NEW YORK (April 8, 2016)—Fitch Ratings has affirmed the 'AAA' rating on the following bonds of Calvert County, Maryland (the county):
--$132.5 million of outstanding general obligation (GO) bonds.
The Rating Outlook is Stable.
Security
The bonds are general obligations of the county backed by a pledge of its full faith, credit and unlimited taxing power.
Key Rating Drivers
SOUND FINANCIAL POSITION: Fitch expects the county to maintain a healthy level of reserves despite several years of expected continued drawdowns for capital and operations. Sound budgetary flexibility is highlighted by ample revenue raising capacity and spending control.
MANAGEABLE LONG-TERM LIABILITIES: Debt metrics and carrying costs for debt service, pension and other post-employment benefits (OPEB) are low.
WASHINGTON D.C. MSA BEDROOM COMMUNITY: The county is part of the Washington-Arlington-Alexandria metropolitan statistical area (MSA) and benefits from a strong regional labor market with consistently low unemployment rates and higher wealth levels. Moderate taxpayer concentration exists in the energy sector.
INCREASING EXPOSURE TO REVENUE CONCENTRATION: The county's significant exposure to revenue concentration from two energy companies is increasing. The county projects forecasted revenue from one of the companies to more than double to 15% by fiscal 2018.
Rating Sensitivities
FINANCIAL FLEXIBILITY: The rating is sensitive to the county's demonstrated ability to maintain a high level of financial flexibility, including satisfactory reserves.
Credit Profile
Calvert County is located in southern Maryland approximately 42 miles southeast of Washington D.C. and 64 miles south of Baltimore. Calvert County is located on a peninsula, bound on the east by the Chesapeake Bay and on the west by the Patuxent River, with 110 miles of shoreline. The county has a 2015 estimated population of 90,595.
Above-Average Economic Factors
Calvert County's unemployment rate is low at 4.2% in January 2016 and benefits from the county's proximity to larger regional employment centers. Approximately 63% of the county workforce commutes outside its boundaries. Median household income is 25% and 77% above state and national levels, respectively.
The two largest private sector influences on the county economy and budget are Constellation Energy Group's Calvert Cliffs nuclear power plant and Dominion's Cove Point liquefied natural gas (LNG) facility. Constellation and Dominion account for 16% of the county's tax base, and their investment in the county is expected to increase as Dominion adds a $3.8 billion LNG exporting terminal to its plant that comes online in fiscal 2018.
Financial Position Remains Sound
Property taxes are the largest revenue source for the county at 60%, followed by income tax at 31%. Property tax revenues are not subject to a cap or limit, and the tax rate is competitive with other governments in the region. The income tax rate is capped at 3.2% and the county's current rate is 2.8%.
Recent operating deficits have been largely driven by increased debt service, pension, and insurance costs without offsetting revenue actions. Fiscal 2015 operations resulted in a $7.9 million use of fund balance, which was larger than the $5.9 million appropriation in the original budget. Both income tax and property tax revenues came in under budget with property taxes decreasing year-over-year. The year concluded with an unrestricted fund balance of $44.9 million or a healthy 18.8% of spending. The unrestricted fund balance includes the county's stabilization reserve equal to $19.4 million or 8% of spending (the county's policy requires the higher of $10 million or 8% of current budgeted expenditures).
The fiscal 2016 adopted budget included a fund balance appropriation of $5.6 million, which year-to-date results show the county as on track to realize. The deficit includes a $3.3 million operating deficit as well as approximately $2.3 million in pay-go capital spending. The unrestricted balance is expected to remain sound at $40.5 million or 16.9% of spending.
The recommended fiscal 2017 budget includes use of an additional $8.9 million of fund balance. Operating revenues are reasonably forecast to increase 2% from fiscal 2016 year-to-date projections. No tax rate increases or other material revenue enhancements are included and total general fund reserves are budgeted to decrease but remain sound at 13% of spending.
Fitch Expects County To Address Forecasted Gaps
The county has chosen in recent years to use a portion of its reserves, rather than increasing revenues or cutting spending in anticipation of receipt of PILOT payments from Dominion (IDR of 'BBB+'), for its new LNG exporting terminal. Plant construction is at or ahead of schedule for completion in fiscal 2018 at which time annual PILOT payments will average $55 million (24% of fiscal 2016 revenues) for five years, followed by a 42% tax credit for nine years. Dominion's exporting contracts are fully subscribed at capacity in fixed 20-year contracts with investment-grade counterparties (see Fitch's March 2016 press release, 'Fitch Revises Dominion Resources' Remarketed Junior Sub Notes Rating to 'BBB''). The county forecasts a break-even budget in fiscal 2018, at which point previously postponed non-recurring expenditures such as funding the OPEB trust and making transfers to the capital fund are increased.
Manageable Long-Term Liabilities
Overall debt levels are low at less than 1% of market value and $1,152 per capita. The county aggressively repays its outstanding debt with 86% retired within 10 years - leaving ample capacity to fund future borrowing needs. The county's capital plan includes issuing $108 million in tax supported debt by 2022. Fitch expects debt levels to increase but remain manageable.
The county manages three single-employer defined benefit pensions plans; one for general employees, another for the sheriff's department, and a third, smaller plan for the volunteer firefighters. The county plan for general employees was closed in 1999 when new employees were moved to a defined contribution plan. The funded status of the pension plans on a combined basis is 86% as reported by the county and slightly less at 80% when calculated using a 7% rate of return. The size of the combined unfunded liability is quite small at $35.3 million, or less than 0.3% of market value.
Fitch estimates the cost of servicing the county's outstanding debt combined with nearly all actuarially-required pension payments and OPEB pay-go contributions at a low 9.3% of fiscal 2015 governmental spending.
Additional information is available at 'www.fitchratings.com'.