Fitch Rates Charles County, MD's GOs 'AAA'; Outlook Stable

Fitch Ratings assigns an 'AAA' rating to the following Charles County, Maryland (the county) general obligation (GO) bonds:

--$31.5 million consolidated public improvement bonds of 2015 (tax-exempt);

--$3.2 million consolidated public improvement bonds of 2015 (taxable).

Proceeds of the tax-exempt bonds will be used to fund various school, road, utility and general government projects. Proceeds of the taxable bonds will finance the construction of a road and pump station for the St. Charles Companies and acquisition of land for economic development. The competitive sale is scheduled for October 20.

In addition, Fitch affirms the following ratings:

--$366 million in outstanding GO debt at 'AAA'.

The Rating Outlook is Stable.

SECURITY

The bonds are GO bonds to which the full faith and credit and unlimited taxing power of the county are pledged.

KEY RATING DRIVERS

STABLE RESERVE LEVELS: The county maintains satisfactory fund balance levels given the stability of operations and other areas of financial flexibility. The county has ample income taxing capacity, and the property tax rate is not subject to limitation.

HEALTHY DEBT PROFILE: A low debt burden, affordable capital needs, sound debt affordability policies and a rapid amortization rate underpin the county's debt profile.

OTHER LONG-TERM LIABILITIES ARE EASILY MANAGED: Costs for retiree obligations are low and do not pressure operations.

NARROW YET STABLE AND WEALTHY ECONOMY: The economy benefits from the presence of a naval research facility as well as a location proximate to the employment centers of Washington D.C. and northern Virginia. Employment and wealth indicators are sound.

RATING SENSITIVITIES

RESERVES PROVIDE ADEQUATE FINANCIAL CUSHION: The rating is sensitive to shifts in the county's strong financial management practices and healthy reserve levels. The Stable Outlook reflects Fitch's expectation that such shifts are unlikely over the next review cycle.

CREDIT PROFILE

Charles County, with a 2014 population of 154,747, is located less than 45 minutes from the myriad employment opportunities in Washington D.C. and northern Virginia. The county's population has increased nearly 30% since 2000, outpacing the region, state and nation.

STABLE FINANCIAL OPERATIONS

Over the past four years the unrestricted general fund balance has remained stable. At the close of fiscal 2014 the unrestricted balance stood at $38.6 million or 11.4% of total general spending, which is essentially unchanged from the prior four years. General fund liquidity is solid with $96.8 million in cash and investments at fiscal 2014 year-end, equivalent to roughly 105 days of operating expenses.

The adopted fiscal 2015 budget is 4.6% higher than the 2014 adopted budget. The budget keeps the property tax and income tax rates constant and includes a $3.2 million fund balance appropriation. The fund balance appropriation mostly includes the use of a restricted bond premium from fiscal 2013.

Preliminary fiscal 2015 operating results show a $6.2 million surplus, due primarily to less than budgeted public safety spending. County management is projecting the total fund balance to increase to $50 million (14.2% of general fund spending), in compliance with the policy range of 8%-15% of budgeted spending.

The county prepares a multiyear financial forecast to identify future fiscal challenges, which Fitch views positively. The current forecast shows modest operating gaps each year through fiscal 2019. Management expects to close the projected shortfalls through the use of bond premium reserves (fiscal 2016 and 2017) and revenue enhancements or spending cuts as necessary.

Fitch views the county's margin under the state income tax rate cap (3.03% vs. cap of 3.2%) as an important measure of financial flexibility, given that income tax accounts for 30% of the general fund revenue base. Income tax revenues have increased annually between 2008 and 2014, but included a rate increase during fiscal 2014. The county estimates it could generate $6.3 million in additional annual revenue if the income tax was levied at the maximum rate.

FISCAL 2016 BUDGET BALANCED WITH NEW REVENUES

The fiscal 2016 budget is a 2.7% ($9.7 million) increase over fiscal 2015. The budget includes a $4 million fund balance appropriation, which consists mostly of a bond premium from prior years. The budget also includes revenue from a new transfer tax which is projected to generate approximately $4.7 million. The new revenue stream was implemented to address increased school funding and to reduce the stormwater remediation fee. The county historically has demonstrated the willingness to increase revenues in a timely manner to address spending pressures, which reflects sound fiscal management and solid revenue flexibility.

ECONOMY ANCHORED BY MILITARY PRESENCE

Charles County's close proximity to Washington, D.C. and northern Virginia employment centers is a positive economic consideration. The favorable regional employment opportunities mitigate the narrower local economy, anchored by several key military installations. The naval research and development center at Indian Head employs approximately 3,000 (civilian and military) and has an annual payroll and defense contracts of approximately $448 million.

A large 21% (approximately 16,000) of the county's labor force consists of civilian employees of the federal government. The county hopes to leverage the base's technological research to attract tenants to its planned Indian Head Science and Technology Park. A number of office and industrial projects are in various stages of development, and the county has historically maintained a commercial vacancy rate below regional averages.

Competitive Power Ventures (CPV) is constructing a state-of-the-art 725-megawatt (MW) combined-cycle natural gas-fired power plant in the county. The $775 million capital investment has generated $4.3 million in one-time recordation tax revenue and, will produce modest annual PILOT payment of $1.3 million to $3.5 million over the 21-year agreement once the project is complete. Additionally, the county receives a $2 million payment per year from CPV during construction. The plant is expected to be operational in fiscal 2017.

The county's unemployment rate trends comfortably below state and national averages, measuring 5.4% in June 2015. Wealth indicators are well above state and national averages.

MODEST TAX BASE GROWTH EXPECTED

The county's estimated market value declined 18% between fiscal years 2010 and 2014 to $17.1 billion. Market value increased 0.6% in fiscal 2015 and preliminary projections show a 0.8% increase for 2016. However, the Zillow housing market forecast shows a 2.3% decline in home prices locally over the next year which would reflected in the 2017 valuation.

The county benefits from a statewide triennial assessment process that smooths annual volatility in tax base performance. The county is somewhat constrained on upside tax base growth given the adopted homestead limitation on annual assessment increases on most owner-occupied residential property to no more than 7%.

FAVORABLE DEBT PROFILE

Charles County's prudent debt policies have resulted in a modest tax-supported debt burden even as the county has met capital needs related to its strong population growth over the last decade. Overall debt equals just 1.6% of fiscal 2015 market value, or $1,751 per capita. County policy caps debt service at 8% of general fund operating revenues; fiscal 2014 debt service expenditures accounted for 5.6% of total governmental spending. Amortization is rapid, with 83% retired in 10 years.

Fitch expects the county's debt burden to remain manageable. The fiscal 2016-2020 governmental capital improvement plan totals approximately $230 million. The plan is nearly 63% debt-funded. Given the current rapid amortization, the additional debt is not expected to materially impact the debt burden.

OTHER LONG-TERM LIABILITY COSTS ARE LOW

Fitch does not expect costs associated with retirement benefits to pressure future operations. The county provides pension benefits through two single-employer defined benefit plans and contributes annually on an actuarially determined basis. As of July 1, 2014, the general employees' plan was well funded at 96% and the sheriffs' plan was adequately funded at 81%. Using Fitch's more conservative 7% discount rate, funding levels were still satisfactory at 89% and 75%, respectively. The aggregate adjusted unfunded actuarial accrued liability (UAAL) totaled $84.5 million or a very low 0.50% of market value.

The county also provides other post-employment benefits (OPEB) to its retirees. The county funded its OPEB cost for fiscal 2014 on a pay-go basis and the UAAL associated with OPEB totaled $156 million or 0.9% of market value. The county plans to fully fund the ARC by 2029. Carrying costs for debt service, pension (including teachers' pension costs) and OPEB totaled a low 10.8% of fiscal 2014 governmental fund spending.

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

Fitch recently published an exposure draft of state and local government tax-supported criteria (Exposure Draft: U.S. Tax-Supported Rating Criteria, dated Sept. 10, 2015). The draft includes a number of proposed revisions to existing criteria. If applied in the proposed form, Fitch estimates the revised criteria would result in changes to fewer than 10% of existing tax-supported ratings. Fitch expects that final criteria will be approved and published by Jan. 20, 2016. Once approved, the criteria will be applied immediately to any new issue and surveillance rating review. Fitch anticipates the criteria to be applied to all ratings that fall under the criteria within a 12-month period from the final approval date.

In addition to the sources of information identified in the applicable criteria specified below, this action was informed by information from CreditScope, IHS Global Insight, and Zillow Group.

Applicable Criteria

Exposure Draft: U.S. Tax-Supported Rating Criteria (pub. 10 Sep 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869942

Tax-Supported Rating Criteria (pub. 14 Aug 2012)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015

U.S. Local Government Tax-Supported Rating Criteria (pub. 14 Aug 2012)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314

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https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=991729

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