Fitch Rates Baltimore County, MD GOs 'AAA'; Outlook Stable
--$150 million Baltimore County Taxable GO Bonds, 2016 Series.
The bonds, which are expected to sell through negotiation on July 20th, are being issued to partially fund the unfunded present or liability of the County under the portion of the Employees' Retirement System of Baltimore County closed to new membership effective as of July 1, 2007. The proceeds of the bonds are expected to be used to purchase investments for the benefit of the pension plan.
In addition, Fitch has affirmed the following ratings:
--The county's Long-Term IDR at 'AAA';
--$2.7 billion outstanding GO bonds at 'AAA';
--$86.2 million outstanding lease obligations at 'AA+'.
The Rating Outlook on the Long-Term ratings is Stable.
SECURITY
The 2016 bonds will be obligations of the county for the payment and performance of which the full faith and credit and unlimited taxing power of the county are pledged.
The outstanding lease obligations are secured by purchase installments made by the county that are subject to appropriation and a security interest in essential leased assets.
KEY RATING DRIVERS
Analytical Conclusion: The 'AAA' IDR and GO rating reflects the county's broad and diverse economy, modest long-term liability burden, and strong control over revenues. The county has exceptionally strong gap-closing capacity through a combination of budget control and reserve funding. Fitch expects revenue growth to be solid.
Economic Resource Base
Baltimore County, covering 612 square miles with an estimated 2015 population of 831,128, possesses a substantial employment base centered in planned development corridors that largely surround the independent city of Baltimore.
Revenue Framework: 'aaa' factor assessment
The county has strong revenue flexibility given the independent legal ability to increase property taxes without limitation. The county gains additional flexibility from the ability to increase the income tax rate, which is the county's second largest revenue source. Revenue growth prospects are solid.
Expenditure Framework: 'aa' factor assessment
Expenditures are likely to grow at a rate in line with to marginally above revenues in the absence of policy action, with no exceptional spending pressures. The county has a proven history of holding spending below revenues during and after the recession resulting in either breakeven or surplus operating results. Fixed carrying costs for debt service and retiree benefits are moderate. This is somewhat offset by labor agreements and the limited flexibility to reduce education spending without state approval.
Long-Term Liability Burden: 'aaa' factor assessment
Overall debt combined with the unfunded pension liability is low at 6.4% of county personal income excluding metropolitan district debt that is supported by special assessments and charges levied against all property in the district, or 9% including district debt. Debt is amortized at 60% in 10 years including this issuance.
Operating Performance: 'aaa' factor assessment
The county has consistently maintained strong operating performance. The unrestricted fund balance at fiscal year-end 2015 was $381 million or 22% of general fund spending. Fitch believes the county will maintain reserves throughout the economic cycle solidly above the level consistent with an 'aaa' financial resilience assessment given the county's strong control over revenue and spending and history of strong budget management.
RATING SENSITIVITIES
PRUDENT MANAGEMENT OF FINANCES: The rating is sensitive to shifts in the county's conservative financial management. The 'AAA' rating and Stable Outlook reflects Fitch's expectation that these practices will continue.
CREDIT PROFILE
The county's employment base is broad and deep. Government, health care, financial services, and higher education predominate, with skilled manufacturing and technology becoming a growing sector and major focus of economic development. The county has five regional medical centers and five major colleges and universities providing some employment stability. It is also home to several federal government agencies including the Social Security Administration and Medicare and Medicaid Services, which combined employ nearly 14,000 people. However, federal employment represents only 5% of the total county employment base, limiting its exposure to any potential federal downsizing.
Employment trends over the past four years have been positive. Growth has been on par with the state but below the national average. Wealth indicators are in line with those of the affluent region and state, and exceed national averages.
The county's overall property tax base values have seen modest declines in each of the past five years. One-third of the county's real property tax base is revalued once every three years, with any increase phased in equally over the ensuing three tax years. The most recent revaluation showed an 11.3% increase and will be phased in beginning fiscal 2017. Recent years of commercial, retail and housing development have contributed to this gain. Overall county housing values are up modestly through May 2016, according to Zillow Group. Fitch believes intermediate and long-range overall economic growth prospects are strong, based on county reports of new development underway or in the planning stages.
Revenue Framework
Typical of Maryland counties, property and income taxes produce the bulk of general fund revenue, at approximately 48% and 38%, respectively, for fiscal 2015. Property tax revenues have remained generally stable, except for a less than 1% decline in 2014, despite a cumulative decline of 13% between 2011 and 2015 in taxable assessed value (TAV). Reductions in the TAV were offset by reductions in the banked homestead credit. Due to improvement in employment and the economy, income tax revenues have increased annually over the past four fiscal years.
General fund revenues have grown ahead of inflation but mildly below national GDP over the 10 years through 2014 without any policy action. Given the pipeline of significant investment underway in the county, revenue growth prospects continue to be positive.
The county last increased the income tax rate, to the current 2.83%, in 2002, which compares to the 3.2% maximum rate allowed by state law. An increase to the maximum rate would generate about $97 million (about 5% of the fiscal 2017 budget) in additional revenue annually. Moreover, the county is not subject to any limitation on its property tax rate or levy; the county last increased its tax rate in 1989.
Expenditure Framework
The county's largest expenditure is education at roughly 47% of general fund expenditures, followed by public safety at 19%.
Given the county's education initiative plans, capital spending is expected to increase at a higher than usual pace; however, economic development within the county remains steady and strong which is expected to impact both property and income tax revenues. As a result, Fitch expects the natural pace of revenue and spending growth to be generally in line going forward.
According to the state's maintenance of effort mandate, education spending cannot decline year-over-year without state approval. Given the county's multi-year $1.3 billion (fiscal 2011-2021) initiative to address aging infrastructure and crowding within certain schools, school spending and related debt service costs are expected to continue to increase. However, overall enrollment growth over the past decade has been flat at less than 1% annually, moderating spending pressures.
Approximately 69% of the county's workforce is unionized with one - or three-year contracts. However, strikes are not permitted and arbitration is not binding on the county council's budget. Carrying costs associated with debt service, actuarially determined pension payments (including the normal cost for teachers' pensions) and other post-employment benefits (OPEB) actual contributions totaled 14% of fiscal 2015 governmental spending; debt service accounted for less than half of the total.
Long-Term Liability Burden
Overall net debt plus the county's unfunded pension liability equals a low 6.4% of personal income excluding metropolitan district debt. Debt ratios increase to a more moderate 9% including metropolitan district debt, which is paid from special assessments and charges levied against all property in the district. While operating revenues (water and wastewater) historically have been sufficient to cover metropolitan district operating expenses and debt service, over the past three years the district has been utilizing enterprise fund balance to pay a portion of debt service while keeping rates unchanged. As of fiscal year-end 2015, cash on hand totaled 134 days of operations. The county expects district operating revenues to fully cover expenditures by fiscal 2017 given an approved rate increase for fiscal 2016 and 2017.
The county's sizable six-year fiscal 2017 - 2022 CIP totals $2.9 billion compared to $2.8 billion currently outstanding. Approximately one-quarter of the plan is devoted to education for modernization projects. Other notable expenditures include water/sewer at 33%, followed by public works at 10%. County tax-supported debt will fund about 50% of the total program. Fitch expects debt ratios to modestly increase, as annual expected issuances are greater than the amount amortized annually, but liabilities should remain a low burden on the resource base.
The county is one of five local entities participating in a cost-sharing multiple employer pension and OPEB plan. The county has consistently contributed 100% of the actuarially calculated annual required contribution for its pension plan. The unfunded pension liability of approximately $1.1 billion as of the 2015 valuation (using a 7% return assumption) is approximately 2.5% of personal income. The unfunded liability has increased annually mostly due to the county's decision to reduce the assumed investment rate of return to 6.75% as of the 2015 valuation from 7.875% prior to 2012. The investment rate of return will further decline to 6.375% after this issuance.
The county administers an OPEB trust fund that provides benefits for its retirees. As of 2015 the plan was 27% funded. The unfunded liability is $1.1 billion (which includes the schools and college liability) or about 2.5% of personal income.
Operating Performance
The county has historically maintained healthy reserve levels and continued to do so during the last recession. The unrestricted fund balance at fiscal year-end 2015 was $381 million or 22% of general fund spending. Fitch expects the county to manage through cyclical downturns while preserving an exceptionally strong level of financial resilience. General fund reserves are well above the county's 10% reserve policy and comfortably above the minimum reserve safety margin that corresponds to the county's superior inherent budget flexibility and moderate sensitivity to economic downturns indicated by results of the Fitch Analytical Sensitivity Tool (FAST).
During the economic downturn, fiscal years 2009-2011, the county reduced pay-go, eliminated the county's share of OPEB costs, did not grant COLAs (fiscal 2011-2014), and offered a targeted retirement incentive program. Fitch expects county management would respond in a similar manner during another economic downturn.
The adopted fiscal 2016 general fund budget of $1.95 billion was a 4.8% increase over the original fiscal 2015 budget. The budget maintained the property tax rate and income tax rate and included a $90 million fund balance appropriation. The budget increase mostly funded a $50 million increase to the capital budget to $102 million and a 3% cost of living adjustment for county employees.
Unaudited year-end operating results show revenues running slightly over budget as recordation and property taxes are higher than anticipated and unbudgeted revenues of approximately $10 million from a newly instituted medic transport fee are collected. Estimated year-end results show a $70 million deficit; however, reserves will remain above the 10% policy.
The adopted $1.98 billion budget for fiscal 2017, which began on July 1, includes a $19 million fund balance appropriation with no change in the property or income tax rate. The budget includes a 2% COLA for county employees as well as a $97 million general fund contribution to the capital budget (5% of the fiscal 2017 budget).
The county's six-year financial forecast shows an intentional projected reduction in unassigned and designated general fund balance closer to its newly revised policy level of 10% of revenues through 2018 primarily due to expected cash-funding of future capital projects. Operations are projected to become positive beginning fiscal 2019 without the use of reserves to balance operations or the need for revenue enhancements. Positive projected operations reflect the completion of major infrastructure and school capital projects. Fitch expects management to maintain a sound financial profile while funding its capital plan.
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