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MOODY'S ASSIGNS Aa1 RATING TO ANNE ARUNDEL COUNTY'S (MD) $179.6 MILLION G.O. (LIMITED TAX) BONDS; OUTLOOK REMAINS NEGATIVE

28 Mar 2011

Aa1 RATING AND NEGATIVE OUTLOOK AFFECT APPROXIMATELY $1.29 BILLION IN G.O. BONDS, INCLUDING CURRENT ISSUE

County
MD

Moody's Rating

ISSUE

RATING

Consolidated General Improvements Series, 2011

Aa1

  Sale Amount

$132,000,000

  Expected Sale Date

03/24/11

  Rating Description

General Obligation Limited Tax

 

Consolidated Water and Sewer Series, 2011

Aa1

  Sale Amount

$47,600,000

  Expected Sale Date

03/24/11

  Rating Description

General Obligation Limited Tax

 

Opinion

NEW YORK, Mar 28, 2011 -- Moody's Investors Service has assigned a Aa1 rating with a negative outlook to Anne Arundel County's (MD) $179.6 million General Obligation Bonds, consisting of $132 million General County Improvements Series and $47.6 million Water and Sewer Series. Both series are secured by the county's general obligation, limited ad valorem tax pledge. Concurrently, Moody's has affirmed the Aa1 rating and negative outlook to $1.1 billion of outstanding parity debt.

SUMMARY RATING RATIONALE

The Aa1 rating reflects the positive factors of a sizable and diverse economy with strong prospects for economic recovery and continued expansion and modest debt profile, balanced against the county's weakened financial position following several years of operating deficits and ongoing structural imbalance. With reserves largely depleted, the county retains minimal financial flexibility to offset its reliance on economically sensitive income, recordation and transfer taxes. Risk is somewhat mitigated given the expectation of near-term taxbase growth and room to increase the local income tax rate under the state maximum allowable rate, however, management faces considerable political obstacles to adopting such an increase.

The negative outlook is based upon significant financial deterioration following operating deficits since fiscal 2008 and an expectation that management will be challenged to return to balanced operations and to rebuild financial reserves over the near term, given the current economic uncertainty and the recent trend of structurally imbalanced operations. In the event that economically sensitive revenues continue to decline or expenditures growth outpaces recurring revenues, the county may face additional credit pressure.

STRENGTHS

-Sizable and diverse tax base with near-term growth prospects

-Manageable debt position

CHALLENGES

-Ongoing structural imbalance

-Narrow reserve balances

DETAILED CREDIT DISCUSSION

REGIONALLY-IMPORTANT ECONOMY CONTINUES TO PERFORM WELL

The county's relatively stable economy and large, $85.9 billion tax base includes the state capital in Annapolis (G.O. rated Aa3/negative outlook), Baltimore/Washington International Thurgood Marshall Airport (BWI), and numerous federal agencies. Providing institutional stability, the county's four largest employers, with more than 70,000 employees total, are all government entities - Fort George G. Meade, with tenant organizations including the National Security Agency (NSA); the county public schools; BWI Thurgood Marshall Airport; and the State of Maryland (G.O. rated Aaa). In addition, approximately 145 Department of Defense private contractors are located in the county. The county's economic stability is reflected in its relatively low average unemployment rate of 6.3% in December 2010, well below the state and national unemployment rates for this period (7.1% and 9.1%, respectively).

The federal government presence in the county is increasing significantly as a result of the Department of Defense Base Realignment and Closure (BRAC) 2005 action which is adding approximately 5,700 direct jobs at Fort Meade. County officials report that BRAC direct job growth has begun and will be complete by August 2011. Due to BRAC, the expansion of the NSA (located on the Fort Meade campus), and the establishment of the U.S, Cyber Command (DOD's centralized cyber security effort also located on the Fort Meade campus), officials estimate the creation of over 26,000 new jobs in the county by 2015. Officials also report that 22 new companies have located in the county in the past two years, many to support and work with military operations. To support anticipated growth in this sector, Fort Meade continues to negotiate an Enhanced Use Lease (EUL) agreement with Trammell Crow to develop a 173-acre site adjacent to Fort Meade over a 10-year period, with total investment estimated at $428 million.

Further development is expected to be accommodated with the completion of Phase II at National Business Park. Three new buildings totaling 468,000 square feet are newly constructed and are under lease, bringing the park to a total 2,600,000 square feet. National Business Park Phase III planning and infrastructure construction is underway. Phase III will add an additional 2,000,000 square feet to the business center. In addition, development of the Odenton Town Center, aided by recent public-private agreements to fund $30 million of infrastructure and utilities, will bring 7.5 million square feet of mixed use (including 3.5 million of new office space) to the immediate vicinity of Ft. Meade. In the planning stage are major office-residential projects at Konterra and Arundel Gateway. Overall, Moodyseconomy.com forecasts that although the county's economy may struggle in the coming year due to the overall economy, BRAC-driven in-migration will help the housing market recover beyond that timeframe.

FISCAL 2009 OPERATING DEFICIT DEPLETES FINANCIAL RESERVES; IMPROVES SLIGHTLY IN 2010

While the county's financial position has narrowed considerably from fiscal 2007 due to an ongoing structural imbalance, Moody's believes that the county is lessening that imbalance and that the most severe fiscal strain of this economic cycle is behind it. The county's General Fund reserves improved slightly during fiscal 2010, following multiple years of declines, although the county's financial position continued to be structurally imbalanced. The General Fund balance increased slightly to a still narrow $51 million in fiscal 2010 from $44.9 million in fiscal 2009. This amount represents a still-slim 4% of General Fund revenues and is lower than other Aa1-rated counties in Maryland and throughout the U.S. Notably, the fiscal 2010 results are also significantly different than the county's position in fiscal 2007, when the total General Fund balance was 13.3% of revenues, at $164.7 million. Financial deterioration began in fiscal 2008, with a $47 million operating deficit occurring due to the under-performance of economically sensitive revenues and the cash-funding of $72 million of capital improvements. Fiscal 2009 operations saw a further financial decline, resulting in a substantial $72.8 million operating deficit. Despite implementing various expenditures controls -- measures that resulted in $26.4 million of savings and a $4.8 million contingency line item -- the county was unable to offset revenue shortfalls driven by the down economy.

Although fiscal 2010 ended with a slightly improved General Fund balance position, operations relied heavily on one-time revenue sources that created an approximate $72 million structural imbalance. The one-time revenues sources included $39.7 million related to unspent pay-go funding from previous years, $23 million from the Health Insurance Fund Balance, $6 million from the Central Garage Replacement Fund Balance, and various other smaller transfers into the General Fund. Importantly, management did also control expenditures, for an approximate $8 million budgetary savings. In addition, the county released $16 million from the Revenue Stabilization Fund and $15 million from an Other Post Employment Benefits (OPEB) reserve, both originally held within the General Fund. Total General Fund balance improved slightly to $51.5 million, equal to a narrow 4.5% of revenue, including a $16 million net draw from the county's Revenue Stabilization Fund (RSF), as allowed by county charter to offset revenue shortfalls; the RSF balance declined to $17.1 million. Undesignated fund balance improved to $22.6 million (2.0% of revenues), reflecting the release of previous designations. Overall, the stabilization of the General Fund was driven by the use of reserves from other county funds, which may limit the county's financial flexibility in the future.

Moody's believes that while the fiscal 2011 structural imbalance will be smaller than it was in fiscal 2009 and 2010, the fiscal year will not restore structural balance to the county. The fiscal 2011 budget anticipates an overall General Fund operating budget that is 0.56% lower than the prior year's original budget, and includes the use of $15.2 million from the reserves. In terms of ongoing savings, the budget includes expenditure reductions such as a five percent decline in salaries to be achieved through a combination of furlough days, pension contribution increases and the suspension of special pay allowance (no layoffs). It also assumes some revenue growth in property taxes of $22 million or 4.3% growth (budget-to-budget) and sales taxes (3.7% growth) and $39.9 million of one-time revenue enhancements that would offset a $7.8 million reduction in state aid, $1.5 million loss in local sales taxes, $3 million decline in investment income and $3.1 million loss in other reimbursements. In terms of one-time savings, the largest expenditure cut is represented by a $26.6 million reduction in pay-as-you-go capital spending. The county funds its ARC at 100% and its four employee pension plans are funded between 75.9% and 91.9%. Year-to-date, management anticipates that the year will end with a slight improvement to the General Fund balance position as expenditures are performing better than budget. Officials report that year-to-date results are ahead of budget and that they anticipate replenishing the appropriated fund balance and may add a relatively nominal amount.

Management is currently in the process of constructing the fiscal 2012 budget and expects to appropriate approximately $22.9 million of reserves to balance the budget and offset the anticipated 1.7% ($19.7 million) budgetary growth. Moody's expects that the county's structural imbalance will continue although at much smaller level as management anticipates growth in the majority of taxes and new revenue related to casino openings. The majority of revenue growth is expected to be derived from local income tax revenues, reflecting both real growth in the economy and the resolution of over-payments owed to the state.Net of the previous year over-payment, management projects an approximate 3% growth in this revenue source. Notably, the budget is structured to include limited pay-go funding and equipment replacements, no merit increases, continued furloughs, departmental reductions and a board of education reduction.

Moody's believes that management will be challenged to maintain financial flexibility as revenues continue to be affected by the ongoing recession. Over last four years, the property tax rate has been reduced from 93 mills to 88 mills. We note that the county retains revenue-raising capacity given its 2.56% income tax rate, in relation to the state maximum allowable rate of 3.2%, although exercising this flexibility remains politically challenging, as does increasing the property tax rate. Management reports that increasing the income tax rate to the maximum 3.2% would generate an additional $100 million annually. Also positively, on Nov. 2, 2010 voters approved a zoning ordinance that will allow video lottery terminals (slot machines) at Arundel Mills. County officials expect to see some new revenue from this source. Overall, future rating reviews will heavily factor in the county's ability to restore financial flexibility and operating balance through the current economic cycle, and to measurably restore financial reserves to levels in line with the current rating going forward.

MANAGEABLE DEBT POSITION SUPPORTED BY LARGE TAX BASE AND AVERAGE PAYOUT

Moody's expects that the county's debt burden will remain modest, given the self-supporting nature of enterprise fund debt, average amortization of principal and continuing tax base growth. Approximately one-third of the county's general obligation debt is self-supporting, contributing to a modest 1.1% overall debt burden. Debt is amortized at an average rate, with 63.6% of principal retired within 10 years. Moody's anticipates that debt levels will remain manageable as the county's Debt Affordability Model limits the debt burden to 1.1% of full valuation and recently increased its cap on debt service as a percent of revenues to 10%, from 9% previously. The county's debt burden (pursuant to its stated policy) differs from Moody's higher burden as it excludes certain classes of debt (such as tax increment) which are included in Moody's calculation of debt burden.

The county's 2011-2015 capital improvement program (CIP) totals $1.4 billion, the largest components of which are $597 million and $448 million, respectively, for school-related projects water and sewer projects. The program includes approximately $925 million (66%) in county bond authorizations. Pay-go amounts are expected to be approximately $13 million annually out of General Fund operations, with another $15 million to $17 million annually from the enterprise funds. All of the county's long term debt is fixed rate and the county is not party to any derivatives agreements.

Outlook

The negative outlook is based upon significant financial deterioration following operating deficits since fiscal 2008 and an expectation that management will be challenged to return to balanced operations. Moody's believes the county will be challenged to rebuild financial reserves over the near term, given the current economic uncertainty, a trend of structurally imbalanced operations. In the event that economically sensitive revenues continue to decline or expenditures growth outpaces recurring revenues, the county may face additional credit pressure.

WHAT COULD CHANGE THE G.O. RATING - UP (Removal of Negative Outlook)

- Establishment of a trend of structurally balanced operations

- Replenishment of fund balance to provide financial cushion to offset reliance on economically sensitive revenues

WHAT COULD CHANGE THE G.O. RATING - DOWN

- Fiscal 2011 audited results that are materially worse than anticipated

- Further reduction of reserves

KEY STATISTICS

2010 population (2010 census): 537,656 (9.8% growth since 2000 census)

2010 Full valuation: $85.9 billion

2010 Full valuation per capita: $167,650

Payout, all G.O. bonds (10 years): 68%

Debt burden: 1.1%.

FY 2008 General Fund balance: $117.7 million (10.2% of General Fund revenues)

FY 2009 General Fund balance: $45 million (3.7% of General Fund revenues)

FY 2010 General Fund balance: $51.5 million (4.5% of General Fund revenues)

1999 Per Capita Income: $27,578 (108% of state, 128% of nation)

1999 Median Family Income: $69,019 (112% of state, 138% of nation)

GOLT debt outstanding: $1.29 billion (post-sale)

The principal methodology used in this rating was[PM] published in [date].

REGULATORY DISCLOSURES

Information sources used to prepare the credit rating are the following: parties involved in the ratings and public information.

Moody's Investors Service considers the quality of information available on the credit satisfactory for the purposes of assigning a credit rating.

Moody's adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.

The date on which some Credit Ratings were first released goes back to a time before Moody's Investors Service's Credit Ratings were fully digitized and accurate data may not be available. Consequently, Moody's Investors Service provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see the Credit Policy page on Moodys.com for the methodologies used in determining ratings, further information on the meaning of each rating category and the definition of default and recovery.

Analysts

Jessica A. Lamendola
Analyst
Public Finance Group
Moody's Investors Service

Julie Beglin
Backup Analyst
Public Finance Group
Moody's Investors Service

Jack Dorer
Senior Credit Officer
Public Finance Group
Moody's Investors Service

Contacts

Journalists: (212) 553-0376
Research Clients: (212) 553-1653


Moody's Investors Service
250 Greenwich Street
New York, NY 10007
USA

MOODY'S ASSIGNS Aa1 RATING TO ANNE ARUNDEL COUNTY'S (MD) $179.6 MILLION G.O. (LIMITED TAX) BONDS; OUTLOOK REMAINS NEGATIVE
No Related Data.
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