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MOODY'S ASSIGNS P-1 RATING ON ANNE ARUNDEL COUNTY'S (MD) GENERAL OBLIGATION BOND ANTICIPATION NOTES SERIES A (CONSOLIDATED GENERAL IMPROVEMENTS SERIES, TAX-EXEMPT COMMERCIAL PAPER) OF $68.929 MILLION

12 Nov 2010

AFFIRMS Aa1 RATING OF THE COUNTY'S OUTSTANDING GENERAL OBLIGATION DEBT AND ASSIGNS NEGATIVE OUTLOOK

County
MD

Moody's Rating

ISSUE

RATING

General Obligation Bond Anticipation Notes, Series A (Consolidated General Improvements Series)

P-1

  Sale Amount

$68,920,000

  Expected Sale Date

10/30/10

  Rating Description

Commercial Paper

 

Opinion

NEW YORK, Nov 12, 2010 -- Moody's Investors Service has assigned the P-1 rating on Anne Arundel County's (MD) $68.929 million in General Obligation Bond Anticipation Notes Series A (Consolidated General Improvement Series, Tax-Exempt Commercial Paper). Moody's has also affirmed its Aa1 rating on Anne Arundel County's (MD) general obligation limited tax debt, and assigned a negative outlook, affecting $960.5 million of outstanding debt.

RATINGS RATIONALE

The short-term commercial paper rating reflects the credit quality of the liquidity facility provider, the structure of the liquidity facility and the low likelihood of termination risk. The long-term G.O. rating and outlook reflect positive attributes such as the county's sizeable and diverse economy with strong prospects for economic recovery and modest debt profile as well as the weakness of its distressed financial position. Further, assignment of the negative outlook is based upon significant financial deterioration following operating deficits in fiscal years 2008 and 2009, and Moody's view that restoration of structural balance is unlikely in the near term, given the use of further reserves in the budgeting of fiscal 2010 and 2011. With reserves largely depleted and liquidity low, the county retains minimal financial flexibility to offset its reliance on several economically sensitive revenue sources.

ASSIGNMENT OF P-1 RATING

Moody's assignment of the P-1 of the county's Commercial Paper Program is in conjunction with the issuance of a Credit Agreement (liquidity facility) to be provided by State Street Bank and Trust Company which will become effective on the upcoming issuance commercial paper notes. There are currently no commercial paper notes outstanding.

The P-1 rating on the Commercial Paper Program is derived from the credit quality of the liquidity facility provider, State Street Bank and Trust Company (the Bank), the structure of the liquidity facility and the likelihood of termination of the liquidity facility without payment of the commercial paper notes. Events that would cause the liquidity facility to terminate without payment of the commercial paper notes are directly related to the county. Accordingly, the likelihood of any such events occurring is reflected in the long-term rating assigned to the county's general obligation debt. The long term and short term other senior obligation (OSO) rating of State Street Bank and Trust Company are Aa2/P-1.

The Bank may automatically terminate or suspend its obligations under the Credit Agreement upon any of the following events: (1) the county shall fail to pay any amount of principal or interest on the reimbursement obligation to the bank when due, other than as a result of the acceleration of such reimbursement obligation; (2) the county shall fail to pay any interest on any commercial paper note when the same shall become due and payable; (3) the county shall fail to pay when due and payable any interest, principal or premium on general obligation debt of the county; (4) the Credit Agreement or the Note Order, any provision of the Credit Agreement or the Note Order relating to payment of principal or interest on the commercial paper notes or the reimbursement obligation, or the general obligation pledge of the county shall cease to be valid and binding on the county or shall be declared null and void; (5) the Credit Agreement or the Note Order, any provision of the Credit Agreement or the Note Order relating to payment of principal or interest on the commercial paper notes or the reimbursement obligation, or the general obligation pledge of the county shall be contested by the county or any governmental agency with jurisdiction; (6) the county shall deny that it has any or further liability or obligation under the Credit Agreement or the Note Order, any term or provision of the Credit Agreement or the Note Order relating to payment of principal or interest on the commercial paper notes or the reimbursement obligation, or the general obligation pledge of the county; or (7) upon bankruptcy or insolvency events of the county.

CREDIT AGREEMENT

The Credit Agreement which is in the amount of $116,086,112 has been sufficiently sized to cover the authorized amount of commercial paper notes. The Credit Agreement covers $125 million for the principal amount of the notes plus 34 days' interest at the maximum rate of the commercial paper notes, 10%. The county and the issuing and paying agent are prohibited from issuing notes in excess of the amount covered by the Credit Agreement.

Draws made on the Credit Agreement received by the Bank at or prior to 1:00 p.m. (New York City time) will be honored by 3:00 p.m. (New York City time) on the same business day. The issuing and paying agent on behalf of the county will draw on the Credit Agreement in order to pay principal and interest on maturing notes to the extent roll-over proceeds or funds of the county are insufficient. The commitment will be reinstated following the repayment by the county in the amount of such draw.

The county may not substitute the Credit Agreement without prior written evidence from Moody's that the rating on the commercial paper notes will not be reduced or withdrawn as a result of such substitution.

The Credit Agreement will terminate upon the earliest to occur of: (i) Nov. 22, 2013; (ii) the business day following maturity of all commercial paper notes outstanding following the issuing and paying agent's receipt of a no issuance notice due to an event of default under the Credit Agreement; (iii) the date on which the available commitment has been permanently reduced to zero; (iv) the business day following the effective date of a substitute liquidity facility; (v) the date on which the bank receives notice of termination of the commitment due to either (a) no commercial paper notes remaining outstanding; or (b) a substitute liquidity facility becoming effective in replacement of the Credit Agreement; or (vi) the date on which the commitment has been terminated in its entirety due to the occurrence of an immediate termination event.

The Credit Agreement includes a provision which permits the incorporation into the Credit Agreement by reference of additional covenants or different rights, remedies, or events of defaults in other bank agreements that the borrower has entered into. However, the Credit Agreement does not permit any additional or different automatic termination events, suspension events or conditions precedent to funding to be automatically incorporated into the Credit Agreement for this transaction unless an amendment to the Credit Agreement is executed and written evidence is received that such amendment will not result in a reduction or withdrawal of the rating on the bonds.

THE COMMERCIAL PAPER PROGRAM

The Issuing and Paying Agent (IPA), U.S. Bank Trust National Association, will issue commercial paper notes upon receipt of issuance instructions from the county. The notes shall be interest bearing only. No commercial paper notes may be issued if such issuance would cause the aggregate principal amount of notes outstanding to exceed the amount provided for under the Credit Agreement. Additionally, each note issued shall mature no later than the earliest of: (a) three years after the date on which the notes were first issued; (b) 270 days from the date of issuance; or (c) five business days preceding the expiration date of the Credit Agreement. The IPA is instructed to stop issuing notes following its receipt of a no-issuance notice from the Bank due to an event of default under the Credit Agreement. On the business day following the payment at maturity of all outstanding commercial paper notes the Credit Agreement will then terminate.

The proceeds from the issuance of roll-over notes will be used to pay the principal on the commercial paper notes due at maturity. The IPA on behalf of the County will draw on the Credit Agreement in order to pay principal and interest on maturing notes to the extent roll-over proceeds or funds of the County are insufficient. The Bank will be reimbursed for each draw with funds provided by the City.

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 Aa1), 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 7.0% in August 2010, well below the state and national unemployment rates for this period (7.6% and 9.5%, 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. To support anticipated growth in this sector, Fort Meade continues to negtoitate 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 warns that the county's economy will struggle in the coming 12 months due to the overall economy, and that BRAC-driven in-migration will help the housing market recover beyond that timeframe.

FISCAL 2009 OPERATING DEFICIT DEPLETES FINANCIAL RESERVES; SLIM IMPROVEMENTS ANTICIPATED IN 2010

Although unaudited results point to some stabilization of the county's financial position, with General Fund balance rising to approximately $50 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. The anticipated 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 occurred 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. Due largely to the effects of the economic downturn, the county booked revenue shortfalls related to income tax ($16.6 million below budget), recordation and transfer tax ($27.2 million) and investment income ($4.4 million). In the face of revenue shortfalls, officials implemented cost savings measures including implementation of a hiring freeze in August 2008 ($3 million), tightening of existing expenditure controls ($9 million), freezing of certain planned one-time expenditures ($4.4 million) and reduction of the county's budgeted OPEB contribution ($5 million). These initiatives generated $26.4 million of savings; operations also benefited from a budgeted $4.8 million contingency line item. Nevertheless, these savings were not sufficient to offset under-performing revenues and the appropriation of $42.7 million of fund balance in the 2009 budget, resulting in the $72.8 million reduction of fund balance. Net of $33 million of pay-as-you-go capital spending, fiscal 2009 operations demonstrated a $31.9 million structural deficit. Total General Fund balance declined to $45 million, equal to a narrow 3.7% of revenues, including a $15 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 $32.8 million. Undesignated fund balance declined to -$2.1 million (-0.2% of revenues), however, we note that this deficit position reflects a conservative one-time accounting adjustment related to prior-year over-distribution of income tax receipts by the state; net of this $7.9 million, the undesignated fund balance would have been nominal, but positive, at $5.8 million. Taken together, RSF and undesignated fund balance comprised a narrow 2.5% of revenues (3.2% net of income tax adjustment), down from 5.2% in 2008.

The approved fiscal 2010 General Fund budget was 2.9% lower than the original fiscal 2009 budget and it projected that operating expenditures would exceed operating revenues by $69.6 million (5.8% of budgeted expenditures). Unaudited results indicate that, instead, the fiscal year ended on June 30 with an approximate $5 million addition to the General Fund balance, due to $18 million of expenditure savings offsetting about $13 million in underperforming revenues. While this expected result adds some stability to the county's credit profile by increasing reserves modestly, Moody's notes that the positive results have not restored structural balance to financial operations, as they involved some ongoing savings such as not filling vacant positions and cutting some administrative costs, as well as one-time savings such as not using reserves as originally planned. As budgeted, officials utilized $16 million drawn from the RSF; however, they under-spent a planned $12 million draw from a $20.6 million contingency fund by $8 million.

Moody's believes that fiscal 2011 is unlikely to 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 $15.5 million from the RSF. 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 (4.3% growth) and sales taxes (3.7% growth) 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. Additionally, the fiscal 2011 budget calls for the use of $1.09 million from the Golf Course reserves and $4.97 million from fund balance. Officials report that year-to-date results are ahead of budget and that they anticipate replenishing the appropriated fund balance, adding to it nominally as well as ending with $3 to 5 million in the undesignated General Fund balance. Moody's believes that management will be challenged to maintain financial flexibility as revenues continue to be affected by the ongoing recession, resulting in some diminishment of bondholder protection. 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 $90 million annually. Also positively, on Nov. 2 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 in fiscal 2011, with the likelihood of $25 million in annual new operating revenue starting in fiscal 2012. 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 1.3% overall debt burden. Debt is amortized at an average rate, with 68% 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 1.5% 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 $27 million annually out of General Fund operations, with another $15 million to $17 million annually from the enterprise funds. Officials expect to issue approximately $95 million of bond anticipation notes in April 2010. All of the county's long term debt is fixed rate and the county is not party to any derivatives agreements.

Outlook

Assignment of a negative outlook is based upon significant financial deterioration following operating deficits in fiscal years 2008 and 2009, and Moody's view that restoration of structural balance is unlikely in the near term, given the use of further reserves in the budgeting of fiscal 2010 and 2011. With reserves largely depleted and liquidity low, the county retains minimal financial flexibility to offset its reliance on economically sensitive income, recordation and transfer taxes. Risk is somewhat mitigated given room to increase the local income tax rate under the state maximum allowable rate, and given the county's large tax base, however, management faces considerable political obstacles to adopting tax rate increases that would lead to revenue growth.

WHAT COULD CHANGE THE SHORT-TERM RATING -DOWN

-The short-term rating on the commercial paper notes could be lowered if the short-term OSO rating on the Bank or the long-term rating of the County was downgraded.

WHAT COULD CHANGE THE G.O. RATING - 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 2010 audited results that are materially worse than anticipated

- Further reduction of reserves in fiscal 2011

- Failure to adopt structural budget enhancements in fiscal 2012

KEY STATISTICS

2007 population estimate: 512,154

2010 Full valuation: $85.9 billion

2010 Full valuation per capita: $167,650

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

Debt burden: 1.3%.

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)

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: $1.2 billion

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

REGULATORY DISCLOSURES

Information sources used to prepare the credit rating are the following: parties involved in the ratings, public information, and confidential and proprietary Moody's Investors Service's 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

Julie Beglin
Analyst
Public Finance Group
Moody's Investors Service

Michael J. Loughlin
Backup Analyst
Public Finance Group
Moody's Investors Service

Contacts

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


Moody's Investors Service
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New York, NY 10007
USA

MOODY'S ASSIGNS P-1 RATING ON ANNE ARUNDEL COUNTY'S (MD) GENERAL OBLIGATION BOND ANTICIPATION NOTES SERIES A (CONSOLIDATED GENERAL IMPROVEMENTS SERIES, TAX-EXEMPT COMMERCIAL PAPER) OF $68.929 MILLION
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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