Fitch Rates Harford County, MD's GO Bonds 'AAA'; Outlook Stable

Fitch Ratings assigns an 'AAA' rating to the following Harford County, Maryland (the county) bonds:

--$45 million consolidated public improvement bonds, series 2015A;

--$74.08 million refunding bonds, series 2015B.

The proceeds of the series 2015A bonds will be used to fund certain capital improvements for general county projects and water and sewer projects. The proceeds of the series 2015B bonds will be used to refund the series 2009 bonds for debt service savings. The bonds will sell competitively on April 21.

In addition, Fitch affirms the following ratings:

--Approximately $430.2 million in outstanding general obligation bonds (GOs) at 'AAA'.

The Rating Outlook is Stable.

SECURITY

The bonds are general obligations of the county, for the payment of which the full faith and credit and unlimited taxing power of the county are pledged.

KEY RATING DRIVERS

SATISFACTORY FINANCIAL PROFILE: Financial operations are characterized by a conservative approach to budget development, timely spending adjustments, and maintenance of reserves comfortably above the county's internal reserve policy equal to 5% of spending.

ECONOMY ANCHORED BY MILITARY PRESENCE: Historically low unemployment and above-average income indicators relative to the nation reflect the high quality of the local labor force, and the county's favorable location along the Baltimore-Washington, D.C. corridor. The county is home to the U.S. Army's Aberdeen Proving Ground (APG) and a cluster of federal government and private contractor employers.

MODERATELY LOW DEBT PROFILE: Harford County continues to adhere to conservative debt management guidelines, which have allowed overall debt levels and amortization to remain above average.

CARRYING COSTS ARE LOW: Carrying costs including debt service, pension and other post-employment benefits (OPEB) are low but expected to increase modestly as the county issues additional debt and assumes a greater share of state teacher pension costs.

RATING SENSITIVITIES

EXISTING RESERVES PROVIDE A SOUND FINANCIAL CUSHION: The rating is sensitive to shifts in fundamental credit characteristics, including the county's strong financial management practices and healthy reserve levels. The Stable Outlook reflects Fitch's expectation that such shifts are unlikely over the next review cycle.

CREDIT PROFILE

The county is located 20 miles north of the city of Baltimore and abuts the Chesapeake Bay to the east. Three interstate highways (I-95, U.S. Route 40 and U.S. Route 1) and three rail lines (Amtrak, CSX and Maryland Rail Commuter) connect residents and businesses in the county with the U.S. Eastern Seaboard. The county's estimated 2014 population of 249,215 represents a 1.8% increase from the 2010 U.S. Census.

STRONG FISCAL MANAGEMENT MARKED BY HEALTHY RESERVE LEVELS

Fiscal 2014 ended with a general fund operating deficit after transfers of $16.5 million (3.3% of spending) compared to a budgeted $22 million use of fund balance. The drawdown was largely driven by $17 million in various capital projects expenditures. The county's unrestricted fund balance remains healthy at approximately $67 million or 13.4% of spending.

The county adopted a budget for fiscal 2015 that was balanced with a $2.3 million fund balance appropriation. In addition to increased funding for education and teachers' pension costs, the budget also funds $5 million in pay-go capital funding. At mid-year, management is projecting a higher $5.9 million use of fund balance due to the cost of incentive payments to fund an early retirement offering which would reduce the unrestricted balance to $64.7 million or 13.2%.

ADEQUATE REVENUE RAISING FLEXIBILITY

Typical of Maryland counties, property and income taxes produced approximately 47% and 39%, respectively, of fiscal 2014 general fund revenue. Property tax revenues have declined annually between fiscal 2012 and 2014, reflecting a decline in taxable assessed value; however, collections remain very strong in excess of 99%. Due to improvement in employment and the economy, income tax revenues have increased annually over the past four fiscal years. Estimated year-end fiscal 2014 collections are 2.7% more than fiscal 2014 actuals but 1.8% under budget. The county last increased the income tax rate to 3.06% in 2001, which compares to the 3.2% maximum rate allowed by state law. An increase to the maximum rate would generate $8.7 million in additional revenue. The county is not subject to any limitation on its property tax rate or levy; however, the county last increased its tax rate in 1982 creating uncertainty as to the practical viability of a tax rate increase as a revenue raising option.

GROWING ECONOMIC BASE ANCHORED BY MILITARY PRESENCE

The APG is a 72,000-acre complex historically operated as a test and evaluation facility for the U.S. Army. APG has evolved considerably following the Base Realignment and Closure Act of 2005 (BRAC). The post is considered a 'megabase' by the U.S. Army, and a leader in science and technology, cyber-security, chemical and biological defense, and medical research for the joint services.

APG is by far the single most influential enterprise in the local economy. APG accounts for approximately $1.8 billion in economic activity within the state of Maryland and $1.1 billion within Harford and neighboring Cecil County, and there are approximately 22,000 military and civilian jobs on and off post (nearly double the figure prior to BRAC). According to the county, employment at APG is expected to remain flat through 2017. The potential for additional private sector and higher wage employment opportunities in support of APG's expansion is viewed favorably by Fitch. A number of office and technology business parks are already under construction in both the county and on APG.

The county's manufacturing and distribution sectors remain strong and continue to expand. During 2014 Gordon Food Service added a new 242,000-square foot distribution facility and plans to add 150 jobs in the next three years. Frito-Lay recently expanded its presence in the county with a $60 million capital investment adding 100 new jobs.

Harford County's rate of unemployment as of December 2014 was 5.1% compared to 5.3% in Maryland and 5.4% nationally. The county's wealth levels are strong with per capita income and median household income at 126% and 152% of the national average.

FAVORABLE DEBT PROFILE

Harford County's prudent debt policies support a modest tax-supported debt burden. Overall debt equals just 2% of market value, or $2,350 per capita. Debt servicing costs accounted for a low 9% of total governmental spending in fiscal 2014. Amortization is rapid with 64% retired in 10 years.

Fitch expects the county's debt burden to remain manageable. The fiscal 2016-2020 governmental capital improvement plan totals approximately $633.3 million and is viewed as flexible, with a limited number of essential projects. The plan is nearly 35% debt-funded and 36% pay-go funded. The additional debt is not expected to impact the debt burden given the rapid amortization of outstanding debt.

OTHER LONG-TERM LIABILITIES COSTS ARE LOW

Fitch does not expect long-term liabilities related to retirement benefits to pressure future operations. The county provides retirement benefits to its employees through the state plan, a single employer defined benefit and a defined benefit length of service award to its volunteer firefighters to which it annually funds 100% of the actuarially-required contribution (ARC). As of July 1, 2014, the sheriffs' plan was 72% funded and the firefighters plan was 71% as of July 1, 2013. Using Fitch's 7% discount rate, funding levels were 72% and 79.5%, respectively. The aggregate unfunded actuarial accrued liability (UAAL) for these plans does not represent a material burden on the county's resource base at less than 0.1% of market value.

The funding for the state's pension obligations for state employees has begun to improve after a decade of weakening that resulted from an actuarial contribution methodology now being phased out and market losses in the last downturn. On an actuarial basis, funded ratios as of June 30, 2014 rose to 61.9% for state employees; the corresponding funding was 59.7% as of June 30, 2010.

The county continues to prudently fully fund the ARC for OPEB; as of July 2013 the UAAL associated with OPEB totaled approximately $121 million or 0.4% of market value and obligations were 33% funded. Carrying costs for debt service, pension (including teachers' pension costs) and OPEB totaled a manageable 14.8% of fiscal 2014 governmental fund spending.

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=981984

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