Feb 25 - Fitch Ratings assigns an 'AAA' rating to the following State of
Maryland (state) general obligation (GO) bonds, state and local facilities loan
of 2013, first series, consisting of:
--$500 million first series A tax-exempt bonds (competitive); and
--$500 million first series B tax-exempt refunding bonds (competitive).
The bonds will be sold via competitive sale on March 6. The par amount for the
first series B refunding bonds is approximate and will be determined upon final
In addition, Fitch affirms the following ratings:
--$7.8 billion state GO bonds, at 'AAA';
--$45 million state appropriation bonds, at 'AA+';
--$206.1 million Maryland Stadium Authority lease revenue bonds, at 'AA'.
The Rating Outlook is Stable.
General obligations to which the state's full faith and credit are pledged.
KEY RATING DRIVERS
STRONG DEBT MANAGEMENT: Debt oversight is strong and centralized, and the debt
burden is moderate. The state has policies to maintain debt affordability, and
the constitution requires GO and transportation bonds to amortize within 15
PENSION FUNDING REFORMS: Pension funding levels have deteriorated, although the
state has undertaken extensive pension and other post-employment benefit (OPEB)
BROAD ECONOMY: The state has a diverse, wealthy economy, benefiting from its
proximity to the nation's capital.
CONSERVATIVE FINANCIAL OPERATIONS: Financial operations are conservative, and
the state maintains a well-funded rainy day fund. The state took repeated action
during the course of the recession to address projected budget gaps, including
raising tax revenues, cutting spending, and using rainy day and other balances.
Sound fiscal management practices and the consistent maintenance of fiscal
flexibility, including in the form of budgetary reserves, provides the state
with significant ability to respond to near-term economic or fiscal shocks,
including from federal budget uncertainty, in a manner consistent with the 'AAA'
The 'AAA' rating on Maryland's GO bonds reflects its sound financial operations,
a wealthy, diversified economy and strong management of debt. The state's
economy has long benefited from proximity to the nation's capital, although the
prospect of near-term federal budget austerity poses a degree of uncertainty for
the state's large federal agency presence and associated private contracting.
Despite this risk and the generally slow pace of economic recovery, the state's
diverse and wealthy service-oriented economy remains a source of credit
strength. The state's approach to fiscal management has been consistently
conservative both through the last recession and during the recovery, with the
state relying on spending cuts, revenue increases and the use of non-recurring
resources to maintain balance. Maryland retains ample fiscal flexibility,
including in the form of a well-funded rainy day fund, the targeted threshold of
which the state is elevating in response to federal budget uncertainty. Although
pension funded ratios have weakened, the state has undertaken multiple reforms
to reverse funded ratio declines.
The state's economy continued to grow through 2012, albeit at the slow pace that
has characterized the current post-recessionary period and below the national
average. December 2012 employment rose 0.9% year-over-year, compared to 1.7%
nationally. Job gains were widespread, including in construction and
professional and business services, although government employment slipped. The
state's unemployment rate, at 6.6% in December 2012, was well under the 7.8%
national average. Measured on a per capita basis, Maryland's 2011 personal
income ranks fourth among the states, at 123% of the U.S. level. Personal income
grew in the third quarter of 2012 by 2.9% year-over-year, below the 3.2%
national pace of growth for the same period. The state's December 2012 economic
forecast anticipates federal budget cuts curbing personal income and job gains
near term but otherwise not derailing the state's slow recovery. The forecast
estimates annual personal income growth of 2.8% in 2013 and 4.9% in 2014, with
employment rising 0.9% and 1.5% in 2013 and 2014, respectively.
Financial operations are conservative, with the state consistently demonstrating
a strong commitment to budgetary balance through the downturn, including through
repeated spending cuts, fund balance transfers and revenue increases. The state
has also maintained flexibility in the form of its rainy day fund (RDF), which
remained funded at or near 5% of general fund revenues through the downturn.
State financial performance in fiscal 2012, which ended on June 30, was stronger
than anticipated, with a general fund balance of $551 million (3.9% of general
fund revenues) remaining at year end and a RDF balance of $672 million (4.7% of
general fund revenues).
The fiscal 2013 adopted budget closed a gap estimated at nearly $1.1 billion.
The plan incorporated $343 million in revenues from various tax rate changes,
including personal income tax rate and exemption changes for high earners.
Appropriations were reduced $698 million, including through Medicaid savings
measures and shifting a portion of the annual contributions for teacher pensions
to local school boards. The latter is the first year of a four-year phased-in
shift of the normal cost of employer contributions for teacher pensions,
estimated to reduce state spending by $217 million by fiscal 2016.
Fiscal 2013 year-to-date collections through January are up 6.9% from the
previous year, partly due to timing factors associated with acceleration of
income in anticipation of federal tax rate changes. The state's December 2012
revenue forecast assumes fiscal 2013 general fund revenues rise to $15 billion,
from $14.3 billion in fiscal 2012. For fiscal 2014, ongoing general fund
revenues are forecast to rise 2.3%, to $15.4 billion. The state's revenue
forecast builds in a partial implementation of federal sequestration cuts,
affecting broader economic activity in the state and thus dampening tax revenue
growth rates in fiscal 2013 and 2014.
The governor's proposed fiscal 2014 budget, released in January 2013, assumes
direct federal program cuts to the state of approximately 1% in both fiscal 2013
and 2014, or about $94 million each year in the event of sequestration. After
modest adjustments to fiscal 2013 appropriations, total general fund uses would
rise 1.3% to $15.1 billion, and the year would end with a fund balance of $614
million (4.1% of general fund revenues). Fiscal 2014 general fund uses after
proposed adjustments would rise 5.8%. The year is forecast to end with a fund
balance of $236 million (1.5% of general fund revenues). The budget also
proposes raising the target RDF level to 6% of general fund revenues, from 5%,
in response to federal budget risks; given the required deposit of past balances
to the RDF, its balance would thus rise to $921 million.
The burden of Maryland's total tax-supported debt is moderate, and its strong
and centralized debt management remains a credit strength. Net tax-supported
debt as of Dec. 31, 2012, equals approximately $11.4 billion, or 3.8% of 2011
personal income, including the current sale and a recent sale of consolidated
transportation bonds. More than two-thirds of tax-supported debt is GO bonds. GO
and transportation bonds are constitutionally required to mature within 15
years, ensuring rapid amortization. Debt affordability guidelines include
holding tax-supported debt at or below 4% of personal income.
The funding of pensions has deteriorated in recent years, with June 30, 2012
system-wide funded ratios for state employees at 62.5% and teachers at 65.8%.
Using Fitch's more conservative 7% discount rate assumption, the employees and
teachers' plans would be funded at 57.7% and 60.7%, respectively. On a combined
basis, net tax-supported debt and the portion of pension liabilities
attributable to the state are estimated by Fitch at about 11.2% of 2011
preliminary personal income, higher than the median of Fitch-rated states.
Despite this comparative credit weakness, the state has taken several steps to
reduce the burden of pensions in addition to the shift of teacher pension
contributions noted earlier. These include reducing benefit accruals and
requiring higher state contributions to accelerate funded ratio improvement.
Additionally, changes in 2011 to other post-employment benefits are estimated to
have reduced the state's OPEB liability to $9.2 billion, from $15.9 billion as
of June 30, 2011; the unfunded liability as of June 30, 2012 is $9.4 billion.
Additional information is available at 'www.fitchratings.com'. The ratings above
were solicited by, or on behalf of, the issuer, and therefore, Fitch has been
compensated for the provision of the ratings.
In addition to the sources of information identified in the Tax-Supported Rating
Criteria, this action was additionally informed by information from IHS Global
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria', dated 14 Aug. 2012;
--'U.S. State Government Tax-Supported Rating Criteria', dated 14 Aug. 2012.
Applicable Criteria and Related Research
Tax-Supported Rating Criteria
U.S. State Government Tax-Supported Rating Criteria