TEXT - Fitch rates Frederick, MD GOs 'AA+'

Mon Jan 14, 2013 4:51pm EST

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Jan 14 - Fitch Ratings has assigned a rating of 'AA+' to the following
general obligation (GO) bonds to be issued by the city of Frederick, Maryland
(the city):

--$54,365,000 GO public improvements refunding bonds of 2013.

The bonds will be sold competitively on Jan. 17. Proceeds will refund all or a 
portion of the city's outstanding GO public improvements bonds, series 2002 and 
series 2005 for debt service savings.

In addition, Fitch affirms the following rating:

--Approximately $142 million of outstanding GO bonds (pre-refunding) at 'AA+'.

The Rating Outlook is Stable.

SECURITY

The bonds are general obligations of the city the payment of which the city's 
full faith and credit and unlimited taxing power are irrevocably pledged.

KEY RATING DRIVERS

STRONG FINANCIAL MANAGEMENT: The city has recorded surplus results in the 
general fund in six of the prior seven audited fiscal periods and maintains 
healthy unrestricted fund balances. Financial flexibility is ample.

STABLE ECONOMIC BASE: The city's economic profile benefits from proximity to the
Washington D.C. area, as well as the presence of Fort Detrick and its mission of
biomedical research and telecommunications.

ABOVE-AVERAGE ECONOMIC INDICATORS: The city continues to experience solid 
employment and income growth and a low unemployment rate relative to the nation.

MODERATE DEBT LEVELS: Debt levels are average on an overall basis, and the city 
reports no definite plans for additional tax supported issuance.

ELEVATED CARRYING COSTS: Debt service costs, pension and other postemployment 
benefit (OPEB) contributions represent almost one-third of annual spending, 
which Fitch considers high. However, Fitch views positively the city's recent 
efforts to curb long-term pension and OPEB liabilities.

CREDIT PROFILE

The city of Frederick is located approximately 45 miles northwest of Washington,
D.C. along I-270 in Frederick County (GO bonds rated 'AAA' with a Stable Outlook
by Fitch).

PRESENCE OF FORT DETRICK AND PROXIMITY TO WASHINGTON, D.C. STABILIZE ECONOMY

The city's economy is fueled by its proximity to the region's key governmental, 
technological, and biomedical economic assets. The U.S. Army's Fort Detrick, 
site of the U.S. Army Medical Research Institute of Infectious Diseases and the 
National Cancer Institute, is located in Frederick. Fort Detrick and its partner
agencies employ more than 9,100. The fort has approximately $1.3 billion in 
ongoing construction projects, and it is anticipated that an additional 1,200 
jobs will be created over the next five years.

The significant government presence has helped insulate the economy from the 
recession. The unemployment rate peaked at 7.5% early in 2010 but has since 
improved to 5.6% in October 2012, which compares favorably to state (6.3%) and 
national (7.5%) averages. The fort has also stimulated private investment, 
particularly within the bioscience, healthcare, and advanced technologies 
sectors, contributing to an above-average rate of income growth. Per capita and 
median household incomes are equal to 120% and 127% of the national average, 
respectively.

HISTORY OF POSITIVE FINANCIAL RESULTS

The city ended fiscal 2012 with a net surplus of $1.8 million (2.5% of 
spending), improving the unrestricted fund balance to $22.2 million or a strong 
30% of spending. Favorable results were achieved largely through conservative 
budgeting practices.

The fiscal 2013 shows a relatively large $5.7 million fund balance appropriation
(8.6% of spending) for one-time expenditures, such as capital projects ($2.3 
million) and capital purchases ($1.5 million). Also included in this number are 
$400,000 additional pension and OPEB contributions. This appropriation is 
anticipated to have a marginal impact on the year-end unrestricted fund balance,
which city management projects will be $21.3 million or a strong 32.2% of 
spending.

Fitch notes that the city budgets conservatively and that it has augmented its 
reserves consistently for the past several years despite annual budget 
appropriations. Fitch anticipates continued sound reserves, given the rainy day 
policy adopted by the city in 2009 requiring an unrestricted fund balance equal 
to 12% of spending.

The estimated value of the city's homestead tax credit, which Fitch has 
previously identified as a source of additional financial flexibility and 
cushion against declining property values, has been trimmed to $132 million or 
2% of net taxable value following the 2011 tri-annual assessment. The city 
believes property values will experience slight growth going forward, noting 
several new construction projects underway and the continued sound performance 
of the local commercial real estate market.

MODERATE DEBT BURDEN, ELEVATED CARRYING COST

Overall debt is moderate (3.7% of market value and $3,762 per capita). These 
metrics include debt of the golf and airport funds for which the city provides 
debt service and at times operational support. The city has applied for 
approximately $75 million in low-interest loans from the state to fund water and
sewer infrastructure projects, ultimately secured by the city's GO pledge.

No additional tax-supported debt is currently planned, though the city may 
refinance outstanding debt as it deems prudent. Tax-supported debt service 
(including the non-self-supporting share of debt service of various enterprise 
funds) is budgeted at approximately $7 million in fiscal 2012, or 11% of general
fund spending, which Fitch considers moderate. Principal amortization is 
average.

Annual debt service and contributions to the city's pension and OPEB plans, 
which totaled $9.4 million and $4.2 million in fiscal 2012, respectively, 
represent an elevated 31% of spending. Yet, the city's pension liabilities will 
reduce in the long-term due to prudent changes enacted in fiscal 2012 that 
reduce benefits for future employees. Additional plan modifications are also 
being considered. Fitch also notes that the city recently increased the employee
share of health insurance, helping to alleviate the overall increase in benefit 
costs. The city has also created a trust to prefund its OPEB liability, which 
Fitch views positively.
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