Fitch Ratings has assigned a 'AAA' rating to the following general
obligation (GO) bonds of Calvert County, Maryland (the county):
--$46.8 million consolidated public improvement and refunding GO bonds,
2016 series.
The bonds are expected to sell via competition on July 19. Bonds
proceeds will be used to fund various school and public improvement
projects and to advance refund the county's outstanding series 2008 and
2009 GO bonds for debt service savings.
In addition, Fitch affirms the following county ratings at 'AAA':
--Issuer Default Rating (IDR);
--$120.2 million of outstanding GO
bonds.
The Rating Outlook is Stable.
SECURITY
The bonds are general obligations of the county backed by
a pledge of its full faith, credit and unlimited taxing power.
KEY RATING DRIVERS
Fitch expects the county to maintain a healthy level of reserves despite
multiple years of planned drawdowns for capital and operations. High
budgetary flexibility is highlighted by ample revenue raising capacity
and strong budget management during the downturn. The long-term
liability burden will remain low.
Economic Resource Base
Calvert County is located in southern
Maryland approximately 42 miles southeast of Washington D.C. and 64
miles south of Baltimore. The county is located on a peninsula bound on
the east by the Chesapeake Bay and on the west by the Patuxent River
with 110 miles of shoreline. The estimated 2015 population is 90,595.
Revenue Framework: 'aaa' factor assessment
Revenues have grown
ahead of national economic expansion with very minimal tax rate
increase. Property taxes are not subject to a cap, providing significant
revenue raising flexibility.
Expenditure Framework: 'aa' factor assessment
Education drives the
county's spending needs and reduction requires approval from the state.
As such, the county's ability to make spending cuts when needed is
somewhat limited. Carrying costs related to debt and pensions are low.
Education spending has grown despite decreased enrollment over the last
decade due to increased mandates from the state.
Long-Term Liability Burden: 'aaa' factor assessment
The county's
liability burden is low. Future debt needs are manageable, and
amortization of existing debt is rapid.
Operating Performance: 'aaa' factor assessment
The county has
consistently maintained fund balances above their conservative reserve
stabilization policy through strong revenue performance, prudent
expenditure management and continued monitoring of annual multi-year
forecasts.
RATING SENSITIVITIES
FINANCIAL FLEXIBILITY: The rating is sensitive
to the county's demonstrated ability to maintain a high level of
financial flexibility, including satisfactory reserves.
CREDIT PROFILE
Calvert County's unemployment rate was 3.7% in May 2016 and benefits
from the proximity to larger regional employment centers in Washington
D.C. and Baltimore. Per capita personal income is on par with the state
and 12% above the national level. Approximately 63% of the county
workforce commutes outside its boundaries as the county is a rural
community with limited economic activity inside it beyond the two
largest private sector employers. These two large employers, Exelon's
Calvert Cliffs nuclear power plant and Dominion's Cove Point liquefied
natural gas (LNG) facility, account for 16% of the county's property tax
base. Dominion is just over halfway through a $3.8 billion expansion
(the largest private project in Maryland's history) to add an exporting
terminal to its plant that comes online in fiscal 2018 and will add 140
jobs.
Revenue Framework
Property taxes are the largest revenue source for
the county at 60% of general fund revenues followed by income taxes at
31%. Taxable assessed values (TAV) are well below the pre-recession peak
of fiscal 2010; however, the fiscal 2017 budget projects a third
consecutive TAV increase based on the rolling three-year reassessment
cycle and new construction. Income tax revenues in fiscal 2016 are
projected to increase for the sixth consecutive year.
Exelon accounted for approximately 10% of fiscal 2015 general fund
revenues ,and Dominion's Cove Point project will begin generating PILOT
payments in fiscal 2018; the first of which is $40 million or 15% of
fiscal 2015 general fund revenue adding to concentrated revenue sources.
Dominion's significant capital investment along with the project's
long-term contracts and the county's legal ability to raise property tax
revenues somewhat offset concern over the increased revenue
concentration.
The county's revenue performance net of tax policy changes over the last
decade was ahead of both inflation and national economic expansion.
Fitch expects future revenue growth to continue to exceed national
expansion based on continued economic developments in assessed values
and stable income growth.
Property tax revenues are not subject to a cap, and the tax rate is
below average for the state. The property tax rate in the adopted fiscal
2017 budget is the first increase since 1987 at 9.52 mills for an
increase of 6 cents or 7%. The income tax rate in the adopted fiscal
2017 rate was also increased, from 2.8% to 3%, and remains under the
3.2% income tax rate limit in Maryland.
Expenditure Framework
The county's primary general fund expenditure
is education at just over half of spending, followed by public safety at
13%.
Spending is expected to continue to increase in line with revenue
growth. The primary driver for the growing expenditures is the county's
education spending. Despite decreased school enrollment in nine of the
last 10 years, school spending increased significantly over the past
decade due to increases in health insurance costs and changes at the
state level that require the county to begin funding teacher pensions.
Fitch expects the trend of increased school funding to continue due to
the expectation for slight enrollment growth, the return of step
increases that were postponed throughout the downturn, and the full
funding of teacher pensions required in fiscal 2017.
There were no layoffs or furloughs during the recession, but the county
did require departmental budget cuts. While county employees do not have
union representation, the state's maintenance of effort mandate
stipulates education spending cannot decline year-over-year without
state approval. The county has begun using a service based budget to
further manage and identify remaining expenditure flexibility outside
the state mandated education expenses and that which would otherwise
require service disruption to cut.
Fitch estimates the county's fixed carrying costs (debt service, other
post-employment benefits (OPEB), and pension actuarially-required
contributions) are a low 9.6% of spending. The county in fiscal 2015
made pension and OPEB contributions for the school board (a component
unit of the county) of $3.6 million and $7.7 million, respectively, or
an additional 4.3% of spending.
Long-Term Liability Burden
The county's long-term liability burden
is low at 3.8% of personal income and is primarily debt. The county
aggressively repays its outstanding debt with 80% retired within 10
years, leaving ample capacity to fund future borrowing needs. The
county's fiscal 2017-2022 capital plan totals $240 million of which half
is funded with bonds. Fitch expects currently low debt levels to
increase moderately but remain low relative to personal income.
The county manages three single-employer defined benefit pension plans:
one for general employees; another for the sheriff's department; and a
third, smaller plan for the volunteer firefighters. The pension plan for
general employees was closed in 1999 when new employees were moved to a
defined contribution plan. The funded status of the pension plans on a
combined basis is 86% as reported by the county and slightly less at 80%
when calculated using a 7% rate of return assumption for plan assets.
The combined net pension liability is very small at less than 1% of
personal income.
The Board of Education of Calvert County, a component unit of the county
with no taxing power, maintains pensions and OPEB plans for employees.
The school board reported an $11.3 million (less than 1% of personal
income) proportionate share of the net pension liability for the
cost-sharing multiple employer plan managed by the state. In addition,
the OPEB liability for the school board totals $211.8 million (4.4% of
personal income) and has doubled since fiscal 2011.
Operating Performance
The county's strong financial resilience is
based on Fitch's expectation that the county could use a combination of
solid budget flexibility and large reserves to offset recessionary
revenue declines. Fitch expects the county would maintain reserves above
their reserve stabilization policy level at 8% of the operating budget
during a downturn. In recent years, the county chose to spend down some
of their excess reserves in expectation of significant PILOT revenues
beginning in fiscal 2018 from the Dominion (IDR 'BBB+') expansion
project. Dominion's construction is at or ahead of schedule for
completion in fiscal 2018 at which time project revenues will average
$50 million annually (about 20% of fiscal 2015 revenues) for the life of
the 15-year agreement. Dominion's exporting contracts are fully
subscribed at capacity in fixed 20-year contracts with investment-grade
counterparties (see Fitch's May 2016 press release, 'Fitch Upgrades
Dominion Resources' Remarketed Junior Sub Notes Rating to 'BBB'').
The county's strong commitment to financial flexibility is demonstrated
by efforts to control costs, increase revenues and produce comprehensive
annual multi-year forecasts. It deferred some capital needs and borrowed
for others during the continued slow economic recovery in the county
without deferring pension spending or any major budget decisions that
would create future obligations.
The county's multi-year forecasts show previously postponed
non-recurring expenditures such as contributions to the OPEB trust and
transfers to the capital fund increase upon receipt of Dominion PILOT
payments.
Fiscal 2015 ended with a general fund deficit of almost $8 million or
3.3% of spending and was larger than originally budgeted based on slower
than expected income tax revenue. Unrestricted general fund reserves
remained healthy at $44.9 million or 18.8% of spending. Year-to-date
estimates for fiscal 2016 show a deficit of $5.6 million, as the
original budget estimated. The deficit includes a $3.3 million operating
deficit as well as approximately $2.3 million in pay-go capital
spending. The unrestricted balance is expected to remain sound at $40.5
million or 16.9% of spending, well above the level Fitch considers
adequate for a 'aaa' financial resilience assessment. The county
indicates balanced budgets will be the policy going forward and adopted
the fiscal 2017 with no use of fund balance.
Additional information is available at 'www.fitchratings.com'.
In addition to the sources of information identified in Fitch's
applicable criteria specified below, this action was informed by
information from Lumesis and InvestorTools.
Applicable Criteria
U.S. Tax-Supported Rating Criteria (pub. 18 Apr
2016)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=879478
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1008650
Solicitation
Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1008650
Endorsement
Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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