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Rating Action:

Moody's assigns Aa3 to Maryland's $426.44M Balt. City Schools Construction Bonds Series 2017; outlook stable

15 Nov 2017

New York, November 15, 2017 -- Issue: Baltimore City Public Schools Construction and Revitalization Program Revenue Bonds Series 2017; Rating: Aa3; Rating Type: Underlying LT; Sale Amount: $426,440,000; Expected Sale Date: 11/29/2017; Rating Description: Lease Rental: Appropriation;

Summary Rating Rationale

Moody's Investors Service has assigned a Aa3 rating to the Maryland Stadium Authority's $426.4 million Baltimore City Public Schools Construction and Revitalization Program Revenue Bonds Series 2017. The rating reflects State of Maryland's Aaa rating, the subject-to-appropriation nature of a substantial portion of the revenues funding the deposits that secure the bonds, the high essentiality of the funded projects, and ample coverage of the proportionate share of debt service by the City of Baltimore (Aa2 stable) income tax backstop for the city's contribution. The rating also reflects the lack of strong bondholder protections that allow for potential impairment by legislative actions and the significant portion of revenue contributed by an allocation of state lottery proceeds, which, while offering very strong coverage, are volatile and risky over the 30-year horizon of the bonds. The outlook is stable.

Rating Outlook

The bonds carry the stable outlook of the state of Maryland.

Factors that Could Lead to an Upgrade

- Statutory non-impairment covenant

- State backstop to lottery revenues

Factors that Could Lead to a Downgrade

- Significant reductions in state education aid to Baltimore City Board of School Commissioners (Aa1 stable)

- Significant reductions in state lottery and/or Baltimore City income tax revenues

- Additional prior claims on lottery proceeds

- Legislative actions that impair bondholders, such as causing school aid that currently supports the bonds to be redirected to other purposes

Legal Security

The bonds are a limited obligation of the Maryland Stadium Authority (MSA) payable solely from deposits in a financing fund, described below. The bonds are not a debt, liability or pledge of the faith and credit or taxing power of the State of Maryland, the City of Baltimore, the MSA, the Lottery Agency or any other governmental unit.

The MSA, the Baltimore City Board of School Commissioners, the City of Baltimore and the Interagency Committee on School Construction are parties to a memorandum of understanding (MOU) laying out the roles and responsibilities of each party. The bonds are issued by the Maryland Stadium Authority (MSA), which has certain oversight and management responsibilities for the construction projects.

The bonds are secured by statutorily-required deposits of a minimum of $60 million per year into an MSA-controlled financing fund. Of this amount, $30 million is from funds appropriated by the General Assembly and deposited directly into a financing fund held by the state comptroller and controlled by the MSA. Principal and interest payments are due November 1 and May 1. The deposits are as follows:

" Lottery proceeds ($20 million) - The comptroller is required to deposit, or cause to be deposited, funds from the State Lottery Fund on a semi-annual basis in fiscal years in which bonds are outstanding. The lottery funds do not require appropriation and are subject to a prior claim of $20 million per year for the Maryland Stadium Facilities Fund.

" Baltimore City school aid ($20 million) - A portion of state education aid due to the Baltimore City school board is transferred by the comptroller to the financing fund. State education aid is subject to appropriation by the General Assembly. The comptroller is required to deposit equal installments of school aid on a bi-monthly basis.

" City of Baltimore education aid funds for retiree health costs for the BCSB ($10m). State education funds leveraged by Baltimore's payments to the BCSB and currently used by the BCSB for capital expenditures under a previous agreement between the state, Baltimore City and the BCSB. The funds are now required to be deposited by the comptroller from state education aid into the financing fund, on a bi-monthly basis.

" City of Baltimore bottle tax, table game proceeds and casino rent (minimum deposit of $10 million). Revenue from three sources to be deposited on a semi-annual basis on November 1 and May 1. Statute requires minimum deposits of $10 million annually in two $5 million deposits until the bonds are no longer outstanding. These deposits are backed up by certain reserves held in a separate facilities fund described below, and a state intercept of undistributed Baltimore City income tax collections.

Deposits to the financing fund are pledged to the trustee. The financing fund receives deposits from parties; pays debt service and reasonable bond-related and administrative charges. The balance of the financing fund, which has been receiving deposits since 2014, was approximately $44.2 million as of June 30, 2017.

Sources of Deposits

School aid is appropriated by the General Assembly to the state's school aid fund and distributed to local governments based primarily on state school aid formulas. No further appropriation is required to enable the comptroller to make the necessary transfers to the financing fund. The BCBSC received about $900 million in state school aid in fiscal 2015, net of teacher retirement costs. As of June 30, the school board had about $160 million in debt outstanding, with capacity to issue an additional $184 million based on its debt policy.

The Lottery Agency generates ticket sales of roughly $1.7 billion per year. Proceeds after prizes, administration, and certain claims are transferred to the state general fund. and equaled about $530 million in fiscal 2016. The $20 million required deposit to the financing fund by the lottery agency occurs prior to distribution to the state and after a $20 million transfer to the Maryland Stadium Facilities Fund to support debt service for sports stadiums and certain distributions to veteran's groups. Coverage of the transfer amount after prior claims is in excess of 25x, based on the fiscal 2016 transfer to the state.

The sources of Baltimore City's required deposits are a beverage container tax, table game proceeds from the Horseshoe Casino, and participation rent payments from the same casino. The container tax was implemented in 2010 at a $0.02 levy on distributors per beverage container, and raised to $0.05 per container in 2013. Tax receipts from the tax were about $13.2 million in fiscal 2016. The table game proceeds were not available until the issuance of video lottery operating license for a new MGM Casino. Baltimore City's allocation of these proceeds are 5% of Horseshoe Casino proceeds, of which half will be deposited into the financing fund. This yielded partial-year collections of $1.8 million during fiscal 2017, and is expected to reach more than $3 million annually beginning in fiscal 2018. The third source of revenues is a requirement that the city deposit on a semiannual basis 10% of participation rent it receives from the Horseshoe Casino. The city's payment is projected to be a minimum of $1.1 million for fiscal year 2017. City beverage tax receipts and participation rent deposits are subject to appropriation by the Baltimore City Council.

Two Mechanisms Backstop Baltimore City Deposits

The authorizing statute created a facilities fund to mitigate risk from volatility or unfavorable trends in Baltimore City payments. The fund receives excess deposits, if any, from Baltimore City and other amounts in the financing fund not needed for debt service and debt service reserves subject to the discretion of the MSA. If excess funds are transferred from the financing to the facilities fund, the MSA may retain up to $2.5 million per year, up to a cap of $20 million, as a reserve against any future shortfalls in deposits from the city. Excess deposits above the $2.5 million annual maximum may be used for various expenses including curing deposits to the financing fund and paying debt service on the bonds even though the facilities fund, including any reserve, is not pledged to the bonds. An executive committee established by the MOU may increase the cap on reserves based on five-year forecasts of the beverage container taxes, table game proceeds and casino rental payments.

If there is a deficiency in Baltimore City payments that reserves are insufficient to cover, the MSA is required to direct the comptroller within 10 business days of a missed deposit to withhold an equal amount of Baltimore income tax revenue, which the state collects, and credit it to the financing fund by the following June 15 or December 15, well in advance of debt service due dates. Baltimore's income tax receipts were $346 million in fiscal 2016. The city's income tax rate is 3.2%, the maximum allowed by law.

Lack of Rate Covenants or Nonimpairment Clause Mitigated by Project Essentiality

The security for the bonds consists of a pledge of financing fund deposits and not the revenue sources themselves. There are no rate covenants governing the Baltimore City revenues and state school aid is subject to legislative appropriation. The governing statute does not contain non-impairment language. In fact, the tripartite financing agreement has proved somewhat elastic as the state has responded to budgetary stresses of Baltimore City Schools. Prior to the initial issuance of bonds, the state legislature canceled the fiscal 2016 deposit of school aid in order to redirect the aid to the Baltimore school system to address a budget gap. For fiscal 2018, the legislature reduced the amount of retiree healthcare related school aid to be diverted to the financing fund in order to increase aid to the school system, offsetting the reduction with excess revenues that had accumulated in the facilities fund from the Baltimore City beverage container tax and table game proceeds.

This activity by the state demonstrates the essentiality of the renovation of Baltimore's schools, helping to mitigate the risks pertaining to no non-impairment language. Furthermore, the lack of rate covenant for Baltimore's contributions is mitigated by the interception of its income tax revenues which provide more than ample coverage of its required contributions.

Use of Proceeds

Proceeds of the Series 2017 bonds will be used to renovate or replace schools in Baltimore City in accordance with the Baltimore City Public Schools Construction and Revitalization Act of 2013.

Obligor Profile

Maryland is the 19th-largest state by population, at 6 million. Its state gross domestic product is 15th largest. The state has above-average wealth, with per-capita personal income equal to 117% of the US level.

Methodology

The principal methodology used in this rating was Lease, Appropriation, Moral Obligation and Comparable Debt of US State and Local Governments published in July 2016. The additional methodologies used in this rating were US Public Finance Special Tax Methodology published in July 2017 and State Aid Intercept Programs and Financings: Pre and Post Default published in July 2013. Please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.

Regulatory Disclosures

For ratings issued on a program, series or category/class of debt, this announcement provides certain 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 certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain 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.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

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.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Marcia Van Wagner
Lead Analyst
State Ratings
Moody's Investors Service, Inc.
7 World Trade Center
250 Greenwich Street
New York 10007
US
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Timothy Blake
MANAGING DIRECTOR
Municipal Supported Products
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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