Sept 27 - Fitch Ratings has assigned a rating of ‘AAA’ to the following general obligation (GO) bonds of Montgomery County, Maryland (the county): --$295 million consolidated public improvement bonds of 2012, series A; --Approximately $24 million consolidated public improvement refunding bonds of 2012, series B. The bonds are scheduled for competitive sale on October 10. Proceeds of the series A bonds will finance various capital projects in the county, and the proceeds of the series B bonds will be used to refund for debt service savings certain of the county’s GO bonds and certain lease revenue bonds issued by the Maryland Economic Development Corporation on behalf of the county. In addition, Fitch affirms the ‘AAA’ rating on approximately $2.1 billion of outstanding GO bonds. The Rating Outlook is Stable. SECURITY The bonds are GOs of the county secured by its full faith, credit, and unlimited taxing power. KEY RATING DRIVERS COMMITMENT TO RESERVE RESTORATION: Strong operating results were achieved in fiscal years 2011 and 2012 that materially enhance the county’s reserve position following sizable draws that occurred from fiscal years 2008-2010. BALANCED FISCAL PLAN: The county has adopted a multi-year fiscal plan that balances current resources against spending and continues to address other critical operating priorities relating to fund balance replenishment, pay-as-you-go capital, and other post-employment benefits (OPEB). Key revenue assumptions appear reasonable, and the forecast incorporates additional expenses related to increased teacher pension costs and maintenance of effort (MOE) funding requirements. EXCELLENT ECONOMIC UNDERPINNINGS: A very stable regional economy 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. DEBT REMAINS MODERATE: 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. CREDIT PROFILE ECONOMIC PERFORMANCE REMAINS VERY STRONG Montgomery County, which borders Washington, D.C. and northern Virginia, continues to exhibit a very impressive economic profile. Nearly 9,200 jobs have been created within the county over the prior 12 months as the county’s rate of unemployment improved to 5.2% in July compared to 8.6% for the U.S. 7.1% for Maryland. The county remains one of the wealthiest in the country with per capita money income and median household income 170%-180% of the national benchmark. Favorable wealth characteristics are fueled by the highly educated nature of the workforce (almost 57% of the adult-aged population hold a bachelor’s degree or higher compared to 28% 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 (29,700 employees) and U.S. Department of Defense (DoD; 12,690 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. The Walter Reed Army Medical Center was relocated from its prior location in Washington D.C. to the campus of the National Naval Medical Center in Bethesda in November 2011, a move that is expected to create 2,500 new jobs and significantly increase visitor and outpatient traffic to the facility (benefiting private enterprise). Fitch also notes that the National Capital Planning Commission has approved a plan to build a new federal intelligence campus in Montgomery County that will serve as home to 3,000 employees of the Office of the Director of National Intelligence, and notable investments for new facilities for the National Cancer Institute, Nuclear Regulatory Commission, and the National Institute of Allergy and Infectious Diseases. SHARP IMPROVEMENT IN RESERVES IN FISCAL YEARS 2011 AND 2012 The sum of the revenue stabilization fund and the unreserved or unrestricted general fund balance under GASB 54 (which includes the unassigned, assigned, and committed fund balance) increased by $289.2 million since fiscal 2010 to $403.8 million in fiscal 2012 (unaudited) or the equivalent of almost 15% of budgeted expenditures and transfers out. Fiscal 2012 operating results were particularly strong, adding $205.9 million to the revenue stabilization fund and unrestricted general fund balance. The county’s fiscal policy differs from Fitch’s standard measure of fund balance flexibility in that it compares the sum of the revenue stabilization fund and the unassigned portion of the general fund balance against revenues (Fitch measures the unrestricted fund balance against operating expenditures and transfers out). The county’s fiscal policies were enhanced in June 2010 requiring a minimum reserve equal to 5% of revenue building up to 10% by fiscal 2020 - unaudited fiscal 2012 results indicate a reserve level equal to 7.5% of revenue. FISCAL PLAN ADDRESSES KEY PRIORITIES The county’s fiscal plan for fiscal years 2013-2018 addresses a number of key initiatives. The fiscal plan matches recurring revenue against recurring spending, and while the fiscal 2013 budget does propose a modest use of existing reserves (for non-operating purposes) the county forecasts adding more than $135 million to the estimated fiscal 2012 revenue stabilization fund and unassigned fund balance during the fiscal plan period. The fiscal 2013 budget funds a total of $79.7 million in pay-as-you-go capital (increasing to $121.6 million by the end of the plan) restoring a source of future expenditure flexibility and softening demands on long-term debt issuance. The fiscal 2013 budget will dedicate $105.4 million to future OPEB costs - the county projects full funding of the actuarial required contribution for OPEB by fiscal 2015 at a cost of $171.9 million. Eligibility requirements and the cost-sharing formula for retiree health benefits were changed in 2011 which should help control OPEB costs over time. The fiscal plan also fully funds additional costs associated with legislation adopted by the state in 2012 related to MOE for the Montgomery County Public Schools (MCPS) and Montgomery College, and a shift in funding responsibility to the counties from the state for the normal cost for teacher pensions. The financial burden related to each is notably reduced from original estimates. Additional revenues are expected to offset most of the cost associated with the pension shift (the county estimates a net burden of approximately $10 million in fiscal 2016) and the county was able to re-establish its MOE level, eliminating an additional cost of $69.2 million in fiscal 2013 and $428.2 million over six years. REASONABLE REVENUE ASSUMPTIONS General fund revenue for fiscal 2013 is projected to increase a reasonable 2.8% over the prior year budget (or 1.1% over estimated fiscal 2012 revenue) and 2.9% on average through the fiscal 2013-2018 fiscal plan. Income taxes and property taxes, which collectively represent approximately 80% of general fund resources, are projected to increase by 3% and 1.8%, respectively, in fiscal 2013 over fiscal 2012 estimated receipts. Over the five-year forecast period income taxes increase at a compound annual growth rate of 4.1% and property taxes 3.2%. Income tax revenues are subject to a good deal of volatility related not only to changes in economic performance but also adjustments in the state distribution formula. Fiscal 2010 revenue fell by almost $250 million or 19% from the prior year followed by flat growth in fiscal 2011. Fiscal 2012 income tax revenues have rebounded strong to $1.23 billion, which is $188 million above the prior year and nearly $110 million above budget. Global Insight forecast personal income growth for the Washington-Arlington-Alexandria metropolitan statistical area (MSA) to average 4.9% annually from 2013-2016, which would bode well for future receipts. Property tax revenues for fiscal 2013 are budgeted at $26 million below the charter limit (growth in real property taxes is generally limited to increases in the Consumer Price Index, excluding new construction, unless approved by a unanimous vote of the council). The county’s fiscal plan assumes property taxes will be levied at the charter limit beginning in fiscal 2014. Growth in the county’s assessed value (AV) is assumed at 2.1% in fiscal 2014 and 2015 increasing to 6.3% by fiscal 2018. While Fitch generally believes there remains some potential for further price deterioration within the county and the broader MSA recent data suggests an improvement in the overall housing market. The Case-Shiller Home Price Index for the MSA increased 3.9% in June 2012 over the prior year, and the county reports a 1.5% increase in median home prices in fiscal 2012 and a decline in foreclosure activity to pre-recession levels. DEBT TO REMAIN AFFORDABLE DESPITE SIZABLE ANNUAL ISSUANCES Outstanding net direct and overlapping debt of almost $2.9 billion equates to $2,899 per capita or 1.6% of market value, while tax supported debt carrying charges are budgeted at near $300 million in fiscal 2013 or approximately 10.5% of spending. These key debt metrics are considered moderate by Fitch. Other long-term obligations related to pension and OPEB are moderate and well managed. The county’s defined benefit pension plan is satisfactorily funded at 72.6% (adjusted by Fitch to assume a 7% investment rate of return) and the Fitch-adjusted unfunded actuarial accrued liability of $1.08 billion is equal to 0.6% of market value. The county’s pension contribution for fiscal 2013 will total $95.3 million or 3.4% of spending. The pension plan was closed to new non-public safety hires on Oct. 1, 1994; this, and recent revisions affecting cost-of-living-adjustments and employee contribution rates reflect management’s commitment to pension cost control. The county established a trust to begin prefunding its OPEB costs in 2007. OPEB costs will equal less than 3% of the tax supported budget in fiscal 2013 and are projected by the county to remain less than 4% by the time the county ramps up to full funding of the OPEB actuarial required contribution in fiscal 2015.