Fitch Rates Baltimore County, MD GOs 'AAA'; BANs 'F1+'; Outlook Stable

Fitch Ratings has assigned the following ratings to Baltimore County, Maryland (the county) general obligation (GO) bonds and bond anticipation notes (BANs):

--$60 million metropolitan district bonds (76th issue), 'AAA';

--$140 million consolidated public improvement bonds - 2014 series, 'AAA';

--$84 million metropolitan district BANs - 2014 series, 'F1+';

--$116 million consolidated public improvement BANs - 2014 series, 'F1+'.

The bonds will redeem the metropolitan district and Baltimore county consolidated public improvement BANs 2013 series.

The GO BANs are being issued for the purpose of providing interim funding for the county's capital program. The bonds and BANs are scheduled to sell competitively on Jan. 30, 2014.

In addition, Fitch affirms the following ratings:

--$2.1 billion outstanding GO bonds at 'AAA';

--$117.9 million outstanding lease obligations at 'AA+';

--$200 million BANs at 'F1+'.

The Rating Outlook is Stable.

SECURITY

The bonds and BANs are secured by the county's pledge of its full faith and credit and its unlimited taxing power. The principal source of repayment for the BANs will be proceeds from the sale of additional BANs or bonds. The principal source of repayment for the metropolitan district bonds will be special assessments and charges levied against all property in the metropolitan district.

KEY RATING DRIVERS

CONSIDERABLE ECONOMIC BASE: The broad and diverse economy benefits from the presence of federal installations, health care, financial services, and higher education. Highly structured development efforts, focusing on growth management and collaboration with surrounding jurisdictions, underscore excellent prospects for continued expansion.

HISTORICALLY STRONG FISCAL MANAGEMENT: Prudent management decisions and adherence to fiscal policies has helped maintain solid reserve levels.

FAVORABLE DEBT POSITION: Debts ratios are expected to remain moderate as future debt plans are affordable and principal amortization rates are average.

APPROPRIATION RISK AND ASSET ESSENTIALITY: The ratings for the lease obligations reflect appropriation risk and the essential nature of the assets subject to lien.

STRONG MARKET ACCESS: The 'F1+' short-term rating reflects the county's strong overall credit characteristics and expected market access.

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 'AAA' rating and Stable Outlook reflects Fitch's expectation that such shifts are unlikely.

CREDIT PROFILE

Baltimore County, with its population of 817,455, covers 612 square miles and surrounds the independent city of Baltimore.

DIVERSE AND ROBUST ECONOMY

The employment base is broad and deep, consisting of over 20,000 companies. Federal installations, health care, financial services, and higher education predominate, with skilled manufacturing and technology becoming a growing sector and major focus of economic development. The county is home to several government agencies including the Social Security Administration and Medicare and Medicaid Services, which combined employ 16,000 people. However, federal employment represents only 5% of the total employment base limiting its exposure to any potential federal downsizing.

Residential unemployment (6.4% in November 2013) compares favorably with that of the U.S. (6.6%) although slightly exceeds the state average (6.0%). Wealth indicators are around those of the affluent region and state, but are well above the U.S. average.

Population growth is directed towards two areas anchored by major transportation networks, and preliminary engineering studies have begun for construction of a new light rail line to connect with existing regional rail lines. Fitch believes intermediate and long-range overall economic growth prospects are strong.

STRONG FISCAL MANAGEMENT MARKED BY HEALTHY RESERVES

Financial operations are strong and reserve levels are expected to remain healthy, based on year-to-date fiscal 2014 performance. Positive fiscal year-end 2013 results reflected a third consecutive year of growth in income tax revenue, the county's second largest revenue source at 30% of general fund revenues. The unrestricted general fund balance increased to $386.2 million or a healthy 19% of general fund spending and transfers out, resulting from a $59.9 million operating surplus (2.9% of spending). No drawdown of the $49.6 million in fund balance conservatively budgeted was necessary.

The unassigned portion of the unrestricted fund balance includes the county's revenue stabilization reserve equal to $85 million or 4% of spending (or 5% of revenues which is at the county's minimum 5% reserve policy). Management's fiscal projections for the next five-years demonstrate compliance with this target and Fitch believes such projections to be reasonable based on the county's conservative budgeting practices and current level of reserves above its target.

The fiscal year 2014 general fund budget is 4% ($67 million) more than the fiscal year 2013 budget and includes a $39.5 million fund balance appropriation. The budget funds a $12.6 million increase for pay-as-you-go capital, $22.6 million in education, $11.5 million in additional debt servicing costs and $8.6 million in additional costs for healthcare. According to current projections, reserves are expected to decline by approximately $10 million to fund capital projects. Reserves are expected to remain in compliance with policy levels.

DEBT PROFILE EXPECTED TO REMAIN MODERATE

Future capital needs are substantial but manageable. Overall tax-supported debt ratios are moderately low at $2,225 per capita and 2.3% of market value. Including metropolitan district debt, which is paid from rates and charges, debt ratios increase to $3,196 per capita and 3.2% of full value. Amortization of total debt is average at 56% within 10 years and debt servicing costs are low at 4% of total governmental spending.

While historically operating revenues have been sufficient to cover operating expenses and debt service, over the past two years the district has been utilizing enterprise fund balance to pay a portion of debt service while keeping rates unchanged. As of fiscal year-end 2013 cash on hand totaled over six months of operations.

The county's capital budget and program for fiscal years 2015-2019 is $1.6 billion. The county's policy is to maintain up to 20% of outstanding debt in variable rate debt through the county's commercial paper (CP) program.

The county has traditionally funded a portion of its capital needs through the issuance of CP which is subsequently refinanced through the issuance of long-term debt. The total CP position is $200 million, the maximum principal amount that is supported by the current liquidity provider, Mizuho Bank. This CP position will result in a variable rate debt position equal to 7.6% of total debt, a level that Fitch considers appropriate for such a highly rated credit.

MANAGEABLE PENSION AND OPEB COSTS

The county is one of five local entities participating in a cost-sharing multiple employer pension and other post-employment benefit (OPEB) plan. The county pays 100% of its pension actuarially required contribution (ARC), equivalent to a low 3.7% of audited fiscal 2013 spending. The plan is adequately funded at an estimated 76.6% as of June 30, 2012, using Fitch's standard 7% rate of return.

Beginning fiscal 2013, teachers' pension costs were shifted to local governments over a four-year period. The state is offsetting the majority of the costs with increases in various revenue streams such as income tax, indemnity mortgage recordation tax and local income reserve relief. The net impact to the county for fiscal 2013 was a minimal $2.6 million, which is expected to grow to $8.3 million (less than 1% of the budget) for fiscal 2016, the final phase-in year.

The county administers an OPEB trust fund that provides benefits for its retirees. As of June 30, 2013, the county maintained a funded ratio of 13.6% based on actuarial asset values of $232 million and an accrued liability of $1.7 billion. Management has made a commitment to increase its annual OPEB funding in order to meet its ARC by fiscal 2015. The county budgeted $109.7 million towards OPEB in fiscal 2014, an increase of $17.6 million from the prior year, which equals 95% of the projected $116.1 million ARC. Fitch believes the budgeted increase this year and commitment to meet its ARC over time are credit positives. Total carrying costs are low at 9.8% of total 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, Real Estate Business Intelligence.

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=816976

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