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Fitch Rates Wicomico County, MD's GOs 'AA-'; Outlook Stable

Monday, September 30, 2013 4:15 PM


Fitch Rates Wicomico County, MD's GOs 'AA-'; Outlook Stable

Fitch Ratings has assigned an 'AA-' rating to the following general obligation (GO) bonds of Wicomico County, Maryland (the county):

--$12.5 million general obligation public improvement bonds of 2013.

The bonds are expected to be sold via a competitive sale on October 15. Proceeds will be used to finance the construction of the Bennett Middle School and renovation of the Parkside High School.

In addition, Fitch affirms the following ratings:

--$94.3 million of outstanding GO bonds at 'AA-'.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by the full faith, credit, and taxing power, subject to constraints set forth in the county charter. Revenues derived from taxes on properties shall not increase, compared with the previous year, by more than 2%, or by the consumer price index for all urban consumers, whichever is lesser. New construction and funding the local board of education's budget are not subject to the charter limitations.

KEY RATING DRIVERS

STRONG FISCAL MANAGEMENT: Timely revenue enhancements and conservative budgeting has resulted in positive operating results, ample reserve levels and strong liquidity.

BELOW AVERAGE ECONOMIC PROFILE: The county is the economic and commercial center for the lower eastern shore region of Maryland, however, key economic metrics remain stressed and below state and national norms.

DEBT BURDEN EXPECTED TO REMAIN LOW: Overall debt levels are low, amortization of principal is rapid, and county officials prudently analyze capital needs alongside debt affordability.

RATING SENSITIVITIES

CONTINUED STRONG FINANCIAL POSITION: The rating is sensitive to shifts in fundamental credit characteristics including the county's strong financial management practices. The Stable Outlook reflects Fitch's expectation that such shifts are unlikely.

CREDIT PROFILE

The county is located on the Delmarva Peninsula in southeastern Maryland and had an estimated 2012 population of 100,641.

CONSERVATIVE BUDGETING & REVENUE ENHANCEMENTS LEAD TO OPERATING SURPLUSES

In fiscal 2012 the county prudently increased the property tax rate and continued to make expenditure reductions to offset revenue pressures stemming from ongoing decline in taxable assessed value (TAV). As a result, the county realized a notable $8.1 million (7.7% of spending) operating surplus after transfers, increasing the unrestricted balance to $37 million or an ample 35.1% of general fund spending. The rainy day fund, which is included in the unrestricted balance, remains funded at the policy level, equal to 5% of the general fund budget (or $5.8 million).

Officials expect to increase the county's financial cushion in fiscal 2013 with a $2.8 million surplus (2.5% of spending), which would mark the third consecutive year of positive year-end results. Favorable operations are due to conservative budgeting and revenue enhancements made during the budgeting process.

DIVERSE REVENUE STREAM

The county derives the majority of its revenues from property taxes (52%). A charter imposed revenue limit, approved by county voters and effective in fiscal 2002, constrains the county's property tax revenue growth to the lesser of the CPI or 2%, new construction and funding the local board of education's budget are not subject to the charter limitations The county increased the property tax rate in fiscal 2013 and 2014 to the maximum rate allowable under the charter.

Income tax revenue accounts for 37% of revenues. Income tax revenues show a positive trend over the past three fiscal years, but estimated year fiscal 2013 results show a 3% decline due to an over-distribution in fiscal 2012 from the state and continued strained economic conditions. Fitch notes the county implemented a mid-year increase to the income tax rate to the maximum rate of 3.2% on January 1, 2013.

The county reports that it retains options to raise revenue, which includes increasing the recordation tax rate, imposing a transfer tax, increasing fees and/or increasing the real property tax rate for education funding, which accounts for the bulk of general fund spending at approximately 40% (education funding is not subject to the revenue cap). Despite recent increases to the property tax rate, rates remain competitive.

FISCAL 2014 BUDGET BALANCED

The 2014 budget reflects a 9% increase ($11 million) in expenditures year-over-year. To fund the increase the county again increased the real property tax rate to the maximum rate allowed under the charter and increased the appropriated fund balance by $1.9 million. Also, the county will realize the full-year effect of the 0.1% income tax rate increase ($1.3 million). The budget also includes a $4.5 million increase in disparity grant moneys from the state.

The budget funds $8.5 million of one-time capital funding and other non-recurring expenses, which is a point of flexibility for future budgets, $1.3 million in increased funding for educational operations ($581,498 of the increase due to increase in the contribution to teacher pension costs), a $1.68 million increase to pension funding for county employees, and a 1.7% cost-of-living pay raise. Given the county's history of strong financial performance, Fitch expects operations to remain positive and reserves to remain ample.

ECONOMIC INDICATORS REMAIN WEAK

While agriculture, higher education and healthcare provide a solid foundation for the economy, socioeconomic indicators are weak. July employment is down 3.3% year-over-year, in contrast to the employment base of the state and nation which continues to grow. Further, the county's employment base remains about 7% below the pre-recession peak, trailing the rate of job recapture by the state and nation. The county's unemployment as of July 2013 was above average at 8.4%. Wealth indicators are fairly in line with national averages but are well below state averages driven by high wealth counties around the Washington D.C. area.

Total taxable value has declined 17% between fiscal 2012 and 2014. The statewide triennial assessment cycle creates a lag in realized TAV declines, and the county projects declines to continue through fiscal 2017.

FAVORABLE DEBT PROFILE

Overall debt levels are low at roughly $1,106 per capita and 1.7% of market value, and amortization is rapid at approximately 69% in 10 years. Debt servicing costs are low at 5.3% of total governmental spending.

The county's fiscal years 2014-2018 capital improvement plan totals $258.8 million, including the current issuance. Additional debt plans are modest at $22 million and pay-go funding totals $13.2 million. State and federal moneys fund about 51% of the plan while $68 million of the plan is currently unfunded. The majority of the plan (82%) funds school projects and public safety (10%).

PENSION & OPEB LIABILITIES REMAIN WELL FUNDED

The county provides a single employer retirement system which remains very well-funded at 85.4% (adjusted by Fitch to a 7% investment rate of return (IRR) from 7.75%). Importantly the county has restored its funding support for the pension plan, following several years of contributions that were significantly lower than the actuarial required contribution (ARC). The county funded 95% and 117% of the ARC in fiscal 2013 and 2014 respectively.

The 2013 budget includes a $3.65 million contribution to other post-employment benefits (OPEB), which represents 127% of the ARC. As of June 2013 the funded ratio was 30% and the trust balance totaled $46 million as of June 30, 2012. The UAAL of $22.8 million accounts for less than half a percent of market value. Pension and OPEB costs accounts for a low 5% of total 2013 budgeted governmental spending.

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

In addition to the sources of information identified in Fitch's Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope, University Financial Associates, S&P/Case-Shiller Home Price Index, IHS Global Insight, National Association of Realtors, Maryland Department of Labor, Licensing and Regulation, and Maryland Department of Business and Economic Development.

Applicable Criteria and Related Research:

--'Tax-Supported Rating Criteria' (Aug. 14, 2012);

--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 14, 2012).

Applicable Criteria and Related Research:

Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015

U.S. Local Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=803658

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(Source: Business Wire )
(Source: Quotemedia)

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