Fitch Ratings assigns a 'AA' rating to the following revenue bonds of Montgomery County, Maryland (the county):
--$40 million water quality protection charge revenue bonds, series 2012A.
The bonds will be sold via negotiation on June 27. Proceeds will finance and refinance the planning, design, acquisition, and construction of storm water management facilities and other related projects, and fund a deposit to the debt service reserve fund (DSRF). The bonds have a final maturity of June 1, 2032.
The Rating Outlook is Stable.
The bonds are special limited obligations of the county payable from amounts on deposit within the trustee-held pledged revenue fund. The county is required to make quarterly deposits to the pledged revenue fund from its water quality protection charge (WQPC) and other revenue of the county, including a carryout bag tax, which are deposited into the water quality protection fund, a special revenue fund of the county. Bond proceeds will fund a DSRF equal to the lesser of maximum annual debt service (MADS), 125% of average annual debt service, or 10% of proceeds.
The WQPC is assessed against all residential and certain non-residential property within the county based on the amount of square feet of roof, driveway, sidewalk and other fixtures or structures impenetrable by water.
The carryout bag tax is assessed at the rate of $0.05 on each customer for each carryout bag that a retail establishment provides to the customer, of which $0.01 is retained by the retailer as an administrative fee.
KEY RATING DRIVERS
STABLE REVENUE PERFORMANCE ANTICIPATED: The WQPC was first implemented in 2002 and represents approximately 95% of revenues received into the water quality protection fund. The charge is assessed against the fixed impenetrable area of a property, and is included as a line item on annual property tax bills, enforced through a tax lien and foreclosure process in the same manner as real property taxes. Historical collection rates are exceptional, and revenue from the WQPC is restricted to stormwater management purposes.
ADDITIONAL LEVERAGING & MODEST COVERAGE PROJECTED: The county plans to sell up to $235 million in parity bonds through fiscal 2018 (including the current issuance). The county's policy is to manage debt service coverage to a target of 1.25 times (x), although the rate covenant requires a more lenient 1.15x threshold.
WQPC SET BY COUNTY COUNCIL: The WQPC rate is established by resolution of the county council and is unlimited as to rate or amount. The county council has frequently approved increases in the WQPC rate in support of its stormwater management program.
FINANCIAL MANAGEMENT STRENGTH: Administration of the WQPC is the responsibility of the Montgomery County Department of Environmental Protection (MCDEP), an agency and department of Montgomery County whose sound financial management and performance underlie Fitch's 'AAA' rating on the county's general obligation (GO) bonds. Fitch also recognizes a lower level of operational risk associated with stormwater operations relative to other municipal utility systems.
EXCELLENT ECONOMIC UNDERPINNINGS: Expectations for stable revenue performance are further supported by a very stable regional economy anchored by the extensive presence of the federal government and related contracting employment, and marked by consistently low rates of unemployment, a highly skilled labor force, and very high income metrics.
INITIAL OFFERING OF BONDS BACKED BY WQPC
The WQPC was first implemented in 2002 to provide funds for the inspection and maintenance of residential and certain non-residential stormwater facilities, water quality monitoring, street sweeping, and associated operating expenses. The charge is based on the median amount of impervious surface area for a single-family dwelling in order to capture its actual contribution to stormwater runoff.
To date the county has funded its stormwater management responsibilities with current WQPC revenues, the proceeds of GO bonds, and various permit and state aid revenue. The approved fiscal 2013 - 2018 stormwater capital improvement plan (CIP) reflects a ramp up in projects in order for the county to meet the requirements under a new Municipal Separate Storm Sewer System permit (MS4 permit) issued on February 16, 2010 by the Maryland Department of the Environment. Non-compliance with the MS4 permit may result in fines and a consent decree under the Water Quality Act of 1987. The CIP totals $295 million to be funded largely through the sale of WQPC revenue bonds. The current offering is expected to be followed by the issuance of $55 million in parity bonds in 2014, $65 million in 2016, and $75 million in 2018.
WQPC ESTABLISHED BY COUNTY COUNCIL
The WQPC is set by resolution of the county council and is not subject to charter or statutory restriction as to rate or amount. As the WQPC charge is collected as part of the annual property tax bill, the ability to implement mid-year adjustments is viewed as being limited.
To support the county's mandated stormwater management efforts the county council has increased the WQPC on seven occasions since its inception, from a rate of $12.75 per equivalent residential unit (ERU) to $92.60 per ERU effective July 1, 2012. The county's WQPC rate is somewhat high relative to the charge assessed by other regional municipalities, but still only accounts for approximately 2% of an average single-family consolidated tax bill.
WQPC CREATES A LIEN ON PARITY WITH REAL PROPERTY TAXES
The WQPC is assessed as a line item on the annual property tax bill of all residential properties and certain non-residential properties throughout the county. Property tax bills are generally payable on a semi-annual schedule, due on September 30 and December 31 (the bonds have debt service payment dates of April 1 and October 1).
Unpaid charges become a lien against the property, with the same priority as a lien imposed for non-payment of real property taxes which Fitch considers a strong incentive for timely collection. The property owner does not have the ability to selectively choose which portions of the property tax bill are paid.
SATISFACTORY PRO-FORMA COVERAGE; RATE INCREASES ANTICIPATED SERVICING NEW DEBT
Based on the $92.60 per ERU effective fiscal 2013 and no change in ERUs from the current fiscal year, the county forecasts $21.6 million in WQPC revenue in fiscal 2013 (Fitch notes that the county collects WQPC revenues on behalf of the City of Gaithersburg, which are not included as revenue available to pay bondholders). The county has assumed flat bag tax revenue of $561,640 in its pro forma compared to approximately $640,000 in bag tax receipts year-to-date; this reflects the reasonable assumption that consumers respond to the tax by increasing their utilization of reusable bags. After deducting for operating expenses of the system net revenues of $4.8 million will cover MADS by 1.5x in fiscal 2013.
The county's rate model forecasts an increase in the WQPC to nearly $175 by fiscal 2018 - this reflects the full issuance of up to $235 million in bonds to fund the stormwater management CIP at a 1.5x coverage ratio. Fitch does not believe this scenario would increase risk to collection of the WQPC, which has averaged an exceptional 99.7% since fiscal 2003, or impact the service area's financial capacity to pay. The rate model does not assume growth in the number of ERUs, which have increased by a compound annual growth rate (CAGR) of 1.6% from fiscal years 2003-2012.
The pro-forma also builds up the balance in the water quality protection fund to $20.5 million in fiscal 2018 from a relatively low $3.2 million in fiscal 2012, while also satisfying the pay-as-you-go funding requirements of the current CIP ($1.1 million annually).
TRUST INDENTURE IMPOSES MODEST COVERAGE REQUIREMENTS; OFFSET BY STRONG REVENUE STABILITY
The county has covenanted in the trust indenture to impose the WQPC at a rate that results in lenient 1.15 x coverage of annual debt service after the payment of operating expenses associated with the operation of the county's stormwater management facilities. The county's current policy is to assess the WQPC in order to generate a slightly higher debt service coverage ratio of 1.25x. The additional bonds test also imposes a 1.15x coverage threshold on a net basis.
As an offset to this risk Fitch recognizes the very stable and predictable nature of the WQPC based on its strong collection enforcement mechanism, very high historical collection rates, independent rate setting authority vested in the county council, and diverse nature of the WQPC base (the ten largest property owners paying the WQPC account for only 2% of fiscal 2011 WQPC receipts).
WQPC revenues collected by the county are deposited into a segregated account held by the county (the water quality protection fund) and may not be used for governmental purpose unrelated to stormwater management programs which Fitch considers favorably. The water quality protection fund has a current balance of $3.2 million, which offers some protection against unanticipated WQPC revenue shortfalls. An additional $3.2 million is expected to be deposited in the DSRF at closing from bond proceeds.
Under the trust indenture, quarterly payments for principal and interest must be made from the water quality protection fund to the pledged revenue fund held by the trustee. Quarterly payments are essentially net obligations of the fund after other operating expenditures and become pledged to bondholders upon deposit with the trustee.
ECONOMIC PERFORMANCE REMAINS VERY STRONG
Montgomery County borders Washington, D.C. and northern Virginia, and its wealthy suburban economy is fueled by a large U.S. government presence, with depth and diversity added by the strong and expanding biotechnology sector. Leading employers include Adventist Healthcare (6,991), Lockheed Martin corp. (5,025) and Marriott International (3,957). The county's unemployment rate has been well below state and national averages since at least 1998. The county's unemployment rate remains a very competitive 4.8% as of April 2012 relative to the state (6.5%) and U.S. (7.7%).
While the rate of job growth within the county has not been robust, it has been very steady. Monthly employment levels have increased compared to the same period in the year prior for 16 consecutive months. The county's median household income and per capita money income are 180% and 173% of the national average, respectively.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
In addition to the sources of information identified in the 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, Zillow.com, National Association of Realtors, and Property and Portfolio Research.
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria' (Aug. 15, 2011).
--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 15, 2011).
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
U.S. Local Government Tax-Supported Rating Criteria
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