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MOODY'S ASSIGNS Aa3 RATING TO THE CITY OF HAGERSTOWN'S (MD) $5.98 MILLION PUBLIC FACILITIES BONDS OF 2011

23 Aug 2011

Aa3 RATING APPLIES TO $45.08 MILLION IN PARITY BONDS, INCLUDING THE CURRENT ISSUE

Municipality
MD

Moody's Rating

ISSUE

RATING

Public Facilities Bonds of 2011

Aa3

  Sale Amount

$5,980,000

  Expected Sale Date

08/26/11

  Rating Description

Public Facilities Bonds of 2011

 

Opinion

NEW YORK, Aug 23, 2011 -- Moody's Investors Service has assigned an Aa3 rating to the City of Hagerstown's (MD) $5.98 million Public Facilities Bonds of 2011. Concurrently, Moody's has also affirmed the Aa3 rating on the city's $39.1 million in previously issued General Obligation debt.

RATING RATIONALE SUMMARY

The bonds are secured by the city's unlimited ad valorem tax pledge. The Aa3 rating reflects the city's moderately-sized tax base which benefits from its proximity to the Baltimore-Washington metropolitan area. The rating also considers the city's sound financial position supported by comprehensive fiscal policies and healthy reserve levels, as well as an affordable debt burden. Proceeds of the bonds will be used for various water and wastewater capital projects.

STRENGTHS:

- Moderately-sized tax base

- Healthy reserve levels

-Comprehensive fiscal policies

CHALLENGES:

- Declines in tax base may impact the city's structural balance

- Financial reserves may decline in the near-term

- Above-average debt burden

DETAILED CREDIT SUMMARY

ECONOMIC EXPANSION SLOWED; DECLINES IN TAX BASE EXPECTED

Located in northwestern Maryland (G.O. rated Aaa/negative outlook) along the Pennsylvania (G.O. rated Aa1/negative outlook) border, the City of Hagerstown continues to benefit from its proximity to the City of Baltimore (G.O. rated Aa2/stable outlook) and Washington, DC (G.O. rated Aa2/stable outlook), both of which are located approximately 70 miles from the city center. Although growth has slowed due to the economic downturn, housing prices and limited land availability in the Baltimore-Washington region pushed residential development westward toward the city over the last decade, a factor further enhanced by the ongoing expansion of suburban employment centers along the I-270 corridor. Recent growth was also spurred by the city's role, along with greater Washington County (G.O. rated Aa2), as the employment and commercial center of a tri-state region that includes western Maryland, West Virginia (G.O. rated Aa1/stable outlook), and southern Pennsylvania. Overall, the city has seen a 10.1% increase in population from 2000 to 2010, markedly outpacing the city's net population growth of 7.5% during the prior 20-year period. Wealth indicators continue to lag both state and national medians, given the rural character of the region. The city's unemployment rate is high at 11.3%, above the state (7.4%) and national (9.3%) levels, as of June 2011

The statewide requirement to phase-in reassessment-related tax base growth over a three-year period effectively smoothed the impact of any near-term property devaluation. As a result, the recent economic environment has had a limited impact on the city's tax base over the last several years, which exhibited a steady, albeit slowed rate of expansion. In addition, the county's 5% homestead tax credit (adopted through a resolution by the Mayor and Council for the taxable year beginning July 1, 2007) restricts the city's ability to capture homestead appreciation of more than 5% annually for tax levy purposes, assuring steady annual growth in the tax levy as pent-up appreciation is added to the tax rolls. As a result, the city saw an average growth rate of 12.2% over the last five years (2006-2010), increasing to a high of $3.3 billion in fiscal 2010. Going forward, as the effects of these requirements dissipate, the city anticipates that property values will decline over the near-term. The initial revenue loss is currently estimated at $2.2 million beginning in fiscal 2012. Overall, the economic downturn has significantly impacted the city's residential and commercial developments as evidenced through the significant decline in new building permit applications during calendar year 2010 (414 permits), which is drastically different from the city's peak during the calendar year 2005 (1,066 permits). As of April 2011, the city has issued 118 new building permits.

STRONG FINANCIAL MANAGEMENT GENERATES CONSISTENT FAVORABLE PERFORMANCE

Moody's believes that the city's financial position will remain healthy despite an expected decrease in reserve levels in fiscal 2011. The city's conservative approach to budgeting and financial administration, along with a comprehensive set of fiscal policies has generated operating surpluses since fiscal 2000. The 10 year average for Undesignated General Fund balance has been a strong 18.1% of General Fund revenues, has remained well above the city's 10% policy minimum. The city does not intend to draw down reserves to this target level; however, should undesignated reserves fall below 10%, the policy requires that the city budget for a 1% increase in undesignated reserves each year, with the full 10% to be restored within five years of a deficiency. Moody's believes that the city's policy of financing capital projects on a pay-go basis further enhances financial flexibility.

Favorable financial performance continued during fiscal 2010, wherein expenditure savings from public safety department ($625,000), decreased capital expenditures ($398,000), and increased property ($718,000) and income ($152,000) tax revenues, more than offset the loss of state highway user revenue ($1.7million). As a result, General Fund balance increased by $661,000 to a high of $8.6 million (22.1% of revenues), of which $8.02 million (20.7% of revenues) was undesignated. While preliminary fiscal 2011 results project General Fund balance to remain level, the city loaned $600,000 to the city volunteer fire company in support of a new station. This loan, which is expected to be repaid over a 30-year period, will decrease General Fund balance to $8 million or a still-healthy 21.8% of General Fund revenues. The fiscal 2012 budget represents a 5% decrease in revenues and a 4% decrease in expenditures when compared to fiscal 2011. The city has maintained the tax rate at the fiscal 2011 level despite the first decline in property values, which is expected to generate a loss of approximately $2.2 million in property tax revenues. To offset this loss, the city has implemented a number of cost-cutting mechanisms including the non-funding of 24 vacant positions ($2.5 million), elimination of 12 positions through restructuring ($725,000), no cost-of-living or step increases ($1.3 million), and reduced capital expenditures ($700,000). Going forward, the city does not have plans to increase the tax rate, as property values continue to decline. Moody's will continue to monitor the city's ability to maintain reserves at historically healthy levels, and if a significant decline occurs, negative credit pressure is possible.

In addition, Moody's will continue to track the city's progress towards funding its outstanding pension ($40.2 million) and other post-employment benefit (OPEB) ($31.9 million) liabilities. The city currently maintains two pension plans, one through the state system which was 65.02% funded as of fiscal 2009, and one through the city itself, which had a low funded ratio of 36.89% for the same time period. The city has established a trust for OPEB, which is 2.04% funded as of fiscal 2009. As these liabilities continue to grow, the city's financial flexibility will be challenged and could present negative pressure to the rating going forward.

DEBT BURDEN EXPECTED TO REMAIN MANAGEABLE

Moody's expects that the city's debt burden will remain manageable given the average retirement of debt and the city's aggressive approach to pay-as-you-go financing for capital improvements. Approximately 45% of the city's outstanding general obligation debt is supported by enterprise funds (Water and Electric Funds) which are currently considered to be self-supporting, resulting in a modest direct debt burden of 1.4% of full valuation. The city's total debt burden, including the overlapping debt of Washington County, is above-average at 2.1% of full valuation. Amortization of debt is average, with 66.6% of principal retired within 10 years. The city's $98.9 million five-year capital improvements program (CIP) is focused on water and sewer infrastructure (58%) and general government projects (42%). The CIP includes approximately $8 million in General Fund supported bond financing.

The city maintains one outstanding variable rate loan with Columbia Bank, which represents 0.03% of the city's overall debt profile. The interest rate for this loan is adjusted on October 12th every three years and is equal to the three yeah T-Note plus 145 basis points per annum. The interest rate was last adjusted to 3.39% in October of 2008, and will be adjusted for a final time in October of 2011, as the loan is scheduled to mature in 2013. The city is not party to any derivative agreements.

WHAT COULD MAKE THE RATING GO UP:

- Substantial increase in tax base resulting in additional revenue

- Significant increase in reserve levels that improve the city's overall financial flexibility

WHAT COULD MAKE THE RATING GO DOWN:

- Significant decline in tax base resulting in decline revenue

- Decline in reserve levels limiting financial flexibility

- Significantly increased debt burden

KEY STATISTICS

2010 population: 39,662

Fiscal 2010 full valuation: $3.3 billion

Fiscal 2010 full value per capita: $82,479

1999 Per Capita Income (as a % of MD and US): $17,153 (67% and 79.5%)

1999 Median Family Income (as a % of MD and US): $38,149 (61.7% and 76.2%)

FY 2010 General Fund balance: $8.6 million (22.1% of revenue)

FY 2010 Undesignated General Fund balance: $8 million (20.7% of revenues)

Debt burden: 1.4%

Payout of G.O. principal (10 years): 66.6%

General Obligation debt outstanding: $45.08 million

The principal methodology used in this rating was Bond Anticipation Notes and Other Short-Term Capital Financings published in May 2007. 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

Jennifer Diercksen
Analyst
Public Finance Group
Moody's Investors Service

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

Julie Beglin
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.
250 Greenwich Street
New York, NY 10007
USA

MOODY'S ASSIGNS Aa3 RATING TO THE CITY OF HAGERSTOWN'S (MD) $5.98 MILLION PUBLIC FACILITIES BONDS OF 2011
No Related Data.
© 2019 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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