TEXT - Fitch rates Maryland's Prince George County GOs 'AAA'

Fri Jan 18, 2013 3:09pm EST

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Jan 18 - Fitch Ratings has assigned an 'AAA' rating to Prince George's
County, Maryland's (the county) limited tax general obligation 
(LTGO) bonds:

--$137.6 million GO consolidated public improvement bonds, series 2013A;

--$188.1 million GO consolidated public improvement refunding bonds, series 
2013B.

The bonds are expected to sell competitively on Feb. 5th. Proceeds will finance 
county capital improvements and refund certain outstanding GO bonds.

In addition, Fitch affirms the following ratings: 

--$978.5 million of outstanding LTGO bonds affirmed at 'AAA'. (A full list of 
affected ratings follows at the end of this release.);

--$86.3 million of outstanding unlimited GO (ULTGO) bonds, series 2004A affirmed
at 'AAA';

--$31.9 million of outstanding Maryland Transportation Authority (MdTA) lease 
revenue bonds, series 2004 affirmed at 'AA'.

The Rating Outlook is Stable.

SECURITY 

The LTGOs are secured by the county's full faith and credit, subject to 
limitations of section 812 and 813 of the county charter. Section 812 limits the
real property tax rate to $0.96 per $100 of AV. Section 813 requires that 
certain taxes and fees may not be increased without voter approval.

The unlimited GO bonds, series 2004A are secured by the county's full faith, 
credit and taxing power to the payment of the bonds. The bonds are payable from 
two unlimited, dedicated ad valorem tax levies based on the financed project: on
all taxable property within the Washington Suburban Transit District (WSTD) for 
the mass transit facilities financing and the second on all taxable property 
within the stormwater management district (SMD) for the stormwater facilities 
financing.

 

The MdTA bonds are secured by lease revenue payments from the Washington 
Metropolitan Area Transit Authority (WMATA) according to the terms of a facility
lease for each parking structure and trust indenture. By terms of a deficiency 
agreement, the county covenants to restore deficiencies in this fund, subject to
annual appropriation. The bonds are not secured by any mortgage or other 
interest in the parking facilities projects other than rentals under the 
facility lease agreements.

KEY RATING DRIVERS

IDENTICAL ULTGO AND LTGO RATINGS: Fitch currently does not distinguish between 
the county's ULTGO and LTGO ratings due to the county's strong financial 
flexibility.

CONSTRAINED REVENUE RAISING CAPACITY: Real property and income tax rate 
limitations restrict the county from further leveraging its two primary revenue 
sources.

SOLID RESERVES DESPITE COST PRESSURES: Fitch anticipates that conservative 
budgeting will permit the county to contain escalating costs and maintain 
reserves above policy levels.

ROBUST AND GROWING ECONOMY: The county benefits from its central location in the
national capital region and its well-developed transportation infrastructure, 
attracting a strong base centered upon vital government operations and higher 
education. Prospects for continued growth are strong. Wealth indicators equal or
exceed national averages.

MODEST DEBT BURDEN: Debt levels are expected to remain moderately low over the 
next few years. Manageable carrying costs coupled with rapid amortization 
enhance the debt position.

PENSIONS INADEQUATELY FUNDED: Pensions are underfunded despite the county fully 
funding its annual retirement contribution (ARC). Annual costs currently 
represent a manageable portion of total county spending.

DEBT SERVICE REPLENISHMENT GUARANTEE: The rating for the MdTA debt service 
reserve guaranty bonds is based on the county's debt service replenishment 
guarantee, subject to annual appropriation.

CREDIT PROFILE

Prince George's County benefits from its location adjacent to Washington, D.C. 
The 2011 population of 871,233 has grown just below the national rate since the 
last census. 

ROBUST ECONOMY WITH EXPANSION POTENTIAL

The county's intrinsically broad commercial base complements Washington D.C.'s 
diverse employment opportunities. Within the county, indispensable governmental 
bureaus and higher education, including Andrews Air Force Base and the 
University of Maryland, provide economic stability. 

Fitch posits that substantial transit oriented development is likely, given the 
notable amount of available land. Expansion continues in the $2 billion 
mixed-use National Harbor project along the Potomac River, including the $100 
million Tanger Outlets at National Harbor. A recently approved gaming facility, 
expected to open in 2017, will most likely be located adjacent to the National 
Harbor. The county anticipates that its recently created $50 million revolving 
economic development initiative fund will boost additional job creation. Fitch 
considers early results promising.

The unemployment rate routinely hovers around that of the state and compares 
favorably to national averages. The October 2012 unemployment rate of 6.5% is 
relatively unchanged from the 6.8% of the prior year, as both employment and 
labor force trends were below those of the state and nation. County wealth 
levels are below those of the wealthy region but at or above national indices.

HINTS OF HOUSING MARKET STABILIZATION

Real estate values, hard hit during the recent national housing correction, are 
showing signs of recovery, although foreclosures remain the highest in the 
state. The 2012 housing median sale price rose 5.2% over that of the prior year 
after a steep 47% decline from the housing peak in 2006. Inventory and sales 
volume metrics have also improved a bit over the past year.

County taxable assessed value (TAV) has benefited from banked Homestead Tax 
Credits, which, by limiting the TAV growth of homesteaded properties, allow 
localities to bank surplus TAV to offset real estate declines. The credits, 
coupled with some growth in the commercial base, allowed AV to grow through 
fiscal 2011 despite steep housing price reductions. 

Remaining banked homestead tax revenue somewhat mitigated near term property tax
reductions attributable to taxbase declines. AV declined by 12.2% and 8.7% in 
fiscal 2012 and 2013, respectively. Fitch views as sufficiently conservative the
county's projections that the rate of decline will diminish to -3% in fiscal 
2015. 

SOLID RESERVES DESPITE FINANCIAL PRESSURES

County reserves are sound, in spite of revenue raising restrictions and 
expenditure pressures. The county cannot increase either the real property tax 
rate or income tax rate due to county charter and state legislative provisions, 
respectively. Out-year financial projections incorporate growing labor cost 
pressures. 

The county expects to utilize reserves in fiscal 2013 and possibly 2014, with 
the majority designated for one-time uses, which Fitch views as a mitigating 
factor. Fitch positively views management's stated commitment to balance 
subsequent budgets without utilizing reserves and ultimately to maintain 
reserves above 7% policy levels; failure to do so could place downward pressure 
on the ratings or lead to a rating distinction between the ULT and L-T ratings.

A return to positive operations in fiscal 2010 and 2011 helped stabilize county 
reserves at solid levels, though both years benefited from a $30 million 
transfer from the Maryland National Capital Park and Planning Commission to the 
county's general fund. Fiscal 2012 concluded with a $5.5 million operating 
surplus net of transfers, equivalent to 0.4% of spending. 

The fiscal 2012 unrestricted fund balance, consisting of the sum of committed, 
assigned, and unassigned fund balance per GASB54, equaled a sound 13.9% of 
spending. These reserves incorporate an operating reserve at the policy level of
2% of spending. The county's fully funded 5% contingency reserve is available 
for emergencies, despite its designation as restricted fund balance. Inclusive 
of the contingency reserve, Fitch calculates the available fund balance as a 
healthy 22.4% of spending.

MIXED REVENUE OUTLOOK, INCREASING LABOR REQUIREMENTS

Real property taxes, the county's largest revenue source, are projected to 
decrease in fiscal 2013 by 3.9% from the fiscal 2012 budget, reflecting taxbase 
deterioration. In contrast, income tax collections, the second largest revenue 
source, are expected to increase 6.9% due to state adjustments to the 
distribution and exemption formulas. Fitch considers this projection quite 
conservative, given that the budgeted amount is 2% below fiscal 2012 
collections.

Expenditure pressures, particularly relating to labor, are escalating. The 
county's recent loss of a police arbitration case resulted in an $8 million 
settlement. Fitch concurs with the county's belief that the settlement will 
influence the tenor of upcoming contract negotiations with other unions, further
pressuring operations. Pension and health insurance funding requirements will 
continue to escalate. The county has begun to address its $78 million deficit in
the workers' compensation fund. 

The adopted fiscal 2013 budget had incorporated the use of $24.6 million of fund
balance, primarily for one-time projects. Current fiscal 2013 budget estimates 
indicate that revenues will surpass the budget by $5 million, with positive 
income taxes variances offsetting lagging speed enforcement revenues. 
Expenditures are estimated to be $27 million above budget, driven by the police 
arbitration payment, public safety overtime, and one-time costs. 

To control its expenditures, the county intends to freeze most vacancies, 
implement agency reductions, and reduce public safety recruitment. Ultimately, 
the county anticipates drawing down reserves by around $32 million, representing
the budgeted $24.6 million along with the police arbitration payment. 

The county has preliminarily identified a $152 million gap for fiscal 2014, 
should expenditure and revenue patterns continue unchecked. Management 
anticipates submitting a balanced operating budget, with any appropriated fund 
balance dedicated to one-time expenditures. Fitch believes that the county's 
strong management team can successfully rein in costs to achieve their fund 
balance goal.

WELL-MANAGED DEBT PROFILE

Overall debt, excluding GO bonds issued to finance the self-supporting solid 
waste system, equals a moderately low $2,347 on a per capita basis and 2.4% as a
percent of market value. Amortization is rapid with roughly 67% of principal 
retired within 10 years. County debt service costs are expected to rise although
remain under the policy level of 8% of certain expenditures. Fitch believes that
the county has demonstrated the ability to limit debt issuances if needed to 
maintain low debt levels and ensure financial flexibility.

The six year fiscal 2013 - 2018 CIP totals $2.3 billion, above the $1.8 billion 
of the previous plan, with most of the increase attributable to additional needs
for the storm water system. Storm water projects comprise 27.6% of all needs, 
followed by education at 23.9% and public works and transportation at 15.2%. 
County tax-supported debt will fund about 44% of the total program. Planned 
issuances this year consist of $152 million in GO bonds that had been previously
deferred as well as $16 million in lease revenue bonds.

UNDERFUNDED PENSION SYSTEMS

The majority of county employees participate in the statewide local government 
retirement pension plan, the State Retirement and Pension System of MD, a 
cost-sharing multi-employer defined benefit plan. The funding of the state's 
pensions has deteriorated in recent years, with June 30, 2011 funding for the 
state employees at 62.8%, a weak level, and teachers at 66.3%. 

Using Fitch's more conservative 7% discount rate assumption, the state employees
and teachers' plans would be 58% and 61.2% funded, respectively. Pension and 
health care reforms enacted with the budget are expected to slow the growth of 
the state's pension liability and direct additional contributions to the pension
system over time to improve funding ratios.

The county maintains four single-employer defined benefit pension plans for 
public safety employees as well as a number of supplemental plans. These plans 
are funded at a weak 57%, which equates to 52% when utilizing Fitch's more 
conservative discount rate assumptions. Management is contemplating a 0.5% 
decrease in the investment rate of return to 7.5%. Fitch views this rate as more
realistic, although the methodology adjustment would decrease the funded ratio. 
The county is examining potential plan modifications to reduce its liability. 

Pension payments at or near 100% of the ARC, including contributions to the 
state plan, total a moderate 7% of spending. The fiscal 2013 budget successfully
incorporates a net $10 million increase in pension contributions to assume a 
portion of funding that was previously paid by the state.

  

The county has been proactive in managing its OPEB needs, including the 
formation of an OPEB trust. The county intends to increase its payments by 3% - 
5% annually to achieve full funding of the $71 million OPEB ARC, equivalent to 
4.5% of spending. The county's timeline for complete funding is open-ended, in 
contrast to management's previously articulated 10-year goal. Fitch believes the
county's willingness to address its pension pressures bode well for its ability 
to meet its OPEB obligations.

GO PLEDGE BASIS FOR RATING LIMITED TAX BONDS

The 'AAA' rating for the county's limited tax GO bonds is based on the GO ad 
valorem tax pledge subject to the county charter limitations. Debt issued for 
certain facilities will be payable first from amounts available and appropriated
for such purposes but these payments do not form the basis for the rating. The 
revenue sources for school facility and renovation debt consist of a school 
facilities surcharge and a sales and use tax on communication services, 
providing in fiscal 2011 $22.8 million and $1.9 million, respectively. 

Debt issued for mass transit facilities will be payable from a separate ad 
valorem tax collected for the county on behalf of the Washington Suburban 
Transit Commission. A direct ad valorem tax within the stormwater district 
services the district's debt. Net income of the self-supporting solid waste 
management system funds the associated debt service. 

DEBT SERVICE RESERVE REPLENISHMENT FOR LEASE REVENUE BONDS

The 'AA' rating on the lease revenues bonds is based on the county's obligation 
to replenish the debt service reserve fund in the event of a deficiency in 
funding, subject to appropriation by the county council. The bonds are secured 
by lease payments from WMATA to the MdTA. WMATA operates the Metrorail and 
Metrobus system, which provides an important service to the county and the 
Washington D.C. region. There has not been a call for the county to replenish 
the debt service reserve fund. 

Fitch affirms the following series of LTGO bonds at 'AAA':

--Series 2000, 2001, 2002, 2003A, 2004C, 2004D, 2004E, 2004F, 2005, 2006, 2007A,
2008, 2009A; 2009B; and 2011A;

--Refunding bonds, series 2002, 2003B; 2007B; and 2011B;

--Qualified School Construction bonds (QSCBs), series 2009A and 2009B.
FILED UNDER:
A couple walks along the rough surf during sunset at Oahu's North Shore, December 26, 2013. REUTERS/Kevin Lamarque

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