Fitch Upgrades Washington County, MD's GOs to 'AA+'; Outlook Stable

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

--$15.46 million public improvement bonds of 2015;

--$26.58 million refunding bonds of 2015.

The bonds are expected to be sold via competitive sale on May 12th. Proceeds will be used to finance various school and county capital projects.

In addition, Fitch upgrades the following rating:

--$180 million of outstanding GO bonds upgraded to 'AA+' from 'AA'.

The Rating Outlook is revised to Stable from Positive.

SECURITY

The bonds are GOs of the county, backed by its full faith and credit pledge and unlimited taxing power.

KEY RATING DRIVERS

STRONG FINANCIAL PROFILE: The rating upgrade reflects the county's strong financial profile including revenue and spending flexibility as well as robust reserves in and outside of the general fund.

ADEQUATE ECONOMIC BASE: Employment opportunities are sufficiently diverse but are generally focused in lower-wage sectors including manufacturing, distribution, retail, and government. The county's unemployment rate is slightly elevated and remains above the state and national averages. Wealth indicators are below state and on par with national averages.

FAVORABLE DEBT POSITION: Overall debt levels are low, amortization of principal is rapid, and county officials prudently analyze capital needs in the context of debt affordability guidelines.

AFFORDABLE OTHER LONG-TERM LIABILITIES: The county's unfunded pension liability is low and should improve as the county moves to fully funding its actuarially required contribution (ARC) in fiscal 2015 and beyond. The county's full funding of its OPEB ARC is a credit positive.

RATING SENSITIVITIES

EXISTING RESERVES PROVIDE A SOUND FINANCIAL CUSHION: The rating is sensitive to shifts in fundamental credit characteristics, including the county's strong financial management practices and healthy reserve levels. The Stable Outlook reflects Fitch's expectation that such shifts are unlikely.

CREDIT PROFILE

Washington County is located in northwestern Maryland. The County seat, Hagerstown, is 70 miles northwest of Washington, D.C. and 72 miles west of Baltimore, Maryland. The estimated 2014 population is 149,573.

STRONG RESERVE POSITION

A string of positive operations relative to budget over at least the past decade has allowed the unreserved general fund balance to increase from $14.7 million or 10.8% of spending and transfers out at year-end 2002 to $37.2 million or an ample 18% of spending at year-end 2014. The county's fund balance policy requires an unreserved fund balance equal to at least 17% of spending.

The county has a practice of transferring surplus revenues from the general fund above the reserve policy into the capital projects fund to minimize future borrowing needs and to fund pay-go capital spending. The reserves in the capital projects fund can be transferred back into the general fund with approval from the commission for general fund operating purposes. As of year-end 2014, the capital projects fund reserve balance totaled $71 million. When combined with the general fund, the unrestricted balance is an ample $87.5 million or 39% of general fund and capital projects fund spending. The county has no current plans to spend down this reserve and Fitch views it as an important source of additional financial flexibility.

PENSION FUNDING DEFICITS ADDRESSED

Somewhat offsetting the county's strong operating performance is the underfunding of the pension ARC over the past decade. The annual funding gaps have generally been modest. Fitch believes the county has taken steps to improve the timelines of information from its pension actuary to properly budget the full pension contribution going forward. The county pension plan reported funded ratio was only 64.7% as of July 2014 (60% using a more conservative 7% rate of return), but the adjusted unfunded actuarial accrued liability of $60.7 million is equal to a very low 0.5% of market value, and the cost of funding pension along with debt and retiree health costs remains very affordable at 9% of governmental spending. Additionally, the county has implemented a formal policy to reach full funding of the unfunded liability by 2029 and to fully fund the ARC annually.

Furthermore the county overfunds its annual contribution for other post-employment benefits (OPEB). The county paid $1.7 million for OPEB in fiscal 2014 equal to 130% of the ARC. The county established a trust fund to account for activities related to OPEB and had a balance of $14.3 million as of fiscal year-end 2014. The unfunded liability is modest at $7.5 million or less than 0.1% of market value and the funded ratio is 60%.

CONTINUED POSITIVE OPERATIONS EXPECTED FOR FISCAL 2015

The fiscal 2015 original general fund budget reflects a 2% increase (approximately $3.3 million) over fiscal 2014 and prudently includes full pension and OPEB ARC funding as well as continued pay-go capital spending. The budget includes a modest $477,030 fund balance appropriation and no revenue enhancements. The increases in spending are mainly due to education, a shift in teachers' pension costs and increased public safety. Year-to-date operating results show an operating surplus of approximately $1.9 million (1% of projected fiscal 2015 spending).

SOLID REVENUE RAISING FLEXIBILITY

Typical of Maryland counties property and income taxes produce the bulk of general fund revenue, at approximately 59% and 34%, respectively, for fiscal 2014. Property tax revenues have declined annually between fiscal 2012 and 2014, reflecting a decline in taxable assessed value. Due to improvement in employment and the economy, income tax revenues have increased annually over the past four fiscal years, offsetting the decline in property taxes. The county last increased the income tax rate to 2.8% in 2001, which compares to the 3.2% maximum rate allowed by state law. An increase to the maximum rate would generate $9.4 million in additional revenue annually. The county is not subject to any limitation on its property tax rate or levy; the county last increased its tax rate in 2001.

AVERAGE TO BELOW-AVERAGE ECONOMIC INDICATORS

Washington County housing prices have rebounded year-over-year, however, modest tax base declines are expected to continue through 2016 primarily due to a decline in assessed value following the triennial reassessment of Hagerstown (22% of tax base). However, projections show growth in assessed value beginning in fiscal 2017.

The local economy is diverse with trade and education and health services accounting for 37% and 15% of employment respectively. However, approximately 39% of the county's land area is considered farmland so the agricultural element of the economy is expected to remain strong.

The county's unemployment rate continues to decline, falling to 6.7% in February, but remains higher than the state and nation (which is generally the relationship) and reflects somewhat stagnant employment growth over the last several years.

During fiscal 2015, Citi, the county's fifth largest employer laid off approximately 650 employees reducing the county's employment base. However, employment growth prospects are positive. Tempur Sealy International will be completing a $5 million expansion project within the county during fiscal 2016 and will add 120 new jobs. Tractor Supply Inc. has recently expanded its presence within the county with a $2 million capital investment adding 108 new jobs. Walmart is currently going through the permitting process to construct a $40 million supercenter that will add 300 in new jobs.

LOW DEBT RATIOS

Debt levels are modest at 2% of market value on an overall basis and $1,723 per capita. Debt service as a percentage of governmental fund spending is a low 6.3%. The fiscal years 2016-2025 capital improvement plan (CIP) totals nearly $395 million, of which 46% is dedicated to education, 21% for road improvements, and 13% for water/sewer quality projects. Tax-supported bonds are expected to fund $120 million (1/3) of the CIP. Fitch expects no material change in debt burden ratios given the fairly rapid amortization of outstanding principal of 65% in 10 years. Additional CIP funding sources include general fund pay-go of $21 million.

The county prudently maintains debt affordability guidelines and will adjust future borrowing to remain in compliance. The guidelines are conservative with debt per capita targeted at $1,500 and debt service as a percentage of general fund revenues not to exceed 8%. The county's debt statistics remain in-line with all the guidelines. The county's debt structure is fairly conservative with all debt in fixed-rate mode and no exposure to swaps or derivatives.

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.

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=984061

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