OREANDA-NEWS. Fitch Ratings has assigned an 'AA' rating to the following general obligation (GO) bonds of Worcester County, Maryland (the county):

--\$12,015,000 consolidated public improvement bonds 2015 series A;
--\$27,000,000 consolidated public improvement refunding bonds 2015 series B.

The proceeds of the series A bonds will be used to finance capital projects and the series B proceeds will be used to refund all or a portion of the county's outstanding series 2007 and 2008 bonds and a 2011 bank loan. The bonds will be offered by the county at a competitive sale on June 16, 2015.

In addition, Fitch affirms the following ratings:

--Approximately \$93 million in outstanding county GO bonds at 'AA'.

The Rating Outlook is Stable.

SECURITY

The bonds are general obligations of the county for which its full faith and unlimited taxing power are pledged.

KEY RATING DRIVERS

HISTORICALLY STRONG FISCAL MANAGEMENT: Prudent management decisions and adherence to fiscal policies have yielded solid reserve levels despite revenue declines experienced in recent years. The county also maintains a high level of revenue-raising flexibility.

PERSISTENT DECLINES IN TAXBASE: Taxable values have declined six straight fiscal years leading to a pressured revenue environment. Officials prudently raised property and income tax rates in fiscal 2016 to offset this decline and maintain county services.

MODERATE OVERALL DEBT BURDEN: The county's overall debt burden is expected to remain moderate, given its manageable capital needs.

CARRYING COSTS ARE LOW: Carrying costs including debt service, pension and other post-employment benefits are low but expected to increase modestly as the county issues additional debt and pension costs rise.

SEASONAL TOURISM-BASED ECONOMY: The tourism sector remains a significant economic driver, vulnerable to economic cycles and contributing to seasonal employment fluctuations, although the county's reliance on direct tourism-related revenues is modest. The county's tourism industry has historically demonstrated resilience during periods of economic stress.

RATING SENSITIVITIES

The rating is sensitive to shifts in fundamental credit characteristics including the county's strong financial management practices and maintenance of sound reserves. The Stable Outlook reflects Fitch's expectation that such shifts are unlikely.

CREDIT PROFILE

Worcester County is located on Maryland's eastern shore and encompasses the entire Atlantic seaboard of the state. The county, a prime tourist destination, boasts many public beaches, a boardwalk, golf courses, and convention facilities. While annual population is 51,675 for 2014, the summer population can peak at over 320,000 with visitors on weekends.

DECLINES IN ASSESSED VALUES PRESSURES REVENUES

Financial operations are characterized by prudent budgetary management, maintenance of sound reserves, compliance with a formal reserve policy, and comprehensive long-range planning.

Property taxes are the main revenue source representing 70% of total general fund revenues. The county has seen its taxable assessed value decline in each of the past six fiscal years. The state department of assessments and taxation appraises portions of the county's real property over 3 year cycles, somewhat contributing to the lag in a return to growth in values. A seven-cent property tax increase was approved for fiscal 2013 after holding rates flat for six fiscal years. Management made considerable expenditure cuts and experienced surplus general fund operations in fiscal years 2010 through 2013.

The fiscal 2014 budget was adopted with a modest \$1.7 million (1% of spending) general fund balance appropriation and no property tax rate increase. The county had conservatively budgeted fiscal 2014 income tax receipts at 4% below fiscal 2012 actuals. The budget included a \$5 million contribution towards the county's OPEB trust, an increase of \$2 million compared to the prior year. Revenues performed slightly better than budget on a GAAP basis, with income taxes outperforming expectations, but expenditures came in over budget by \$2.8 million. The general fund ended fiscal 2014 with a net deficit of \$7.1 million which included a transfer of \$4.2 million for capital projects and the increased contribution to the OPEB trust. Unrestricted fund balance declined to \$49.5 million or a still healthy 28% of spending. The county's formal reserve fund balance policy is equal to 10% of budgeted expenditures.

BUDGETED FUND BALANCE USE PROJECTED FOR FISCAL 2015

The \$178 million fiscal 2015 budget was a \$9.3 million increase (5.5%) over the prior year's budget. The tax rate was not changed but TAV declined modestly. The budget included a \$6.3 million use of fund balance and \$2 million use of bond premiums to balance the budget. School funding was increased by \$2.1 million and salaries increased by 3%. Management reports that revenues are tracking about 1% below budget while expenditures are flat. Management is projecting an approximate use of \$8.3 million in fund balance for fiscal year end. This result would cause unrestricted fund balance to decline to \$38.6 million or a still sound 22% of budget.

FISCAL 2016 BUDGET INCLUDES TAX INCREASES

To address the past year's budget imbalance management has approved a 6.5-cent property tax increase and a 0.5% income tax rate increase to 1.75% from 1.25%. The rate increases are projected to generate an additional \$9.1 million in property taxes and \$2.2 million in income taxes (income tax change is effective Jan. 1, 2016). Additionally, a budget surplus of \$1.5 million was approved to help partially restore fund balance. The budget also includes \$2 million for capital and equipment needs.

SIGNIFICANT REMAINING REVENUE CAPACITY

The county's property tax rate is now the third lowest in the state at \$0.835 per \$100 of AV in fiscal 2016. The property tax rate and levy are not subject to limitation. The county's increased income tax rate (1.75%) is still the lowest in the state. The state cap on the income tax rate is 3.20% leaving additional flexibility if needed. In fiscal 2014, the county received \$13.7 million in income tax revenues which represented 8% of total general fund revenues.

TOURISM-DRIVEN LOCAL ECONOMY

Worcester County encompasses the entire Atlantic coastline of Maryland, serving as home to Ocean City, a prime tourist destination. Tourism-generated revenues have continued to increase year-over-year. The county collects hotel and room taxes and remits the bulk of collections to its local municipalities. Remaining tourism generated tax revenues represented a small portion of overall revenues after these pass-throughs.

Leisure and hospitality is the leading employment sector at 37%. Top employers include several hotel and restaurant establishments including the Harrison Group (1,083 employees) and O.C. Seacrets (380). Atlantic General Hospital is the second largest employer with 830 employees followed by WalMart (500).

County unemployment rates exhibit a seasonal pattern similar to that of tourist arrivals. Unemployment rates averaged 13.8% from January-April 2015, the traditional off-season for tourism. Rates averaged a still-high 8.3% last May-September during the height of the tourist season.

The county's population experienced good growth between 2000 and 2010, with 11% growth in full-time residents. Since 2010 growth has tapered off. The county's wealth metrics are mixed, as evidenced by a county median household income at 109% of the national average but 79% of the state's high average. However, additional wealth flows into the county during the summer months from tourists and second homeowners.

FAVORABLE DEBT PROFILE

Overall debt levels are moderate at roughly \$4,464 per capita and 1.6% of market value, reflecting the relatively low permanent population, and amortization is rapid with 79% of outstanding principal repaid in 10 years. Debt service costs accounted for an affordable 5.6% of fiscal 2014 total governmental spending, well within the county's 10% policy. Future debt plans are moderate and involve mostly school improvements. Fitch expects debt ratios to remain moderate.

MODEST PENSION AND OPEB COSTS

The county contributes to the State of Maryland Employees Retirement and Pension System and makes all annually required contributions. Funding for county employees and teachers of \$3.2 million accounted for 1.8% of total governmental spending in fiscal 2014. The funding for the state's pension obligations for employees and teachers has begun to improve after a decade of weakening that resulted from an actuarial contribution methodology now being phased out and market losses in the last downturn. The system-wide funded ratios under new GASB pension accounting requirements were 64.9% for general employees and 68.7% for teachers as of June 30, 2014, when adjusted by Fitch to a more conservative 7% discount rate assumption.

The county also provides OPEB to its retirees. During fiscal 2014, the county contributed \$5 million for county and board of education employees. The county has established a trust, which as of 7/1/2014 had a combined balance of \$70 million. The funded ratio for employees of the general government was 65% and 17% for the board of education.

Carrying costs for debt service, pension and contributions towards OPEB were a low 10% of total fiscal 2014 governmental spending, but are expected to rise modestly as the cost for teachers' pensions are shifted to counties and new debt is issued.