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