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