OREANDA-NEWS. Fitch Ratings has assigned a 'AAA' rating to the following Frederick County, Maryland (the county) general obligation (G0) bonds:

--$90 million general obligation public facilities bonds, series 2016A;

--$34.8 million general obligation public facilities taxable refunding bonds, series 2016B.

The bonds are expected to sell competitively on June 15, 2016. Proceeds will be used to fund various capital projects as well as refund the county's series 2014B bonds.

In addition, Fitch affirms the following ratings:

--Issuer Default Rating (IDR) at 'AAA';

--$470.2 million of Fitch rated GO bonds at 'AAA'.

The Rating Outlook is Stable.

SECURITY

The bonds are general obligations of the county, payable by its full faith and credit and unlimited taxing power.

KEY RATING DRIVERS

The county's 'AAA' rating reflects strong operating performance, enabled by strong revenue flexibility, expenditure control, conservative budgeting, and affordable long-term liabilities.

Economic Resource Base

Frederick County remains among the fastest growing counties in Maryland, supported by the availability of developable land and proximity to employment opportunities in the Baltimore and Washington, D. C. metro areas.

Revenue Framework: 'aaa' factor assessment

The county has strong revenue flexibility due to its independent legal ability to increase property taxes without limitation. The county gains additional flexibility from the remaining margin below the maximum income tax rate, which the tax is the second largest revenue source.

Expenditure Framework: 'aa' factor assessment

The county has a proven history of controlling spending growth, as evidenced by positive operating results during and after the last recession. This flexibility is somewhat offset by the limited flexibility to reduce education spending without state approval. Carrying costs are moderately low.

Long-Term Liability Burden: 'aaa' factor assessment

The county's combined debt and unfunded pension liability burden is low. Although the current capital improvement plan includes annual debt issuance that exceeds the pace of amortization, the county's long-term liability burden is expected to remain modest.

Operating Performance: 'aaa' factor assessment

Fitch expects the county would demonstrate strong financial resilience in a typical economic downturn based on its solid reserves, revenue-raising capacity, expenditure flexibility and budgetary discipline. The unrestricted fund balance at fiscal 2015 year-end was $76 million or 14.9% of general fund spending (excluding bond proceeds).

RATING SENSITIVITIES

Strong Financial Position: The 'AAA' rating is sensitive to the county's stable financial performance, the maintenance of a healthy reserve cushion and solid financial management practices. The Stable Outlook reflects Fitch's expectation that such shifts are unlikely.

CREDIT PROFILE

Frederick County's sound economic base, focused in the bioscience and military sectors, shows solid prospects for continued development and expansion. The economy performed relatively well during the most recent economic downturn.

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 the county's largest employer (9,100 civilian and military employees). The county has experienced significant growth in the bioscience and advanced technology industries over the past few years. The growth is due in part to the county's access to the federal labs and other public and private high tech facilities in the region.

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 March 2016, the county's unemployment rate of 4.1% was below that of the state's 4.4% and nation's 4.7%. Median household income is approximately 111% and 157% of the state and national averages, respectively.

Revenue Framework

The revenue base is dominated by property and income taxes at 53% and 40% of total general fund revenues, respectively. Revenues showed little volatility during the last recession, declining modestly as economic conditions weakened. Subsequent revenue trends have been positive but reflect a property tax rate increase to provide county taxpayers one consolidated rate.

General fund revenue growth over the last 10 years exceeds CPI and is on par with national GDP, factoring in both property tax rate reductions and increases and a stable income tax rate. Fitch believes revenue growth prospects are solid, based on recent assessed valuation trends, new economic development within the county and steady income tax revenue growth.

The county last increased the income tax rate to 2.96% in 2001, still below the 3.2% maximum rate allowed by state law. An increase to the maximum rate would generate $15.8 million (3% of the fiscal 2016 budget) in additional revenue annually. The county is not subject to any limitation on its property tax rate or levy; the county last increased its tax rate in 2014, followed by a smaller reduction in 2015.

Expenditure Framework

The county maintains adequate expenditure flexibility, with moderately low spending associated with fixed carrying costs.

Given the county's steady population growth (5% since 2010 vs. the national average of 4%), the pace of growth in main expenditures is expected to increase but remain manageable based on expected revenue trends.

The county's largest expenditure category is education at roughly 52% of general fund outlays, followed by public safety at 20%. According to the state's maintenance of effort mandate, education spending cannot decline year-over-year without state approval. Student enrollment has remained flat over the past 10 years, and Fitch expects costs to remain level. The county collectively bargains with two labor units (the division of fire and rescue and sheriffs and corrections officers), which represent approximately 26% of the county's employees. While the county currently has a two-year contract with fire and rescue, a two-year contract has been proposed to sheriffs and corrections officers but has not been ratified. Strikes are not permitted.

Carrying costs associated with debt service, actuarially determined pension payments (including the normal cost for teachers' pension) and OPEB actual contributions totaled 14.3% of fiscal 2015 governmental spending; debt service accounted for 9.2% of the total. A portion of debt service (mostly related to school construction) is paid through various special revenue funds. Including this additional debt service increases the debt service costs to 11% of governmental spending and total carrying costs to 16%.

Long-Term Liability Burden

Debt levels are low at 4.6% of total personal income. Debt levels are expected to remain low because of the county's affordable debt issuance plans. The adopted fiscal 2017 to 2022 six-year capital improvement plan (CIP) totals approximately $663 million. School projects account for the largest spending (33% of the total) to address capacity at a number of school facilities. The plan is slightly more than 50% debt-funded.

Of the $534 million in outstanding GO bonds, $158.6 million or 30% of the total has been issued for the water and sewer utility. Water and sewer operations provide less than sum sufficient debt service coverage. During fiscal 2015 operating revenues (excluding capital contributions) provided 0.86 times coverage of operations and debt service. However, cash balances at fiscal 2015 year-end were more than $66 million or over 2.1 times annual operating costs (excluding debt service -1.5x including debt service) and covered this gap. 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 full support of utility operations including debt service by fiscal 2019.

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, 2015, the unfunded liability was $33.5 million or 0.2% of personal income. According to the valuation report, the actuarially determined contribution is expected to decline in fiscal year 2017.

For a number of years the county has over-funded its other post-employment benefits (OPEB). As a result, the July 2015 actuarial valuation report lists the plan at 62% funded. The unfunded liability is projected to decline to $65.9 million or less than a half of 1% of personal income by July 2016.

Operating Performance

The county has historically maintained healthy reserve levels and continued to do so during the last recession. Fitch expects the county to manage through cyclical downturns while preserving a superior level of financial resilience. General fund reserves (14.9% of spending at fiscal 2015 year-end) are well above the county's 5% reserve policy and comfortably above the minimum reserve safety margin that corresponds to the county's revenue and expenditure flexibility according to the Fitch Analytical Sensitivity Tool (FAST).

In preparation for the next downturn the county recently enhanced its reserve policy, increasing it to 7% by fiscal 2019. During the recession the county reduced and delayed capital spending, reorganized and eliminated positions, placed a hiring freeze on vacant positions, and modified certain pension plan provisions. Fitch expects county management would respond in a similar manner during another economic downturn.

The fiscal 2016 general fund adopted budget is $535 million; the budget does not include any revenue enhancements but appropriates $21.3 million of fund balance. Preliminary year-end results show positive variances in both spending (due to attrition) and revenues (due to strong property and income tax receipts relative to budget). The unrestricted general fund balance is expected to increase to approximately $80 million or 15% of spending at year-end.

The adopted fiscal 2017 general fund budget of $560 million is a 4.5% increase over the fiscal 2016 adopted budget. The budget includes a $25 million fund balance appropriation and no adjustment to tax rates. The budget increase mostly funds an increase in maintenance of effort for county public schools, and also includes funding of a new firefighter/EMT recruit class and a new pay scale for deputies and correctional officers. Multiyear projections show use of fund balance due to the state requirement to appropriate reserves above the 5% reserve for operations, but actual results have historically outperformed budgeted results.