OREANDA-NEWS. Fitch Ratings assigns an 'AA' rating to the following revenue bonds of Montgomery County, Maryland (the county):

--$41.47 million water quality protection charge revenue bonds, series 2016.

The bonds will be sold via competitive sale on March 30. Proceeds will finance various stormwater related capital improvement projects.

In addition, Fitch affirms the following ratings:

--$34.3 million water quality protection charge revenue bonds, series 2012A.

The Rating Outlook is Stable.

SECURITY

The bonds are special limited obligations of the county payable from a net revenue pledge of its water quality protection charge (WQPC) assessed against all residential and certain non-residential property within the county based on the amount of square feet of roof, driveway, sidewalk and other fixtures or structures impenetrable by water, and other revenue of the county, including a carryout bag tax, assessed at the rate of $0.05 on each customer for each carryout bag that a retail establishment provides to the customer, of which $0.01 is retained by the retailer as an administrative fee. A cash-funded debt service reserve is sized at the lesser of maximum annual debt service, 125% of average annual debt service, or 10% of proceeds.

KEY RATING DRIVERS

STABLE REVENUE PERFORMANCE ANTICIPATED: The WQPC is included as a line item on annual property tax bills, enforceable through a tax lien process in the same manner as real property taxes. Historical collection rates are exceptional, and revenue from the WQPC is restricted to stormwater management purposes.

ADDITIONAL LEVERAGING & MODEST COVERAGE PROJECTED: The county plans to sell up to $293 million in parity bonds through fiscal 2020 according to the $381 million CIP. The county's policy is to manage debt service coverage to a target of 1.25x, although the rate covenant requires a more lenient 1.15x threshold.

WQPC SET BY COUNTY COUNCIL: The WQPC rate is established annually by resolution of the county council and is unlimited as to rate or amount. The county council frequently has approved increases in the WQPC rate in support of its stormwater management program.

FINANCIAL MANAGEMENT STRENGTH: The limited and flexible scope of operations support a risk adverse operating environment which is managed by a department of Montgomery County (ULTOGO rated 'AAA'/Stable Outlook by Fitch).

EXCELLENT ECONOMIC UNDERPINNINGS: Expectations for stable revenue performance are further supported by a very stable regional economy anchored by the extensive presence of the federal government and related contracting employment, and marked by consistently low rates of unemployment, a highly skilled labor force, and very high income metrics.

RATING SENSITIVITIES

MAINTENANCE OF FINANCIAL PERFORMANCE: Significant leveraging beyond expectations or financial decline could pressure the rating, but given the county's strong financial planning Fitch views this as unlikely.

CREDIT PROFILE

Montgomery County borders Washington, D.C. and northern Virginia. The county's population increased 11% in the last decade, and the estimated 2013 population of 1,016,677 is a 5% increase since 2010.

The WQPC was first implemented in 2002 to provide funds for the inspection and maintenance of residential and certain non-residential stormwater facilities and associated operating expenses. In 2013 (effective 2014) the WQPC rate structure was revised to broaden the non-residential base and create tiered structures for residential and 501(C)(3) entities. The charge is based on the median amount of impervious surface area for a single-family dwelling in order to capture its actual contribution to stormwater runoff.

WQPC LIEN PARITY WITH REAL PROPERTY TAXES

The WQPC is set by resolution of the county council and is not subject to charter or statutory restriction as to rate or amount.

Property tax bills are generally payable on a semi-annual schedule, due on Sept. 30 and Dec. 31 (the bonds have debt service payment dates of April 1 and Oct. 1). Unpaid charges become a lien against the property with the same priority as a lien imposed for non-payment of real property taxes, which Fitch considers a strong incentive for timely collection. The property owner does not have the ability to selectively choose which portions of the property tax bill to pay.

SATISFACTORY COVERAGE; RATE INCREASES ANTICIPATED

WQPC revenues account for 92% of fiscal 2015 total revenues and bag tax 8%. The county council has increased the WQPC on seven occasions since its inception, from a rate of $12.75 per equivalent residential unit (ERU) to $92.60 per ERU effective July 1, 2013. The rate was lowered for fiscal 2014 to $88.40 per ERU and has remained unchanged. Relative to the overall tax rate bill, the charge represents only 2.5% of an average single-family consolidated property tax bill.

Fiscal 2015 ended with strong MADS coverage of 3.1x up from 2.5x the prior year. The increase in coverage was mainly due to the change in the WQPC rate structure to a tier structure from a flat rate. Estimated actual results for year-end fiscal 2016 have coverage remaining strong at 3.89x.

The county's rate model forecasts an increase in the WQPC to $121 by fiscal 2020 and reflects the issuance of up to $65 million in bonds to fund the stormwater management CIP while maintaining coverage above 1.3x. Cash also remains strong at between 90 and 150 days cash on hand. The CIP includes the projects the county must undertake to meet the requirements under the Municipal Separate Storm Sewer System permit (MS4 permit) issued on Feb. 16, 2010 by the Maryland Department of the Environment.

The forecast assumes an annual reduction in bag tax revenues, which reflects the reasonable assumption that consumers will respond to the tax by increasing their utilization of reusable bags. The rate model does not assume growth in the number of ERUs.

MODEST COVERAGE REQUIREMENTS OFFSET BY REVENUE STABILITY

The county has covenanted in the trust indenture to impose the WQPC at a rate that results in lenient 1.15x coverage of annual debt service after the payment of operating expenses of the county's stormwater management facilities. The county's current policy is to assess the WQPC in order to generate a slightly higher debt service coverage ratio of 1.25x. The additional bonds test also imposes a 1.15x coverage threshold on a net basis.

Mitigating this risk are the very stable and predictable nature of the WQPC based on its strong collection enforcement mechanism, very high historical collection rates (99.8% in 2014 and 99.6% in 2015), independent rate setting authority vested in the county council, and the diverse nature of the WQPC base (the 10 largest property owners paying the WQPC comprise only 2.2% of fiscal 2015 WQPC receipts).

ECONOMIC PERFORMANCE REMAINS VERY STRONG

Montgomery County borders Washington, D.C. and northern Virginia, and its wealthy suburban economy is fueled by the large U.S. government presence, with depth and diversity added by a strong and expanding biotechnology sector. Leading private employers include Adventist Healthcare (4,800), Lockheed Martin corp. (3,000) and Marriott International (4,600).

The rate of job growth within the county has not been robust, but it has been steady. The county's unemployment rate historically has been well below state and national averages. The county's unemployment rate remains a very low 3.3% as of December 2015 relative to the state (4.7%) and U.S. (4.8%). The county's median household income and per capita money income are 166% and 145% of the national average, respectively.

Contact:

Primary Analyst
Evette Caze
Director
+1-212-908-0376
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004

Secondary Analyst
Michael Rinaldi
Senior Director
+1-212-908-0833

Committee Chairperson
Arlene Bohner
Senior Director
+1-212-908-0554

Media Relations: Elizabeth Fogerty, New York, Tel: +1 (212) 908 0526, Email: elizabeth.fogerty@fitchratings.com.

Additional information is available at 'www.fitchratings.com'.

Fitch recently published exposure drafts of state and local government tax-supported criteria (Exposure Draft: U.S. Tax-Supported Rating Criteria, dated Sept. 10, 2015 and Exposure Draft: Incorporating Enhanced Recovery Prospects into U.S. Local Tax-Supported Ratings). The drafts include a number of proposed revisions to existing criteria. If applied in the proposed form, Fitch estimates the revised criteria would result in changes to less than 10% of existing tax-supported ratings. Fitch expects that final criteria will be approved and published in the beginning of the second quarter of 2016. Once approved, the criteria will be applied immediately to any new issue and surveillance rating review. Fitch anticipates the criteria to be applied to all ratings that fall under the criteria within a 12-month period from the final approval date.

Applicable Criteria
Exposure Draft: Incorporating Enhanced Recovery Prospects into US Local Tax-Supported Ratings (pub. 02 Feb 2016)
Exposure Draft: U.S. Tax-Supported Rating Criteria (pub. 10 Sep 2015)
Tax-Supported Rating Criteria (pub. 14 Aug 2012)
U.S. Local Government Tax-Supported Rating Criteria (pub. 14 Aug 2012)

Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
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