Fitch Rates Baltimore County, MD's GOs 'AAA'; Outlook Stable
OREANDA-NEWS. Fitch Ratings has assigned the following ratings to Baltimore County, Maryland (the county) general obligation bonds:
--$88 million Baltimore County metropolitan district bonds, (78th issue), 2016;
--$112 million Baltimore County consolidated public improvement bonds, 2016 series;
--$54.87 million Baltimore County metropolitan district bonds, 2016 refunding series.
Bond proceeds will be used to refund outstanding series 2015 bond anticipation notes (BANs) and to refund the metropolitan district's 70th and 71st issues for savings. A competitive sale is scheduled for Feb. 23rd.
In addition, Fitch affirms the following ratings:
--Approximately $2.3 billion outstanding general obligation (GO) bonds at 'AAA';
--$86 million outstanding lease obligations at 'AA+';
--$200 million BANs, maturing Apr. 1, 2016, at 'F1+'.
The Rating Outlook is Stable.
The GO bonds and BANs are payable from the county's pledge of its full faith and credit and its unlimited taxing power. The principal source of repayment for the metropolitan district bonds will be special assessments and charges levied against all property in the metropolitan district.
The outstanding lease obligations are secured by purchase installments made by the county that are subject to appropriation and a security interest in essential leased assets.
KEY RATING DRIVERS
STRONG FISCAL MANAGEMENT: Prudent management decisions and adherence to fiscal policies have helped maintain healthy reserve levels. A historical use of reserves for capital pay-go and moderate tax levels provide for financial flexibility.
CONSIDERABLE ECONOMIC BASE: The broad and diverse economy benefits from the presence of federal installations, health care, financial services, and higher education. Highly structured development efforts, focusing on growth management and collaboration with surrounding jurisdictions, underscore excellent prospects for continued expansion.
FAVORABLE DEBT POSITION: Debt ratios are expected to remain moderate as future debt plans are affordable and principal amortization rates are average.
APPROPRIATION RISK AND ASSET ESSENTIALITY: The ratings for the lease obligations are notched down from the GO rating to reflect appropriation risk and the essential nature of the assets subject to lien.
MAPPING TO LONG TERM RATING: The 'F1+' short-term rating is mapped to the county's long-term GO rating.
PRUDENT MANAGEMENT OF FINANCES: The rating is sensitive to shifts in the county's conservative financial management and compliance with its fiscal policies. The 'AAA' rating and Stable Outlook reflects Fitch's expectation that these practices will continue.
Baltimore County, with its estimated 2014 population of 832,050, covers 612 square miles and surrounds the independent city of Baltimore.
DIVERSE AND ROBUST ECONOMY
The employment base is broad and deep. Government, health care, financial services, and higher education predominate, with skilled manufacturing and technology becoming a growing sector and major focus of economic development. The county has five regional medical centers and five major colleges and universities providing some employment stability. It is also home to several government agencies including the Social Security Administration and Medicare and Medicaid Services, which combined employ nearly 16,000 people. However, federal employment represents only 5% of the total county employment base limiting its exposure to any potential federal downsizing.
County unemployment of 5.3% in November 2015 is down slightly from 5.7% the prior year and reflects the steady growth in both jobs and labor force. Wealth indicators are in line with those of the affluent region and state, but exceed national averages.
The county's overall tax base values have seen modest declines in each of the past five years. One-third of the county's real property tax base is revalued once every three years, with any increase phased in equally over the ensuing three tax years. The most recent revaluation showed an 11.3% increase and will be phased in beginning fiscal 2017. Recent years of commercial, retail and housing development has contributed to this gain. Overall county housing values, though, are up a modest 1.1% year over year through December, according to Zillow Group. Fitch believes intermediate and long-range overall economic growth prospects are strong, based on county reports of new development underway or in the planning stages.
STRONG FISCAL MANAGEMENT MARKED BY HEALTHY RESERVES
Financial operations are well managed and reserve levels are expected to remain at or above policy levels. The county has achieved surplus operating results, excluding amounts appropriated for capital pay-go, in fiscal years 2012 through fiscal 2015. Fiscal 2015 audited results show a $28 million operating deficit, after transfers, which compares favorably to the original $89 million fund balance appropriation. Year-end results incorporate $51 million in pay-as-you-go capital spending. The positive operating results relative to the budget reflect in part better than anticipated transfer and recordation taxes, higher income tax revenues and conservative spending estimates.
The unrestricted general fund balance decreased to $381 million representing a solid 20.4% of spending. In fiscal 2015 the county prudently increased its target level for unassigned and designated general fund balance to 10% of general fund revenues from 8%. These combined balances represent 17.5% of revenues at fiscal end 2015.
The adopted fiscal 2016 general fund budget of $1.95 billion is a 4.7% increase over the final fiscal 2015 budget. The budget maintains the property tax rate (unchanged since fiscal 2006) and income tax rate and includes an $89.6 million fund balance appropriation. The budget increase mostly funds a $50 million increase to the capital budget to $102 million and a 3% cost of living adjustment for county employees. Fitch expects at a minimum that reserves will remain in line with the county's reserve policy.
To date, revenues are running slightly over budget as recordation and property taxes are higher than anticipated and unbudgeted revenues of approximately $10 million from a newly instituted medic transport fee have been collected through December 2015. This fee is projected by management to generate $20 million annually in new revenues. While snowstorm related expenses may result in a negative expenditure variance for that category, other countywide departments are projected to see savings.
The county's six-year financial forecast shows an intentional projected reduction in unassigned and designated general fund balance closer to its newly revised policy level of 10% of revenues in fiscal years 2017 through 2019 primarily due to expected cash-funding of future capital projects. Historically, though, the county has outperformed the budgeted drawdown. Fitch expects management to maintain a sound financial profile while funding its capital plan.
AMPLE REVENUE FLEXIBILITY
Property taxes represent approximately 50% of general fund revenue. Fitch views the county's regionally competitive property tax rate as an important measure of financial flexibility given its dominance as a source of general fund revenues. There are no statutory restrictions on property tax growth. Income taxes represent roughly 38% of general fund revenues. The county's income tax rate of 2.83% is below the maximum of 3.2%.
DEBT PROFILE EXPECTED TO REMAIN MODERATE
Future capital needs are substantial but Fitch expects debt ratios to remain moderate. The county's capital program for fiscal years 2016-2021 is $2.54 billion. The program is primarily funded by metropolitan district funding (58%) and GO bonds (27%).
Overall tax-supported debt ratios are moderately low at $2,149 per capita and 2.3% of market value. Debt ratios increase to a more moderate $3,472 per capita and 3.7% of market value including metropolitan district debt, which is paid from special assessments and charges levied against all property in the district. While operating revenues (water and wastewater) historically have been sufficient to cover metropolitan district operating expenses and debt service, over the past three years the district has been utilizing enterprise fund balance to pay a portion of debt service while keeping rates unchanged. As of fiscal year-end 2015, cash on hand totaled 134 days of operations. The county expects operating revenues to fully cover expenditures by fiscal 2017 given an approved rate increase for fiscal 2016. Amortization of total debt is average at 57% within 10 years and debt servicing costs are low at 5.3% of total governmental spending.
MANAGEABLE PENSION AND OPEB COSTS
The county is one of five local entities participating in a cost-sharing multiple employer pension and OPEB plan. The county pays 100% of its pension ARC, equivalent to a manageable 4.3% of fiscal 2015 governmental spending. During fiscal 2013, the investment rate of return was prudently lowered to 7%. The fiduciary net position to total pension liabilities was 68% as of a June 30, 2014 measurement date and the net pension liability was $1.1 billion or a moderate 1.4% of market value.
The county administers an OPEB trust fund that provides benefits for its retirees. As of June 30, 2015, the county maintained a funded ratio of 25% based on actuarial asset values of $378 million and an accrued liability of $1.5 billion. Total carrying costs for debt service, pension ARC and OPEB contributions made were low at 12.4% of total fiscal 2015 governmental spending.