Jan 18 - Fitch Ratings has assigned an 'AAA' rating to Prince George's
County, Maryland's (the county) limited tax general obligation
--$137.6 million GO consolidated public improvement bonds, series 2013A;
--$188.1 million GO consolidated public improvement refunding bonds, series
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
--$31.9 million of outstanding Maryland Transportation Authority (MdTA) lease
revenue bonds, series 2004 affirmed at 'AA'.
The Rating Outlook is Stable.
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
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
CONSTRAINED REVENUE RAISING CAPACITY: Real property and income tax rate
limitations restrict the county from further leveraging its two primary revenue
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.
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
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
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
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
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
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.