News Column

Fitch Rates Frederick County, Maryland's GOs 'AAA'; Outlook Stable

July 8, 2014

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.

SECURITY

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 revenue variances.

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 and nation.

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.

RATING SENSITIVITIES

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.

CREDIT PROFILE

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 over time.

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 spending.

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 corporation.

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) (1,874).

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

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=838544

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 St.

New York NY 10004

or

Secondary Analyst

Michael Rinaldi

Senior Director

+1-212-908-0833

or

Committee Chairperson

Douglas Offerman

Senior Director

+1-212-908-0889

or

Media Relations

Elizabeth Fogerty, +1 212-908-0526

elizabeth.fogerty@fitchratings.com

Source: Fitch Ratings


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