Fitch Rates Washington County MD's $30MM GOs 'AA+'; Outlook Stable
OREANDA-NEWS. Fitch Ratings has assigned an 'AA+' rating to the following Washington County, MD general obligation (GO) bonds:
--$20.6 million public improvement bonds of 2016;
--$9.7 million refunding bonds of 2016.
The bonds are expected to sell on May 3 via competitive bid. The proceeds of the bonds will be used to finance the costs of various public improvement projects of and for the county and to refund certain outstanding GO bonds of the county.
In addition, Fitch affirms the county's 'AA+' Issuer Default Rating (IDR) and the 'AA+' rating on $175 million in outstanding GO bonds.
The Rating Outlook is Stable.
The bonds are GOs of the county, backed by its full faith and credit pledge and unlimited taxing power.
KEY RATING DRIVERS
Analytical Conclusion: The 'AA+' rating reflects the county's solid resource base that has yielded a strong financial profile, favorable debt position, and affordable other long-term liabilities.
Economic Resource Base: Washington County is located in northwestern Maryland, bounded by Pennsylvania, Virginia and West Virginia. The county seat, Hagerstown, is 70 miles northwest of Washington, D.C. and 72 miles west of Baltimore, Maryland. Population growth since 2010 of 1.5% has been modest relative to state and national growth. The 2015 population is estimated at 149,585. Employment opportunities are sufficiently diverse but are generally focused in lower-wage sectors including manufacturing, distribution, retail, and government.
Revenue Framework: 'aa' factor assessment
The county has strong revenue flexibility given the independent legal ability to increase property taxes without limitation. The county gains additional flexibility from the ability to increase the income tax rate, which is the county's second largest revenue source.
Expenditure Framework: 'aa' factor assessment
The county has a proven history of holding spending below revenues during and after the recession resulting in either breakeven or surplus operating results. This is somewhat offset by labor agreements and the limited flexibility to reduce education spending without state approval. Carrying costs are low at 9.8% of governmental spending.
Long-Term Liability Burden: 'aaa' factor assessment
The county's combined debt and unfunded pension liability burden is low. Additional debt plans are affordable and should not notably impact ratios given rapid (76% in 10 years) amortization of outstanding debt and modest borrowing needs.
Operating Performance: 'aaa' factor assessment
Operating performance is stellar with consistently breakeven or surplus results without the need of revenue enhancements or use of reserves. The county maintains sound reserves in and outside the general fund.
Positive Economic/Revenue Trends Expectation: Sustained tax base growth and consequently revenue growth trends could put positive pressure on the rating. A change in the county's fiscal management policies could be downward pressure on the rating, although that is not expected.
Typical of Maryland counties, property and income taxes produce the bulk of general fund revenue, at approximately 57% and 35%, respectively, for fiscal 2015. Property tax revenues have declined annually between fiscal years 2012 and 2015, reflecting a decline in taxable assessed value, which is somewhat due to Maryland's revaluation process. However, collections rates remain solid and estimated fiscal 2016 values show a 1.3% increase.
Due to improvement in employment and the economy, income tax revenues have increased annually over the past four fiscal years, offsetting the decline in property taxes. The county last increased the income tax rate to 2.8% in 2001, which compares to the 3.2% maximum rate allowed by state law. An increase to the maximum rate would generate $9.4 million (4.5% 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 2001.
General fund revenues have grown ahead of inflation but mildly below national GDP over the last 10 years without any policy action. Given the pipeline of significant investment underway in the county, revenue growth prospects without policy action are positive.
The county maintains adequate expenditure flexibility with modest spending associated with fixed carrying costs.
Given the county's modest population growth, the pace of growth in main expenditures is expected to be manageable.
The county's largest expenditure is education at roughly 50% of general fund expenditure. According to the state's maintenance of effort mandate, education spending cannot decline year-over-year without state approval. Given the recent decline in enrollment, costs are expected to remain level. Less than a quarter of the county's full-time employees are unionized and management does possess the ability to impose terms unilaterally if no agreement is reached, affording ample flexibility in salaries.
Long-Term Liability Burden
The county's overall liability burden is low at 8% of personal income, primarily driven by debt, but also includes the unfunded portion of the pension. Debt levels are low with overall debt of $266 million totaling just 2.2% of full market value. Debt amortization is rapid with over 70% scheduled for retirement within 10 years. Debt levels are not expected to increase in the near term since new debt issuance planned is less than the pace of annual amortization. County employees participate in the Washington County defined benefit pension plan. As of the July 2015 valuation report, the funded ratio was 58% funded using a Fitch adjusted 7% rate of return. The unfunded actuarially accrued liability (UAAL) is an adjusted $155 million or 1.3% of market value. The county also administers a Volunteer Length of Service defined benefit plan for fire and rescue employees. The plan is an adjusted 59% funded and the UAAL is approximately $4.7 million.
The county's financial resilience comes from a combination of expenditure cutting and revenue-raising flexibility and maintaining a strong, stable reserve cushion. An unaddressed moderate economic decline scenario shows an operating reserve cushion that Fitch judges to remain consistent with an 'aaa' financial resilience assessment. Moreover, Fitch expects that in the event of such an actual revenue decline, the county would continue to maintain reserves at a significantly higher level through active expenditure management.
The county maintains a healthy unrestricted fund balance (15.7% of general fund expenditures and transfers out at fiscal 2015 year-end). The county maintains additional reserves in the capital projects fund that can be accessed for general fund purposes, which totaled $11 million at year-end 2015 or a combined 20.4% of general fund spending and transfers out. The county's capital improvement plan (CIP) shows approximately $2 million of capital reserves used to fund future CIP needs, which will not significantly impact the county's reserve cushion.
Year-to-date fiscal 2016 operating results are positive with property, income and recordation taxes outperforming the budget and spending under budget. Management is projecting an operating surplus, which continues the county's long history of surplus or breakeven operating results.