OREANDA-NEWS. November 11, 2015. Fitch Ratings has assigned an 'AAA' rating to the following Montgomery County, Maryland (the county) general obligation (GO) bonds:

--\\$300 million consolidated public improvement bonds of 2015, series B.

The bonds are scheduled for competitive sale on Nov. 18. Proceeds of the series B bonds will permanently finance \\$300 million in bond anticipation notes.

In addition, Fitch affirms the following ratings:

--\\$2.7 billion GO bonds at 'AAA';
--\\$41.33 million Maryland-National Capital Park and Planning Commission (MNCPPC) park acquisition and development GOs at 'AAA';
--\\$14.3 million certificates of participation (COPs), series 2007 and 2010 at 'AA+';
--\\$49.8 million taxable limited obligation certificates (facility and residential development projects), series 2010A and 2011 at 'AA';
--\\$27.2 million (metro garage projects) lease revenue bonds, series 2011 at 'AA'.

The Rating Outlook is Stable.

SECURITY

The GOs are payable from the full faith, credit, and unlimited taxing power of Montgomery County.

The COPs, limited obligation certificates, lease obligations and lease revenue bonds are secured by payments subject to annual appropriation. A two-notch distinction is assigned where bondholder payments are not secured by a leasehold interest in essential governmental facilities. The series 2011 lease obligation (metrorail garage project) revenue bonds are secured by the county's obligation to replenish any reserve fund deficiency.

KEY RATING DRIVERS

HEALTHY FINANCIAL FUNDAMENTALS: Montgomery County has a sophisticated management team that uses conservative budgeting and has established debt and reserve policies that have resulted in healthy reserve and liquidity levels.

SOLID OPERATING PERFORMANCE: Strong operating results in fiscals 2011 through 2014 have materially enhanced the county's reserve position. The county's multi-year financial plan shows a further strengthening of reserves.

BALANCED FISCAL PLAN: The county has adopted a multi-year fiscal plan that balances current resources against spending while addressing revenue challenges and moderating spending.

STRONG ECONOMIC CORE: The stable regional economy is anchored by the extensive presence of the federal government and related contracting employment, marked by consistently low rates of unemployment, a highly skilled labor force, and very high income metrics.

MANAGABLE LONG-TERM LIABILITIES: Debt ratios are expected to remain at a moderate level despite some pressure from future bond issuance plans to fund the county's capital improvement program (CIP). The county has prudently managed its exposure to other long-term liabilities related to pension and OPEB.

REVENUE BOND RATING DISTINCTION: The ratings on the COPs and the limited obligation certificates are notched down from the county GO rating, reflecting risk to annual appropriation by the county. The differing ratings reflect the presence and essentiality of leased assets for various series of bonds as well as the value of the collateral relative to debt outstanding.

RATING SENSITIVITIES

SOUND CREDIT PROFILE: The rating is sensitive to shifts in fundamental credit characteristics including the county's affordable debt profile, strong financial management practices, and diversified economy. The Stable Outlook reflects Fitch's expectation that such shifts are unlikely.

CREDIT PROFILE

Montgomery County borders Washington, D.C. and northern Virginia. The county's estimated 2014 population of 1,030,447 is a 6% increase over 2010.

SHARP IMPROVEMENT IN RESERVES

Sound fiscal management has led to four consecutive operating surpluses. Fiscal 2014 operating results were strong reflecting a \\$91 million operating surplus (3% of spending) mostly due to strong income tax revenue growth. The unrestricted balance totaled \\$385.6 million or 12.8% of spending.

The county's fund balance policy compares the sum of the revenue stabilization reserve and the unassigned portion of the general fund balance to adjusted governmental revenues. The county's charter requires a maximum general fund reserve equal to 5% of prior year revenue, while the county's fiscal policies require a building up of general fund and revenue stabilization fund reserves to 10% by fiscal 2020. The county's fiscal plan shows reserves reaching 10% by 2020.

FISCAL PLAN BALANCED OVERALL WITH SOME USE OF RESERVES

The county's fiscal plan for fiscals 2015-2021 is balanced over the long term and continues to add to reserves and maintains capital pay-go spending. Fiscal 2015 was originally budgeted with a \\$70 million deficit (to offset exceptional over-performance in fiscal 2014), although results now show a deficit of approximately \\$109.2 million. Contributing to the variance are higher than expected snow removal costs and income tax under-performance. Despite the higher-than-planned use of reserves, fund balance will remain healthy.

The adopted \\$4.5 billion fiscal 2016 budget is 3.4% over fiscal 2015, adds \\$2.2 million to fund balance and increases the tax rate above the constant yield rate but below the rate of inflation. According to the county's charter the county cannot take in an amount of real property tax revenue for a given year that exceeds the rate of inflation plus the value of new construction without the unanimous vote of the council.

According to the fiscal plan, spending growth is held to just 2.1% in fiscal 2017 which reflects slower income tax revenue mostly due to the Wynne case decision that requires the county to reimburse approximately \\$135.7 million in income tax revenue beginning in November 2016 over nine equal installments. In response, the county prudently implemented a \\$54 million savings plan. The county expects to absorb the remaining reimbursement costs with growth in revenues.

ECONOMIC PERFORMANCE REMAINS VERY STRONG

Montgomery County continues to exhibit a very impressive economic profile. The county has gained employment each year between 2010 and 2014, although growth slowed to just 0.2% in 2014. However, the unemployment rate as of August 2015 is low at 3.8%, well below those of the U.S. (5.1%) and Maryland (5.1%).

The county remains one of the wealthiest in the country with per capita money income and median household income at 166%-182% of the national benchmark. Favorable wealth characteristics are fueled by the highly educated workforce (almost 57% of the adult-aged population holds a bachelor's degree or higher compared to 29% for the nation) and the significant presence of the U.S. government and contractors within the information and intelligence, biotechnology, and high-tech manufacturing industries.

Federal government employment is led by the U.S. Department of Health and Human Services (28,500 employees) and U.S. Department of Defense (DoD; 12,000 employees). Concerns with respect to budget cuts at the DoD are somewhat tempered by the nature of defense operations within the county, which center on the Walter Reed National Military Medical Center and the U.S. Army Research Laboratory. A new \\$300 million federal intelligence campus was completed in October serving as home to 3,000 employees of the Office of the Director of National Intelligence.

DEBT TO REMAIN AFFORDABLE DESPITE SIZABLE ANNUAL ISSUANCES

Debt ratios are favorable at \\$3,454 per capita or a low 2% of market value. Debt service accounted for a low 7.5% of fiscal 2014 total governmental spending. Amortization is rapid at 66% in 10 years. The 2015-2020 capital improvement plan totals \\$4.6 billion. Additional debt is expected to fund \\$2.3 billion of the plan while general fund revenues account for \\$300 million.

Other long-term obligations related to pensions and OPEB are moderate and well managed. The county's defined benefit pension plan is funded at 84.2%, or an estimated 80% (adjusted by Fitch to assume a 7% investment rate of return) and the Fitch-adjusted estimate of unfunded actuarial accrued liability of \\$843 million is equal to approximately 0.3% of market value.

The county's pension contribution for fiscal 2014 totaled \\$144.7 million or approximately 3.5% of governmental fund spending. The defined benefit pension plan was closed to new non-public-safety hires on Oct. 1, 1994.

The county established a trust to begin prefunding its OPEB costs in 2007, which Fitch views as a credit positive. OPEB costs accounted for 2.6% of total governmental spending in fiscal 2014 or 110% of the ARC. As of the June 2014 valuation date, OPEB was 19.3% funded. Carrying costs for debt service, pension (including teachers' pension costs) and OPEB totaled a low 15% of fiscal 2014 governmental fund spending.