Fitch Rates Howard County, MD GO Bonds 'AAA'; Remains on Negative Outlook

Business Wire, Jan 13, 2004

Business Editors

NEW YORK--(BUSINESS WIRE)--Jan. 13, 2004

Fitch Ratings assigns a 'AAA' rating to Howard County, MD's approximately $132.9 million consolidated public improvement project and refunding bonds, series 2004A and to $4.9 million of metropolitan district refunding bonds, series 2004A.

The bonds are scheduled for negotiated sale during the week of Jan. 19 through a syndicate led by UBS Financial Services, Inc. The bonds are full faith and credit general obligations of the county, payable from unlimited ad valorem taxes. Bond proceeds will refinance approximately $82.2 million of outstanding consolidated public improvement. Metropolitan district bonds for economic savings will redeem $50 million of outstanding commercial paper bond anticipation notes. The rating on $571 million of outstanding county general obligation bonds is affirmed at 'AAA'. The Rating Outlook is Negative.

Howard County's 'AAA' rating reflects the diversity of its tax base, the relative affluence of its residents, and its tradition of sound financial management and long-range planning. However, service demands are high, contributing to steady operating and capital pressures that have been more acute in the challenging revenue environment of the past two years.

Consistent with its high credit standing, the county moved decisively to meet the spending pressures by increasing its income tax rate to the maximum permitted under state law, but made few permanent adjustments to the expenditure base. Through the first six months of fiscal 2004, revenues are 3% lower than budget, requiring midyear spending reductions to achieve balance.

The Negative Outlook is based on the county's current budgetary imbalance and diminished financial position, as well as Fitch's concerns regarding its ability to restore financial flexibility consistent with our highest rating category over the next few years. While rainy day reserves have not been tapped, balances on hand at the close of fiscal 2003 fell short of the charter-mandated 7% of prior year audited spending.

Given the likelihood of tightly balanced operations in the current fiscal year, the county does not foresee fulfillment of its reserve requirements until fiscal 2006. Further, impaired financial flexibility is also evidenced by the elimination of pay-as-you-go capital funding from the operating budget, sharply reduced general fund liquidity, and largely unavoidable costs related to pending labor agreements and school enrollment.

Maintenance of the 'AAA' rating requires a return to the county's more conservative fiscal posture. Specifically, Fitch minimally anticipates the county will improve revenue forecasting and budget execution, focus on the prioritization of future spending, and restore budgetary flexibility by meeting charter minimum reserve requirements over the next one to two years.

The county's excellent schools and proximity to both Baltimore and Washington, D.C. continue to generate strong demand for housing and related commercial expansion, although the pace of growth has slowed due to controls on development and the recent economic weakness. Residential assessed valuation (AV) rose sharply over the past few years, but commercial vacancies also are up due to weakness in core industries such as photonics and fiber optics. Residential employment remains strong, with the October 2003 unemployment rate of 2.5% well below the state's 4% and the nation's 6%. Wealth levels by all indicators are high and above state and national averages.

The capital program is a sizable $1.7 billion through fiscal 2009, driven largely by the highly regarded school system. The county will again seek additional taxing power from Annapolis in 2004 to address school needs; the initiative was unsuccessful in the most recent session. Debt levels are manageable, and the county measures debt affordability annually, along with operating projections, via its spending affordability advisory committee. Overall debt ratios, net of that portion of metropolitan district utility bonds supported from user charges, is moderate at $2,423 per capita and 2.6% of market value. Debt amortizes at an above-average 68% in 10 years.