Fitch Rates Montgomery County, MD's $821.87MM GOs 'AAA'; Outlook Stable

Fitch Ratings has assigned the following ratings to Montgomery County, Maryland (the county) general obligation (GO) bonds:

--$500 million consolidated public improvement bonds of 2014, series A 'AAA';

--$321.87 million consolidated public improvement refunding bonds of 2014, series B 'AAA'.

The bonds are scheduled for competitive sale on Nov. 6. Proceeds of the series A bonds will finance various capital projects in the county and refinance all or a portion of certain bond anticipation notes. Proceeds of the series B bonds will be used to refund certain of the county's GO bonds for mostly upfront savings.

In addition, Fitch affirms the following:

--$2.35 billion GO bonds at 'AAA';

--$21 million certificates of participation (COPs), series 2007 and 2010 at 'AA+';

--$52 million taxable limited obligation certificates (facility and residential development projects), series 2010A and 2011 at 'AA';

--$29.3 million lease obligations (Metrorail Garage Projects), series 2011 at 'AA';

--$44.52 million Maryland-National Capital Park and Planning Commission (MNCPPC) park acquisition and development GOs at 'AAA'.

The Rating Outlook is Stable.

SECURITY

The GOs are secured by the full faith, credit, and taxing power of Montgomery County.

The COPs, limited obligation certificates, lease obligations and lease revenue bonds are secured by payments subject to annual appropriation. A two-notch distinction is assigned where bondholder payments are not secured by a leasehold interest in essential governmental facilities. The series 2011 lease obligation (metrorail garage project) revenue bonds are secured by the county's obligation to replenish any reserve fund deficiency.

KEY RATING DRIVERS

HEALTHY FINANCIAL FUNDAMENTALS: Montgomery County has a sophisticated management team that uses conservative budgeting and has established debt and reserve policies that have resulted in healthy reserve and liquidity levels.

SOLID OPERATING PERFORMANCE: Strong operating results in fiscals 2011 through 2013 have materially enhanced the county's reserve position. Fitch believes operations will remain positive and in line with the county's plans.

BALANCED FISCAL PLAN: The county has adopted a multi-year fiscal plan that balances current resources against spending and continues to address other critical operating priorities relating to fund balance replenishment, pay-as-you-go capital, and other post-employment benefits (OPEB).

STRONG ECONOMIC CORE: The stable regional economy is anchored by the extensive presence of the federal government and related contracting employment, marked by consistently low rates of unemployment, a highly skilled labor force, and very high income metrics.

DEBT REMAINS MODERATE: Debt ratios are expected to remain at a moderate level despite some pressure from future bond issuance plans to fund the county's capital improvement program (CIP). The county has prudently managed its exposure to other long-term liabilities related to pension and OPEB.

REVENUE BOND RATING DISTINCTION: The ratings on the COPs and the limited obligation certificates are notched down from the county GO rating, reflecting risk to annual appropriation by the county. The differing ratings reflect the presence and essentiality of leased assets for various series of bonds as well as the value of the collateral relative to debt outstanding.

RATING SENSITIVITIES

CONTINUED STRONG FINANCIAL POSITION: The rating is sensitive to shifts in fundamental credit characteristics, including the county's strong financial management practices. The 'AAA' GO rating and Stable Outlook reflect Fitch's expectation that such shifts are unlikely.

CREDIT PROFILE

Montgomery County borders Washington, D.C. and northern Virginia. The county's estimated 2013 population of 1,016,677 is projected to increase to 1,075,000 by 2020.

ECONOMIC PERFORMANCE REMAINS VERY STRONG

Montgomery County continues to exhibit a very impressive economic profile. The county has gained employment each year between 2010 and 2013, although the employment base has declined slightly in 2014. The August 2014 unemployment rate is low at 5.1%, well below those of the U.S. (6.3%) and Maryland (6.6%).

The county remains one of the wealthiest in the country with per capita money income and median household income at 170%-180% of the national benchmark. Favorable wealth characteristics are fueled by the highly educated workforce (almost 57% of the adult-aged population holds a bachelor's degree or higher compared to 28% for the nation) and the significant presence of the U.S. government and contractors within the information and intelligence, biotechnology, and high-tech manufacturing industries.

Federal government employment is led by the U.S. Department of Health and Human Services (28,195 employees) and U.S. Department of Defense (DoD; 11,686 employees). Concerns with respect to budget cuts at the DoD are somewhat tempered by the nature of defense operations within the county, which center on the Walter Reed National Military Medical Center and the U.S. Army Research Laboratory. The Walter Reed Army Medical Center was relocated from its prior location in Washington D.C. to the campus of the National Naval Medical Center in Bethesda in November 2011, a move that created 2,500 new jobs and increased annual visitors by 500,000. Currently, a new $300 million federal intelligence campus is under construction in Montgomery County that will serve as home to 3,000 employees of the Office of the Director of National Intelligence.

SHARP IMPROVEMENT IN RESERVES

Sound operating surpluses led to increased reserves by $386.4 million since fiscal 2010 to $502.9 million in fiscal 2013. The fiscal 2013 reserves are equivalent to 17.4% of general fund spending and transfers out. Fiscal 2013 operating results were strong reflecting a $93 million operating surplus (3.2% of spending) to unrestricted general fund balance. Estimated fiscal year-end 2014 results reflect a $22.3 million increase to the revenue stabilization fund (RSF) and $53.3 million to the unrestricted general fund balance, mainly due to strong income tax performance, conservative revenue estimating and debt service savings.

The county's fiscal policy is more conservative than Fitch's standard measure of fund balance. It compares the sum of the RSF and the unassigned portion of the general fund balance to adjusted governmental revenues. The county's fiscal policies require a minimum reserve equal to 5% of revenue, building up to 10% by fiscal 2020. The fiscal plan estimates a reserve level equal on a budgetary basis to 10% of adjusted governmental revenues at year-end fiscal 2014.

FISCAL PLAN ADDRESSES KEY PRIORITIES

The county's fiscal plan for fiscals 2015-2020 addresses a number of key initiatives. The plan matches recurring revenue against recurring spending, and while the adopted fiscal 2015 budget does propose a larger $69.6 million use of existing reserves (for non-operating purposes) the county forecasts adding more than $124.3 million to the revenue stabilization fund over the plan period.

The $4.3 billion tax-supported adopted fiscal 2015 budget funds a total of $79.4 million in pay-as-you-go capital (increasing to $111 million by the end of the plan), softening demands on long-term debt issuance. The fiscal 2015 budget fully funds the actuarial required contribution for OPEB. Eligibility requirements and the cost-sharing formula for retiree health benefits were changed in 2011, which has helped control OPEB costs. The budget also funds the second wage increase in four years for general government employees, which is projected to cost $28 million in fiscal 2015.

The fiscal plan also fully funds additional costs associated with legislation adopted by the state in 2012 related to the maintenance of effort (MOE). The MOE provides a funding floor for the Montgomery County Public Schools and Montgomery College and shifts funding responsibility to the counties from the state for the normal cost for teacher pensions. Education costs are the county's largest expenditure item at over 50%.

DEBT TO REMAIN AFFORDABLE DESPITE SIZABLE ANNUAL ISSUANCES

Net direct and overlapping debt of almost $2.9 billion equates to $2,875 per capita or a low 1.6% of market value. Tax-supported debt service is budgeted at $314 million in fiscal 2014 or approximately 10% of unaudited fiscal 2014 tax-supported spending. Amortization is rapid at 66% in 10 years. These key debt metrics are considered generally positive by Fitch.

The current issuance will refinance $500 million of bond anticipation notes and $321.87 million of long-term debt. In the short term, the county will issue an additional $300 million of commercial paper. The remaining debt issuances during 2014 are expected to be modest refunding and an energy conservation bond issuance.

Other long-term obligations related to pensions and OPEB are moderate and well managed. The county's defined benefit pension plan is satisfactorily funded at 78.8%, or an estimated 75% (adjusted by Fitch to assume a 7% investment rate of return) and the Fitch-adjusted estimate of unfunded actuarial accrued liability of $1 billion is equal to 0.5% of market value.

The county's total pension contribution for fiscal 2013 (including payments made to a defined contribution plan, the state plan, and length of service award program) totaled $145.8 million or approximately 3.6% of governmental fund spending. The defined benefit pension plan was closed to new non-public-safety hires on Oct. 1, 1994. Recent revisions affecting cost-of-living-adjustments and employee contribution rates reinforce management's commitment to pension cost control. Pension costs for fiscal 2014 totaled $164.3 million. The increase reflects an increase in the number of public safety participants.

The county established a trust to begin prefunding its OPEB costs in 2007. OPEB costs accounted for 2.3% of total governmental spending in fiscal 2013. The fiscal 2015 budget includes full funding of the ARC ($130.4 million).

Additional information is available at 'www.fitchratings.com'.

In addition to the sources of information identified in Fitch's Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope, University Financial Associates, S&P/Case-Shiller Home Price Index, IHS Global Insight, National Association of Realtors.

Applicable Criteria and Related Research:

--'Tax-Supported Rating Criteria' (Aug. 14, 2012);

--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 14, 2012).

Applicable Criteria and Related Research:

Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015

U.S. Local Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=904254

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