Fitch Rates Harford County, MD's GO Bonds 'AAA'; Outlook Stable

--$40 million consolidated public improvement bonds, series 2016.

The proceeds of the bonds will be used to fund certain capital improvements for general county projects and water and sewer projects. The bonds will sell competitively on Jan. 26.

In addition, Fitch affirms the following ratings:

--Approximately $443 million in outstanding general obligation bonds (GOs) at 'AAA'.

The Rating Outlook is Stable.

SECURITY

The bonds are general obligations of the county, for the payment of which the full faith and credit and unlimited taxing power of the county are pledged.

KEY RATING DRIVERS

SATISFACTORY FINANCIAL PROFILE: Financial operations are characterized by a conservative approach to budget development, timely spending adjustments, and maintenance of reserves comfortably above the county's internal reserve policy equal to 5% of spending.

ECONOMY ANCHORED BY MILITARY PRESENCE: Historically low unemployment and above-average income indicators relative to the nation reflect the strength of the local labor force, and the county's favorable location along the Baltimore-Washington, D.C. corridor. The county is home to the U.S. Army's Aberdeen Proving Ground (APG) and a cluster of federal government and private contractor employers.

MODERATELY LOW DEBT PROFILE: Harford County continues to adhere to conservative debt management guidelines, which have allowed overall debt levels to remain low and amortization above average.

CARRYING COSTS ARE LOW: Carrying costs including debt service, pension and other post-employment benefits (OPEB) are low and expected to remain stable.

RATING SENSITIVITIES
EXISTING RESERVES PROVIDE A SOUND FINANCIAL CUSHION: The rating is sensitive to shifts in fundamental credit characteristics, including the county's strong financial management practices and healthy reserve levels. The Stable Outlook reflects Fitch's expectation that such shifts are unlikely over the next review cycle.

CREDIT PROFILE

The county is located 20 miles north of the city of Baltimore and abuts the Chesapeake Bay to the east. Three interstate highways (I-95, U.S. Route 40 and U.S. Route 1) and three rail lines (Amtrak, CSX and Maryland Rail Commuter) connect residents and businesses in the county with the U.S. Eastern Seaboard. The county's estimated 2014 population of 250,105 represents a 2.2% increase from the 2010 U.S. Census.

STRONG FISCAL MANAGEMENT MARKED BY HEALTHY RESERVE LEVELS

Fiscal 2015 ended with a general fund operating deficit after transfers of $643,000 (0.1% of spending), which compares favorably to a budgeted $2.3 million use of fund balance. The county's unrestricted fund balance remains healthy at approximately $65.2 million or 13% of spending.

The county adopted a budget for fiscal 2016 that was balanced with a $6.7 million fund balance appropriation. The 2.9% or $14 million year-over-year budget increase mostly funds a merit increase for all general government employees, the inclusion of the storm water management operating budget within the general fund and increased funding for education and teachers' pension costs. At mid-year, management is projecting a $455,000 operating surplus due to positive variances in income and property taxes and expenditure savings.

ADEQUATE REVENUE RAISING FLEXIBILITY

Typical of Maryland counties, property and income taxes produced approximately 51% and 41%, respectively, of fiscal 2015 general fund revenue. Following a decline in property tax revenues between fiscal 2012 and 2014, reflecting a decline in taxable assessed value, revenues increased in fiscal 2015 following a rebound in taxable base. Due to improvement in employment and the economy, income tax revenues have increased annually over the past five fiscal years. The county last increased the income tax rate to 3.06% in 2001, which compares to the 3.2% maximum rate allowed by state law. An increase to the maximum rate would generate approximately $8.7 million in additional revenue. The county is not subject to any limitation on its property tax rate or levy; however, the county last increased its tax rate in 1982 creating uncertainty as to the practical viability of a tax rate increase as a revenue raising option.

GROWING ECONOMIC BASE ANCHORED BY MILITARY PRESENCE

The APG is a 72,000-acre complex historically operated as a test and evaluation facility for the U.S. Army. APG has evolved considerably following the Base Realignment and Closure Act of 2005 (BRAC). The post is considered a 'megabase' by the U.S. Army, and a leader in science and technology, cyber-security, chemical and biological defense, and medical research for the joint services.

APG is by far the single most influential enterprise in the local economy. APG accounts for approximately $1.8 billion in economic activity within the state of Maryland and $1.1 billion within Harford and neighboring Cecil County, and there are approximately 22,000 military and civilian jobs on and off post (nearly double the figure prior to BRAC). According to the county, employment at APG is expected to remain flat through 2017.

The county's economic base continues to expand. During 2015, new and expanding businesses added approximately $33.3 million in capital investment or 370 new jobs.

Harford County's rate of unemployment as of November 2015 was 4.8% compared to 5.1% in Maryland and 4.8% nationally. The county's wealth levels are strong with personal income per capita and median household income at 123% and 148% of the national average.

FAVORABLE DEBT PROFILE

Harford County's prudent debt policies support a modest tax-supported debt burden. Overall debt equals just 1.6% of market value, or $1,916 per capita. Debt servicing costs accounted for a low 8.7% of total governmental spending in fiscal 2015. Amortization is rapid with 65% retired in 10 years.

Fitch expects the county's debt burden to remain low. The $416.5 million fiscal 2017-2021 capital improvement plan is notably lower than the previous $633.3 million plan which is reflective of the county's plan to move away from new projects and concentrate on existing infrastructure. The plan is nearly 41% GO tax-supported debt-funded and 23% pay-go funded. The additional debt is not expected to impact the debt burden given the rapid amortization of outstanding debt.

OTHER LONG-TERM LIABILITIES COSTS ARE LOW

Fitch does not expect long-term liabilities related to retirement benefits to pressure future operations. The county provides retirement benefits to its employees through the state plan, a single employer defined benefit plan, and a defined benefit length of service award to its volunteer firefighters to which it annually funds 100% of the actuarially-required contribution (ARC). As of July 1, 2015, the sheriffs' plan was 79.4% funded and the firefighters' plan was 76.6% funded. The aggregate unfunded actuarial accrued liability (UAAL) for these plans does not represent a material burden on the county's resource base at less than 1% of market value.

The funding for the state's pension obligations for state employees has begun to improve after a decade of weakening that resulted from an actuarial contribution methodology now being phased out and market losses in the last downturn. As of June 2015, the plan fiduciary net position as a percentage of the total pension liability was approximately 72%.
The county continues to prudently fully fund the ARC for OPEB; as of July 2015 the UAAL associated with OPEB totaled approximately $72.2 million or 0.2% of market value and obligations were 59% funded. Carrying costs for debt service, pension and OPEB totaled a manageable 13.4% of fiscal 2015 governmental fund spending.