NEW YORK--(BUSINESS WIRE)--
Fitch Ratings assigns an 'AAA' rating to the following Frederick County,
Maryland (the county) general obligation (GO) bonds:
--$34.8 million general obligation public facilities bonds, series 2014A.
The bonds will be sold competitively on July 10. Proceeds will provide
funds for county, school and utility capital projects.
In addition, Fitch affirms the following ratings:
--$574.5 million GO bonds at 'AAA'.
The Rating Outlook is Stable.
The bonds are general obligations of the county, secured by its full
faith and credit and unlimited taxing power.
KEY RATING DRIVERS
SATISFACTORY FINANCIAL RESERVES: Reserves considered available for
operations by Fitch have historically been sound, providing satisfactory
financial cushion to accommodate unforeseen spending needs or negative
SOUND BUDGETARY PERFORMANCE: Operating results are generally positive
with net draws on fund balance occurring during fiscal years 2013-2014
largely related to capital and other non-recurring uses. General fund
expenditures are conservatively forecasted, contributing to net results
that consistently and comfortably exceed budget projections.
ADEQUATE REVENUE FLEXIBILITY: Revenue raising flexibility is adequate,
as the county maintains a comparable property tax rate and an income tax
rate that is below the state maximum.
STRONG ECONOMIC CHARACTERISTICS: Frederick County benefits from its
location within an approximately one-hour driving distance to both the
Baltimore, MD and Washington D.C. metro areas. Key economic and
demographic factors, including employment and population growth, wealth
indicators, educational attainment, and rates of joblessness,
consistently perform at a level on par with or in excess of the state
DEBT TO REMAIN AFFORDABLE: Outstanding debt is rapidly amortized,
affording flexibility to absorb future issuance plans with minimal
impact on key debt ratios and spending levels that are currently
considered moderate on an overall basis by Fitch. Post-retirement
benefits are well funded.
BALANCED OPERATIONS: The rating is sensitive to shifts in fundamental
credit characteristics, including the county's ability to restore
balanced operations over the near term. A material change in the
county's financial flexibility and reserves relative to historical
levels could pressure the current rating and/or outlook.
Frederick County is located in the north central part of Maryland and is
664 square miles in area. The estimated 2013 population is 241,409.
HEALTHY RESERVE LEVELS
The county's reserve levels and financial flexibility are healthy.
Fiscal 2013 ended with an operating deficit after transfers of $6.2
million; however, results include $8.8 million of discretionary capital
spending. The unrestricted fund balance equaled $89.9 million or a
healthy 18.2% of general fund spending. The county's adequate reserve
policy requires a committed general fund balance equal to 5% of general
expenditures and transfers to the Board of Education and Frederick
Community College on a budgetary basis was fully funded at fiscal
year-end 2013. The county has established a bond rating enhancement
reserve that is to be funded at 3% of budgeted general fund spending
Fitch views the county's margin under the state income tax rate cap and
a regionally competitive property tax rate as important measures of
financial flexibility given the combined dominance (83%) of the general
fund revenue base.
The 2014 budget appropriated $36.6 million (7.1% of spending) of fund
balance. According to county code provisions, the county must
appropriate the prior year's entire surplus toward the following year's
budget. Due to vacancy savings and conservatively budgeted property tax
revenues the county projects it will spend approximately $20.45 million
of reserves on the year. The projected use of fund balance is driven by
one-time capital expenses totaling $13 million, a prudent $1 million in
additional pension contribution above the ARC, $500,000 toward the bond
rating enhancement reserve, $1.9 million for the volunteer retirement
incentive, $2.25 million for extra snow removal costs and pothole
repairs due to severe winter weather, and an additional $1.4 million to
the county's nursing home facility. The unrestricted balance is
projected to decline to $69.5 million or a still healthy 13.5% of
The fiscal 2015 budget includes a 1.8% increase over the fiscal 2014
budget. The budget keeps the tax rate stable and includes a $24.3
million fund balance appropriation. The budget funds $7 million in merit
and cost of living increases for employees, $14.08 million in capital
spending and $6.2 million to Aurora Holdings VII, LLC for a continued
care commitment for the cost of providing ongoing care to certain
residents of Montevue Home following the sale of the facility to the
The county currently owns a 170-bed comprehensive and skilled nursing
care facility and a 75-bed assisted living facility, Citizens Care &
Rehabilitation Center and Montevue Home. Historically the facility has
run losses with support required from the general fund ($4.2 million in
fiscal 2013). As such, the county turned operations over to Aurora
Holdings VII, LLC beginning May 2014. Aside from the continuing care
commitment that totals $10.7 million through 2017, the county will not
be obligated to provide any additional support to either facility. The
county will receive $1.44 million in lease payments annually until the
sale to Aurora is finalized.
Multiyear projections show use of fund balance due to the state
requirement to appropriate reserves above the 5% reserve for operations;
however, historically actual results have been better than budget. Fitch
believes any sustained fiscal imbalance would be inconsistent with the
current rating level and could warrant a negative rating action.
STRONG ECONOMIC FUNDAMENTALS
Frederick County remains among the fastest growing counties in Maryland,
supported by the availability of developable land, competitively priced
housing stock, and reasonable proximity (approximate one-hour drive
time) to three international airports, as well as employment
opportunities in the Baltimore and Washington, D.C. metro areas.
With a well-educated workforce and close proximity to vibrant labor
markets, the county has maintained low unemployment rates and high
wealth indicators. As of April 2014, the county's unemployment rate of
4.5% was well below that of the state's 5.3% and nation's 5.9%. Median
household income is approximately 114% and 157% of the state and
national averages, respectively.
Fort Detrick, which is located in Frederick County, is the home of the
National Cancer Institute, the U.S. Army Medical Research Institute of
Infectious Diseases and the leading medical research laboratory for the
nation's biological defense program. The Fort Detrick campus, which
hosts five cabinet-level agencies, is responsible for over 12,000
existing employees (7,700 civilian). Despite the presence of Fort
Detrick, according to census data approximately 8% of residents are
employed as civilian federal employees.
The presence of Fort Detrick has fueled growth in the bioscience and
advanced technology sectors, although, the county has experienced
economic growth in other sectors including financial activities,
education and health services and leisure hospitality. Other large
private sector employers within the county include Frederick Memorial
Healthcare System (2,696 employees), Wells Fargo Home Mortgage (1,881
employees) and Science Applications International Corporation (SAIC)
MANAGEABLE DEBT PROFILE
Overall debt levels are moderate at $2,500 per capita and 2.3% of market
value, excluding utility debt. Water and sewer operations provide less
than sum sufficient debt service coverage, however, cash balances are
over $67 million or over 1.9 times annual operating costs. During fiscal
2014 operating revenues (excluding capital contributions) provided 0.38
times coverage of operations and debt service. The general fund does not
provide any operational support for the water and sewer utility. The
county implemented rate increases effective July 2013 that management
anticipates will lead to self-support of utility operations including
debt service by fiscal 2019. Failure to demonstrate self-support will
result in Fitch's inclusion of the utility debt to the county's debt
profile. The debt burden would grow to a still moderate 2.8%.
Amortization of tax-supported debt is above average with over 65% of
principal retired within 10 years.
Fitch expects the county's debt burden to remain manageable. The county
has adopted a fiscal 2015 - 2020 capital improvement plan (CIP) totaling
$594 million. The county's education system remains the emphasis of the
CIP, accounting for $281.5 million. The planned annual amount of debt to
be issued exceeds the annual amount of debt amortized; however the debt
burden is projected to remain moderate at about 3%.
WELL-FUNDED LIABILITIES RELATED TO EMPLOYMENT BENEFITS
Long-term liabilities related to employment benefits are not expected to
pressure future operations. The county provides pension benefits to its
employees through a single-employer defined benefit plan and annually
contributes 100% of the annual required contribution (ARC). As of July
1, 2013, the plan was well funded at 85%, or 81%, using Fitch's more
conservative 7% discount rate. Due to recent plan changes and additional
funding above the ARC, the county expects the funded ratio to reach 97%
by 2017. The aggregate unfunded actuarial accrued liability (UAAL)
totaled $82 million or a very low 0.32% of market value.
The county also provides other post-employment benefits (OPEB) to its
retirees. The county continues to provide funding over the OPEB ARC. The
fiscal 2015 budget includes funding of 101% of the ARC. According to the
latest actuarial valuation the funded ratio will be 54.3% as of July
2014. Fitch views this level of OPEB pre-funding a strength. The UAAL
associated with OPEB totals $112 million as of July 2013 or 0.4% of
market value. Carrying costs for debt service, pension and OPEB totaled
a moderate 17.2% of fiscal 2013 governmental fund 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, Fort Detrick Alliance, Real Estate Business
Intelligence, Maryland Department of Planning.
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
U.S. Local Government Tax-Supported Rating Criteria
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Elizabeth Fogerty, +1 212-908-0526
Source: Fitch Ratings