News Column

Fitch Affirms Montgomery County, MDs Water Quality Protection Charge Revs at 'AA'; Outlook Stable

June 9, 2014

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has affirmed the 'AA' rating on the following revenue bonds of Montgomery County, Maryland (the county):

--$36.92 million water quality protection charge revenue bonds, series 2012A.

The Rating Outlook is stable.

SECURITY

The bonds are special limited obligations of the county, payable from amounts on deposit within the trustee-held pledged revenue fund. The county is required to make quarterly deposits to the pledged revenue fund from its water quality protection charge (WQPC) and other revenue of the county, including a carryout bag tax, which are deposited into the water quality protection fund, a special revenue fund of the county. The DSRF is fully funded at maximum annual debt service (MADS).

The WQPC is assessed against all residential and certain non-residential property within the county based on the amount of square feet of roof, driveway, sidewalk and other fixtures or structures impenetrable to water.

The carryout bag tax is assessed at the rate of $0.05 on each customer for each carryout bag that a retail establishment provides to the customer, of which $0.01 is retained by the retailer as an administrative fee. The bag tax was imposed in March 2011.

KEY RATING DRIVERS

STABLE REVENUE PERFORMANCE ANTICIPATED: The WQPC is included as a line item on annual property tax bills, enforced through a tax lien and foreclosure process in the same manner as real property taxes. Historical collection rates are exceptional, and revenue from the WQPC is restricted to stormwater management purposes.

ADDITIONAL LEVERAGING & MODEST COVERAGE PROJECTED: The county plans to sell up to $115 million in parity bonds through fiscal 2020. The county's policy is to manage debt service coverage to a target of 1.25 times (x), although the rate covenant requires a more lenient 1.15x threshold.

WQPC SET BY COUNTY COUNCIL: The WQPC rate is established by resolution of the county council and is unlimited as to rate or amount. The county council has frequently approved increases in the WQPC rate in support of its stormwater management program.

FINANCIAL MANAGEMENT STRENGTH: Administration of the WQPC is the responsibility of the Montgomery County Department of Environmental Protection (MCDEP), an agency and department of Montgomery County whose sound financial management and performance underlies Fitch's 'AAA' rating/Stable Outlook on the county's general obligation (GO) bonds.

EXCELLENT ECONOMIC UNDERPINNINGS: Expectations for stable revenue performance are further supported by a very stable regional economy anchored by the extensive presence of the federal government and related contracting employment, and marked by consistently low rates of unemployment, a highly skilled labor force, and very high income metrics.

RATING SENSITIVITIES

MAINTENANCE OF STRONG FINANCIAL POSITION: The rating is sensitive to shifts in fundamental credit factors. Preservation of a solid financial profile consistent with the high credit rating is a key consideration.

CREDIT PROFILE

Montgomery County borders Washington, D.C. and northern Virginia. The county's population increased 11% in the last decade, and the estimated 2013 population of 1,016,677 is a 5% increase since 2010.

The WQPC was first implemented in 2002 to provide funds for the inspection and maintenance of residential and certain non-residential stormwater facilities and associated operating expenses. In 2013 (effective 2014) the WQPC rate structure was revised to broaden the non-residential base and create tiered structures for residential and 501-(3) entities. The charge is based on the median amount of impervious surface area for a single-family dwelling (and certain non-residential structures) in order to capture its actual contribution to stormwater runoff.

WQPC ESTABLISHED BY COUNTY COUNCIL

The WQPC is set by resolution of the county council and is not subject to charter or statutory restriction as to rate or amount. The WQPC charge is assessed and collected as a separate item on an annual property tax bill.

To support the county's mandated stormwater management efforts, the county council has increased the WQPC on seven occasions since its inception, from a rate of $12.75 per equivalent residential unit (ERU) to $92.60 per ERU effective July 1, 2013. The rate was lowered for fiscal 2014 to $88.40 per ERU. The county's WQPC rate is somewhat high relative to the charge assessed by other regional municipalities, but still only accounts for approximately 2% of an average single-family consolidated property tax bill.

WQPC CREATES A LIEN ON PARITY WITH REAL PROPERTY TAXES

Property tax bills are generally payable on a semi-annual schedule, due on September 30 and December 31 (the bonds have debt service payment dates of April 1 and October 1). Unpaid charges become a lien against the property with the same priority as a lien imposed for non-payment of real property taxes, which Fitch considers a strong incentive for timely collection. The property owner does not have the ability to selectively choose which portions of the property tax bill to pay.

SATISFACTORY PRO-FORMA COVERAGE; RATE INCREASES ANTICIPATED

Fiscal 2013 ended with strong MADS coverage of 2.5x due to conservative budgeting of the bag tax. Based on the lower rate of $88.40 per ERU effective fiscal 2014, a 11% year-over-year increase in ERUs, and a 23% reduction in bag tax revenues, projected fiscal 2014 results show lower but still strong MADS coverage of 2.03x. WQPC revenues account for 93% of projected fiscal 2014 total revenues and bag tax 7%.

The county's rate model forecasts an increase in the WQPC to nearly $99 by fiscal 2020, reflecting the full issuance of up to $115 million in bonds to fund the stormwater management CIP at a 1.5x coverage ratio. The CIP includes the projects the county must undertake to meet the requirements under the Municipal Separate Storm Sewer System permit (MS4 permit) issued on February 16, 2010 by the Maryland Department of the Environment.

The forecast assumes an annual reduction in bag tax revenues, which reflects the reasonable assumption that consumers will respond to the tax by increasing their utilization of reusable bags. The rate model does not assume growth in the number of ERUs after 2016, following the three year phase-in of the assessment of nonresidential properties.

The pro-forma also builds up the balance in the water quality protection fund to $12.5 million in fiscal 2020 from $8 million in fiscal 2013, while also satisfying pay-as-you-go funding requirements (between $880,000 and $13.9 million annually).

MODEST COVERAGE REQUIREMENTS OFFSET BY REVENUE STABILITY

The county has covenanted in the trust indenture to impose the WQPC at a rate that results in lenient 1.15x coverage of annual debt service after the payment of operating expenses of the county's stormwater management facilities. The county's current policy is to assess the WQPC in order to generate a slightly higher debt service coverage ratio of 1.25x. The additional bonds test also imposes a 1.15x coverage threshold on a net basis.

As a mitigant to this risk, Fitch recognizes the very stable and predictable nature of the WQPC based on its strong collection enforcement mechanism, very high historical collection rates (99.8% in 2011 and 99% in 2012), independent rate setting authority vested in the county council, and diverse nature of the WQPC base (the ten largest property owners paying the WQPC comprise only 2% of fiscal 2013 WQPC receipts).

ECONOMIC PERFORMANCE REMAINS VERY STRONG

Montgomery County borders Washington, D.C. and northern Virginia, and its wealthy suburban economy is fueled by the large U.S. government presence, with depth and diversity added by a strong and expanding biotechnology sector. Leading private employers include Adventist Healthcare (5,669), Lockheed Martin corp. (5,200) and Marriott International (5,497).

While the rate of job growth within the county has not been robust, it has been very steady. The county's unemployment rate historically has been well below state and national averages. The county's unemployment rate remains a very competitive 4.5% as of March 2014 relative to the state (5.9%) and U.S. (6.8%). The county's median household income and per capita money income are 181% and 171% of the national average, respectively.

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.

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=833673

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, New York

Media Relations

Elizabeth Fogerty, +1-212-908-0526

elizabeth.fogerty@fitchratings.com

or

Primary Analyst

Director

Evette Caze, +1-212-908-0376

or

Fitch Ratings, Inc.

33 Whitehall Street

New York, NY 10004

or

Secondary Analyst

Senior Director

Michael Rinaldi, +1-212-908-0833

or

Committee Chairperson

Senior Director

Steve Murray, +1-512-215-3729


Source: Fitch Ratings


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