering studies have begun for construction of a new light rail line to connect with existing regional rail lines. Fitch believes intermediate and long-range overall economic growth prospects are strong.

STRONG FISCAL MANAGEMENT MARKED BY HEALTHY RESERVES

Financial operations are strong and reserve levels are expected to remain healthy, based on year-to-date fiscal 2014 performance. Positive fiscal year-end 2013 results reflected a third consecutive year of growth in income tax revenue, the county's second largest revenue source at 30% of general fund revenues. The unrestricted general fund balance increased to $386.2 million or a healthy 19% of general fund spending and transfers out, resulting from a $59.9 million operating surplus (2.9% of spending). No drawdown of the $49.6 million in fund balance conservatively budgeted was necessary.

The unassigned portion of the unrestricted fund balance includes the county's revenue stabilization reserve equal to $85 million (or 4% of spending) and is at the county's minimum policy level of 5% of revenues. Management's fiscal projections for the next five years demonstrate compliance with this target. Fitch believes such projections to be reasonable based on the county's conservative budgeting practices and current level of reserves above the target.

The fiscal year 2014 general fund budget is 4% ($67 million) more than the fiscal year 2013 budget and includes a $39.5 million fund balance appropriation. The budget funds a $12.6 million increase for pay-as-you-go capital, $22.6 million in education, $11.5 million in additional debt servicing costs and $8.6 million in additional costs for healthcare. According to current fiscal year end projections, a $10 million operating surplus is expected due to positive variances in income tax revenues.

The $1.86 billion fiscal 2015 budget is 8% above the fiscal 2014 budget and includes a $78 million fund balance appropriation. It is the 22nd straight year of no property tax rate increases. The budget funds a $7.2 million increase in pension funding to offset the lowering of the discount rate to 7% from 7.25%, which Fitch views as prudent. The budget also funds capital spending of $48 million (up from $22 million), an 8% increase in school spending, $4 million in additional other post-employment benefits (OPEB) funding to fully fund the annual required contribution (ARC), and a 3% bonus to employees.

The county's five-year financial forecast shows an intentional projected reduction in unassigned and assigned general fund balance closer to its newly revised policy level of 7% of revenues in the final year primarily due to expected cash-funding of future capital projects. Fitch expects management to maintain a sound financial profile while funding its capital plan.

DEBT PROFILE EXPECTED TO REMAIN MODERATE

Future capital needs are substantial. Overall tax-supported debt ratios are moderately low at $2,346 per capita and 2.4% of market value. Debt ratios increase to a more moderate $3,641 per capita and 3.7% of market value including metropolitan district debt, which is paid from special assessments and charges levied against all property in the district. Amortization of total debt is average at 52% within 10 years and debt servicing costs are low at 4% of total governmental spending.

While operating revenues historically have been sufficient to cover metropolitan district operating expenses and debt service, over the past two years the district has been utilizing enterprise fund balance to pay a portion of debt service while keeping rates unchanged. As of fiscal year-end 2013 cash on hand totaled over six months of operations. The county expects operating revenues to fully cover expenditures by fiscal 2017.

The county's capital budget and program for fiscal years 2015 -2020 is $2.6 billion. The program is primarily funded by metropolitan district funding (56%) and GO bonds (31%). The county's policy is to maintain up to 20% of outstanding debt in variable rate debt through the county's commercial paper (CP) program.

The county has traditionally funded a portion of its capital needs through the issuance of CP which is subsequently refinanced through the issuance of long-term debt. The total CP outstanding is $200 million, the maximum principal amount that is supported by the current liquidity provider, Mizuho Bank. This CP position results in a variable rate debt position equal to 7.6% of total debt, a level that Fitch considers reasonable for such a highly rated credit.

MANAGEABLE PENSION AND OPEB COSTS

The county is one of five local entities participating in a cost-sharing multiple employer pension and OPEB plan. The county pays 100% of its pension ARC, equivalent to a low 3.3% of fiscal 2013 governmental spending. The plan is adequately funded at an estimated 77% as of June 30, 2012, using Fitch's standard 7% rate of return.

The county administers an OPEB trust fund that provides benefits for its retirees. As of June 30, 2013, the county maintained a funded ratio of 13.6% based on actuarial asset values of $232 million and an accrued liability of $1.7 billion. The 2015 proposed budget includes full funding of the ARC as planned, which is a sizable 6.2% of budgeted spending.

Total carrying costs for debt service, pension ARCs and OPEB contributions made was low at 15.5% of total fiscal 2013 governmental spending.

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, National Association of Realtors, Real Estate Business Intelligence.

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

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=835722

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

Evette Caze

Director

+1-212-908-0376

Fitch Ratings, Inc.

33 Whitehall Street

New York, NY 10004

or

Secondary Analyst

Kevin Dolan

Director

+1-212-908-0538

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


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