From Fitch Ratings:
Fitch Ratings assigns an ‘AAA’ rating to the following Harford County, Maryland (the county) general obligation (GO) bonds.
–$91 million Public Improvement Bonds (tax-exempt, direct payment Build America), series 2010A;
–$102.575 million Public Improvement Bonds (tax-exempt, direct payment Build America), series 2010B;
–$27.8 million refunding bonds series 2010.
The bonds are expected to sell competitively the week of June 1st.
In addition, Fitch affirms the ‘AAA’ rating on the county’s $293 million in outstanding GO bonds.
The Rating Outlook is Stable.
–Debt levels are moderately low and expected to remain so due to prudent planning of future infrastructure development.
–Aberdeen Proving Ground, with its unique military mission, anchors an economy still concentrated in military employment though increasingly diversifying.
–Reserves levels are sound and buttressed by strong financial management.
–Pension funding levels are below-average, although the county has demonstrated its willingness to allocate additional resources to this area.
KEY RATING DRIVERS.
–Positive operating results should continue despite budgetary pressures and the broader recessionary climate.
–Pension contributions equal to or exceeding the annual required contribution should, over time, elevate the funding levels.
The bonds are secured by the county’s pledge of its full faith and credit and its unlimited taxing power.
Including both suburban and rural areas, Harford County lies northeast of Baltimore on the Chesapeake Bay. The county’s location on the I-95 corridor in Northeast Maryland offers access to prominent research institutions such as Johns Hopkins and the University of Maryland, as well as Aberdeen Proving Ground (APG), a military research facility.
APG, with its unique military mission, is expected to gain increased economic influence as a result of the most recent base realignment and closure commission (BRAC) process, with a projected increase of 8,200 jobs on-post by 2011 and as many as 20,000 related positions by 2015.
Private sector development in the county has been bolstered by $1.2 billion in private investment over the past five years. The proposed build out of office and flex space to meet BRAC contractor demand may exceed an additional $1 billion, and the construction of the Department of Defense (DoD) facilities on APG is budgeted at $1.3 billion.
Distribution, manufacturing, and an expansion into sports marketing and tourism round out the employment base as seen by the 9.4% of earnings in professional and business services in 2008. The county’s employment base is further diversified by the presence of the Higher Education and Applied Technology Center (HEAT), a 152-acre site that is central to Harford County’s efforts to cultivate technology industry growth and higher education programming to support both industry and APG. The residential unemployment rate of 8.1% in March 2010 was slightly above the Baltimore-Towson MSA and state which, were, 8.1% and 7.7% respectively. Income indictors are solid, as demonstrated by a median household income slightly above the MSA and the state and solidly above the nation.
Financial operations are characterized by maintenance of sound reserves, a conservative approach to budget development, and timely revenue and spending adjustments. Fiscal policies governing multiyear planning, reserve retention, and use of surplus funds for capital and other one-time spending aid in steady operating performance. Fiscal 2009 ended with an anticipated $9 million fund balance reduction, offset by the county’s planned expenditures of $14 million for pay-as-you-go capital spending and $6 million towards OPEB liability funding. Despite the drawdown, unreserved fund balance levels at the conclusion of fiscal 2009 were a sound 11.2% of spending. The enacted fiscal year 2010 budget incorporated significant pay-go financing reductions and five days of employee furloughs to achieve minimal fund balance appropriation and maintenance of the county’s 5% rainy day fund. The county is on track to meet the budget and anticipates ending the fiscal 2010 year flat in the general fund. The adopted fiscal 2011 budget does not include any layoffs or furlough days.
The county’s long-established development zone has directed utility and other necessary infrastructure to well-defined zones, limiting expensive extensions to more rural areas, and the county has a history of solid pay-as-you-go capital financing. Harford County’s debt ratios are therefore expected to remain moderately low in spite of growth related needs fueled by the APG expansion. With this issue, overall debt totals approximately $2,272 per capita and 1.9% of market value. Payout is rapid, with 57% retired within 10 years. The $845 million capital improvement plan for fiscal years 2011-2016 prudently maintains debt service payments within the county’s 8% limit, in contrast to plans of previous years. The county’s significantly underfunded pension plans for sheriff and fire employees are the only debt profile characteristics that are below average for the rating category. While the county has fully funded its annual required contribution contributions for the past several years, overall funded rations are low for the rating category.
Fitch expects that pension contributions equal to or exceeding the annual required contribution should elevate the funding levels.
Considerations for Taxable/Build America Bonds Investors
The following sector credit profile is provided as background for investors new to the municipal market.
Local Government General Obligation Bonds.
The unlimited taxing power of most local government general obligation pledges is the broadest security a U.S. local government can provide to the repayment of its long-term borrowing, and therefore is the best indicator of its overall credit quality. The average local government general obligation rating is ‘AA’ with approximately 85% rated at or above ‘AA-‘ and 1% rated ‘BBB+’ or below. The relatively high ratings reflect local governments’ inherent strengths: the authority to levy property taxes, nonpayment of which can result in property foreclosures; additional taxing power that can include sales, utility, and income taxes; and essentiality of and lack of competition for services provided by local governments. Those with low investment-grade or below-investment-grade ratings generally have a combination of a limited or highly volatile economic base, high levels of long-term liabilities including debt and post-employment benefits, and/or unusually limited financial flexibility.