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MOODY'S ASSIGNS Aa1 RATING TO ANNE ARUNDEL COUNTY'S (MD) $47.3 MILLION G.O. (LIMITED TAX) BONDS; OUTLOOK REMAINS NEGATIVE

17 Aug 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 Water and Sewer Series, 2011 Refunding Bonds

Aa1

  Sale Amount

$9,350,000

  Expected Sale Date

08/29/11

  Rating Description

General Obligation Limited Tax

 

Consolidated General Improvements Series, 2011 Refunding Series

Aa1

  Sale Amount

$37,910,000

  Expected Sale Date

08/29/11

  Rating Description

General Obligation Limited Tax

 

Opinion

NEW YORK, Aug 17, 2011 -- Moody's Investors Service has assigned a Aa1 rating to Anne Arundel County's (MD) $47.3 million General Obligation Bonds, consisting of $37.9 million General County Improvements Series, 2011 Refunding Bonds and $9.4 million Water and Sewer Series, 2011 Refunding Series. The outlook is negative. Concurrently, Moody's has affirmed the Aa1 rating and negative outlook to $1.29 billion of outstanding parity debt.

SUMMARY RATING RATIONALE

The bonds are secured by the county's general obligation, limited ad valorem tax pledge. This sale will refund a portion of the county's 2003 bonds for a total net value savings of $2.8 million or 2.5% of refunded principal, with no extension of the final maturity. The Aa1 rating reflects the positive factors of a sizable and relatively diverse economy and modest debt profile, balanced against the county's weakened financial position following several years of operating deficits and ongoing structural imbalance. With reserves narrow, the county retains minimal financial flexibility to offset its reliance on economically sensitive income, recordation and transfer taxes. The county anticipates that with strong prospects for economic recovery and continued expansion at several commercial development projects, near-term taxbase growth will provide adequate additional revenue to return the county structural balance.

The negative outlook is based upon significant financial deterioration following annual 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 expenditure 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

-Dependence on tax base growth to return to structural balance

DETAILED CREDIT DISCUSSION

REGIONALLY-IMPORTANT ECONOMY CONTINUES TO PERFORM WELL

The county's relatively stable economy and large, $87.2 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. Moody's notes that while the county's proximity to the metro-D.C. area has been considered a strength and will likely remain so over the long term, current credit pressures on the U.S. federal government (Aaa/Negative Outlook) could present near to medium term vulnerabilities for the county. 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/negative outlook). 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 6.9% in June 2011, well below the state and national unemployment rates for this period (7.4% and 9.3%, respectively).

The federal government presence in the county is increasing significantly as a result of the 2005 Department of Defense Base Realignment and Closure (BRAC) 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.

FISCAL 2009 OPERATING DEFICIT DEPLETED 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 reducing that imbalance and that the most severe fiscal strain of this economic cycle is behind it. In fiscal 2010, the county's General Fund reserves improved slightly, 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 $51.5 million in fiscal 2010 from $44.9 million in fiscal 2009. This amount represents a still-slim 4.5% 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 from 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 the creation of 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 in 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 revenues, 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 county has not returned to structurally balanced operations. Following the fiscal year end, management anticipates only utilizing approximately $1 million from General Fund reserves despite appropriating the use of $6.1 million from reserves to balance the budget. However, the county's structural imbalance will likely be close to $40 million due primarily to the use of $11.7 million transfer to the General Fund from the Central Garage Fund, $7.1 million originally designated for pay-go capital and to other smaller transfers from various other funds. Moody's does not believe this type of budgetary structure is sustainable over the medium to long-term. The original budget did include moderate ongoing savings, including 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). In terms of one-time savings included in the original budget, 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 73.4% and 91.7%.

The fiscal 2012 budget appropriates $22.9 million of reserves to balance the budget, which includes a $5 million increase to the Revenue Reserve Fund. This appropriation reduces the actual projected use of Fund Balance for ongoing operations to $17.9 million. Fiscal 2012 budget growth was limited to 1% ($11.9 million) and includes an overall structural imbalance of at least $31.7 million. The majority of revenue growth is expected to be derived from local property tax revenues, which were budgeted to increase by 2.8% due to growth in assessed valuation. Local income tax revenues are also projected to increase, reflecting both real growth in the economy and the resolution of over-payments owed to the state. Net of the previous year's over-payment, management projects an approximate 2.6% growth in this revenue source. Over the medium term, these revenue sources may face constricted growth given the overall down economy. 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. Between 2008 to 2011, the property tax rate was reduced from 93 mills to 88 mills and increased to 91 miles for fiscal 2012. Although Moody's has historically noted the additional revenue-raising capacity given that its income tax is below the state maximum allowable rate of 3.2%, the county lowered the income tax rate to 2.49% for the 2012 calendar year and projects a revenue loss of $8 million (includes $4 million in fiscal 2012 and $4 million in fiscal 2013). At the end of calendar year 2012, the income tax rate will return to 2.56%. The lowering of the income rate further exemplifies that exercising this flexibility remains politically challenging. The county's two largest sources of revenue are from property taxes and income taxes, which consistently have been challenging to maintain at past rates, therefore we believe that increasing them in the near-term is unlikely. Positively, on Nov. 2, 2010, voters approved a zoning ordinance allowing video lottery terminals (slot machines) at Arundel Mills which is expected to be operational in June of 2012 and is expected to yield approximately $25 million annually. 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 annual operating deficits since fiscal 2008 and our expectation that management will be challenged to return to balanced operations. Moody's believes it will be difficult for the county to rebuild financial reserves over the near term, given the current economic uncertainty and the 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

- Tax base expansion is less than currently projected over the near-term

- Inability to return to structural balance over the near-term

KEY STATISTICS

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

2011 Full valuation: $87.2 billion

2010 Full valuation per capita: $162,100

Payout, all G.O. bonds (10 years): 63.6%

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 General Obligation Bonds Issued by U.S. Local Governments published in October 2009. Please see the Credit Policy page on www.moodys.com for a copy of this methodology .

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides relevant regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides relevant regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides relevant regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

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

Moody's considers the quality of information available on the rated entity, obligation or credit satisfactory for the purposes of issuing a rating.

Moody's adopts all necessary measures so that the information it uses in assigning a 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 Moody's Rating Symbols and Definitions on the Rating Process page on www.moodys.com for further information on the meaning of each rating category and the definition of default and recovery.

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

The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's 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 www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

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, Inc.
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New York, NY 10007
USA

MOODY'S ASSIGNS Aa1 RATING TO ANNE ARUNDEL COUNTY'S (MD) $47.3 MILLION G.O. (LIMITED TAX) BONDS; OUTLOOK REMAINS NEGATIVE
No Related Data.
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