Fitch Rates Prince George's County, MD's $177.4MM GOs 'AAA'; Outlook Stable

Fitch Ratings has assigned an 'AAA' rating to the following Prince George's County, Maryland (the county) general obligation (G0) bonds:

--$115.8 million consolidated public improvement bonds series 2016A;

--$61.6 million consolidated public improvement refunding bonds series 2016B.

The bonds are expected to sell competitively on June 7, 2015. Proceeds will be used to fund various capital projects as well as refund the series 2008 bonds.

In addition, Fitch affirms the following ratings:

--$1.4 billion of outstanding county LTGO bonds at 'AAA';

--$71.1 million of outstanding Maryland National Capital Park and Planning Commission (M-NCPPC) GO bonds at 'AAA';

--Issuer Default Rating (IDR) at 'AAA'.

SECURITY

The LTGOs are secured by the county's full faith and credit, subject to limitations of section 812 and 813 of the county charter. Section 812 limits the real property tax rate to $0.96 per $100 of assessed value (AV). Section 813 states that certain taxes and fees may not be increased without voter approval.

The M-NCPPC bonds are general obligations of both the commission and the county, to which the full faith and credit of each is pledged. The bonds are payable in the first instance from proceeds of limited annual ad valorem taxes that the county is required to levy in the Maryland-Washington Metropolitan District in the county (the metropolitan district) pursuant to state law.

KEY RATING DRIVERS

The 'AAA' rating reflects the county's strong economic underpinnings, solid gap-closing capacity and low long-term liability burden. A demonstrated capacity to absorb the constraints of a recessionary revenue environment while maintaining a healthy financial cushion further supports the assignment of an 'AAA' rating.

Economic Resource Base

The county's economic base benefits from its location adjacent to Washington, D.C. as well as its intrinsically broad commercial base. Vital governmental bureaus and higher education provide economic diversity and stability. The county's estimated 2015 population of 909,535 has increased 5.3% since 2010.

Revenue Framework: 'aaa' factor assessment

The property and income taxes that support the county's budget are expected to continue to yield moderate growth given positive housing value and construction prospects and strong income tax revenue growth. The county's independent legal ability to raise real property tax revenues is limited by county charter to $0.96 per $100 of AV. The rate can be exceeded for educational purposes by a majority vote of the county council and for any purpose by voter or state approval.

Expenditure Framework: 'aa' factor assessment

The county has the proven ability to reduce spending during an economic downturn. Fitch expects the natural pace of spending to grow in line with revenues over time.

Long-Term Liability Burden: 'aa' factor assessment

The county's combined debt and unfunded pension liability burden is low, but preliminary additional debt plans are large and could increase the county's debt ratios. The county is currently reviewing options to reduce the amount of debt needed to fund the plan.

Operating Performance: 'aaa' factor assessment

The county has maintained a healthy fund balance despite cost pressures and aggressive revenue budgeting. However, recent tax and fee increases, an improving economy and more conservative budgeting have brought operations back into balance.

RATING SENSITIVITIES

SOUND CREDIT PROFILE: The rating is sensitive to shifts in fundamental credit characteristics including the county's modest long-term liability burden, solid financial resilience, and diverse economy. The Stable Outlook reflects Fitch's expectation that such shifts are unlikely.

CREDIT PROFILE

The county's own broad commercial base complements Washington D.C.'s diverse employment opportunities. Within the county governmental bureaus and higher education, including Joint Base Andrews and the University of Maryland, provide economic stability.

Expansion continues at National Harbor with the construction of the $1.3 billion MGM National Harbor Casino. The casino is scheduled to open in mid-2016 and create 3,600 jobs. Additionally, the county has $4.2 billion in other development projects in its pipeline that will add to the county's robust economy.

The unemployment rate routinely hovers around that of the state and national averages, and employment trends have continued to remain positive. County wealth levels below those of the state and above national indices may be somewhat reflective of the University of Maryland student population (34,610 compared to a 909,535 county population).

Revenue Framework

The county relies on a combination of property and income tax revenues, which equate to 44% and 32% of general fund revenues, respectively in fiscal 2015.

Historical growth of general fund revenues slightly exceeds national CPI and is modestly below GDP, with modest property and income tax rate adjustments. Given projected development trends and steady positive employment trends revenue growth prospects are sound.

Property tax revenue has fluctuated, reflecting sharp increases in AV during the housing boom and equally sharp declines during the recession. Home values are beginning to recover; Zillow's 1-year forecast shows a 2.7% increase. The lag in the rate at which home values have recovered is somewhat reflective of the state's triannual assessment process which also smooths out changes in property tax revenues. However, income tax revenue growth has been solid reflecting the growth of the local and regional economy.

The county's independent legal ability to raise revenues for education (43% of fiscal 2015 general fund spending) is unlimited with a unanimous vote by the council, voter approval or state approval. The county also has the ability to increase fees without voter approval.

Expenditure Framework

The county maintains healthy expenditure flexibility with affordable spending associated with fixed carrying costs.

Given a strong pipeline of economic development the pace of spending growth is expected to be in line with revenue growth.

According to the state maintenance of effort mandate, education spending (43% of general fund spending and transfers out) cannot decline from year to year without approval from the state unless enrollment declines. In response to weakened income and property tax revenues following the recession, the county was granted approval to reduce spending on education, which offsets potential expenditure flexibility. To balance operations, management also reduced overtime costs, cancelled and/or delayed public safety classes, implemented a retirement incentive program, froze wages and salaries, and increased employee contributions for retirement among other measures.

Approximately 80% of the county's workforce is unionized. While arbitration is binding and staffing minimums are required with the county's largest union, The Fraternal Order of Police, management does possess the ability to impose terms unilaterally if no agreement is reached with the remaining workforce and impose layoffs or cuts. Although strikes are permitted under limited circumstances, the county has not experienced a work stoppage.

Long-Term Liability Burden

Overall net debt plus the county's unfunded pension liability equals a moderately low 7.4% of personal income. County debt service costs are expected to rise due to new issuances although remain within the policy of keeping debt service below 8% of certain expenditures. The county has demonstrated the ability to limit debt issuances if needed to ensure financial flexibility.

The county's sizable six-year fiscal 2017 - 2022 CIP totals $4.7 billion. Approximately one-half of the plan is devoted to education for modernization projects. Other notable expenditures include storm water at 29%, followed by public works at 13%. County tax-supported debt will fund about 53% of the total program. Debt ratios would modestly increase as annual expected issuances are greater than the amount amortized annually. As such, the county is currently reviewing the plan to find ways to reduce the amount of tax-supported debt needed to fund the plan.

The majority of county employees participate in the statewide local government retirement pension plan, the State Retirement and Pension System of MD, a cost-sharing multi-employer defined benefit plan. The plan has had a more significant burden, but the state has implemented multiple reforms to benefits and contribution policies to improve pension sustainability and accelerate funded ratio improvement over time.

The county maintains four single-employer defined benefit pension plans for public safety employees as well as a number of supplemental plans. During fiscal 2014, the county made several plan modifications to reduce the rate of growth in its liability, including increasing the vesting timeframe, modifying the retirement eligibility and increasing employee contribution rates for new employees. For fiscal 2015 pension payments were 112% of the actuarially required contribution. Other post-employment benefit (OPEB) costs are paid on a pay-go basis, and the liability is sizable at 4% of personal income.

Operating Performance

The county's financial resilience comes from a combination of expenditure cutting flexibility in response to weakened revenues, timely adjusted revenue projections and the ability to raise revenues. Fitch expects that in the event of a recessionary revenue decline, the county would maintain reserves at or above the county's 7% policy level, which is significantly higher than the minimum Fitch believes is sufficient for a 'aaa' financial resilience assessment, through active revenue and expenditure management.

Fitch expects the county would implement similar changes as during the most recent recession when officials froze funded vacancies, reduced overtime costs cancelled or delayed public safety classes and increased employee contributions for retirement, among other measures.

For fiscal 2016, the county increased the real property tax rate above the charter limit for the first time since 2003 by a unanimous vote of the county council. The increase of four cents or $30.8 million in new property tax revenue (approximately 1% of the budget) was used to support the board of education. The county also increased various fees including permit fees and hotel taxes. The county maintains a healthy unrestricted fund balance of 8.7% of general fund expenditures and transfers out at fiscal 2015 year-end and a restricted but available economic stabilization reserve. At year-end 2015, the total available fund balance equaled a healthy 17.5% of spending.

Estimated fiscal 2016 year-end results show a $35.5 million operating surplus (1% of 2016 budget) reflecting positive operating variances across various revenue categories compared to a $13 million budgeted fund balance appropriation. The proposed fiscal 2017 budget is a 5.5% increase over the adopted fiscal 2016 budget. The budget reflects additional revenues from the opening of MGM National Harbor, additional property tax revenue attributable to increasing property values, and growing income tax receipts. The budget increase mainly funds additional public safety staff and a $93.5 million increase in school aid over fiscal 2016.

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

In addition to the sources of information identified in the 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

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