CREDIT OPINION Wicomico County, MD New Issue - Moody's Assigns Aa2 to Wicomico County, MD's GO Bonds New Issue Summary Rating Rationale Moody's Investors Service has assigned an Aa2 rating to Wicomico County's (MD) 20.5 million General Obligation Consolidated Public Improvement and Refunding Bonds of 2017. The bonds are secured by the county's general obligation limited tax pledge. Concurrently, Moody's has affirmed the Aa2 rating on 131 million of parity debt. Contacts Nikki S Carroll +1.212.553.1742 Associate Analyst nikki.carroll@moodys.com The Aa2 rating is based on the county s strong financial operating history leading to an ample reserve position, strong management with conservative budgeting practices, a sizeable tax base with average demographics, and manageable debt and pension burdens. Gregory W. Lipitz +1.212.553.7782 VP-Sr Credit Officer/ Manager gregory.lipitz@moodys.com Credit Strengths CLIENT SERVICES» Growing employment bolstering income tax revenues Americas 1-212-553-1653 Asia Pacific 852-3551-3077 Japan 81-3-5408-4100 EMEA 44-20-7772-5454» Strong financial operating history with ample reserve and liquidity levels bolstered by formal policies» Well-funded pension plan Credit Challenges» Limited revenue raising flexibility due to locally-imposed property tax cap and recent increase in income tax rate» High dependence on economically sensitive income tax revenues Rating Outlook Outlooks are usually not assigned to local government credits with this amount of debt outstanding. Factors that Could Lead to an Upgrade» Sustained strong reserve levels» Material tax base growth and expansion» Improved wealth and income levels
Factors that Could Lead to a Downgrade» Deterioration of reserves due to structural imbalance» Material decreases in tax base» Significant increase in debt burden or capital needs Key Indicators Exhibit 1 Wicomico (County of) MD 2012 2013 2014 2015 2016 Economy/Tax Base Total Full Value (000) Full Value Per Capita Median Family Income (% of US Median) 7,071,346 6,664,263 71,471 93.6% 66,855 91.7% 6,335,461 6,061,918 6,099,761 63,117 59,911 59,585 93.5% 95.8% 95.8% Finances Operating Revenue (000) 113,345 117,327 123,635 129,758 131,980 Fund Balance as a % of Revenues 32.7% 35.6% 35.9% 37.3% 40.9% Cash Balance as a % of Revenues 34.1% 34.8% 35.5% 36.4% 41.1% Debt/Pensions Net Direct Debt (000) 95,491 98,755 106,727 108,017 Net Direct Debt / Operating Revenues (x) 0.8x 0.8x 0.9x 0.8x 112,360 0.9x Net Direct Debt / Full Value (%) 1.4% 1.5% 1.7% 1.8% 1.8% Moody's - adjusted Net Pension Liability (3-yr average) to Revenues (x) Moody's - adjusted Net Pension Liability (3-yr average) to Full Value (%) 0.7% 0.9% 1.0% 1.0% 1.0% Source: Moody's Investors Service Detailed Rating Considerations Economy and Tax Base:Primarily Agricultural Tax Base Serving As Employment Center On Eastern Shore Centrally located on the Delmarva Peninsula, Wicomico County has a predominantly agricultural economy with an established trend of gradual expansion and diversification. The county's tax base, fully valued at 6.3 billion as of fiscal 2018, has declined at a compound annual rate of 1.1% during the past five years. While the county's taxable value is below average for the rating category, favorably, the tax base has grown 3.9% from a recession low of 6.0 billion in fiscal 2015. Ongoing development includes an expansion at Cadista Pharmaceuticals and a command center at Wallops Flight Facility, a NASA launch site. The county continues to serve as a regional economic center to the Eastern Shore and benefits from the stabilizing presence of a large regional hospital (2,700 jobs) and a university and community college system (together, over 2,500 jobs serving 10,500 FTE students). The county's strong agricultural economy, which includes a stable, vertically integrated poultry industry, and farmland comprises 39% of the county's land area. As the home to the corporate headquarters of Perdue Farms Inc., which employs 1,600 countywide, the county is of the nation's largest producers of broiler chickens. The county is also home to the second-largest commercial port in the state, which imports petroleum products, construction materials, stone and grain. While the county's rural character is reflected in its below-average wealth and income levels, indicators are in-line with national averages, median family income equal to 95.8% of the nation. County unemployment is nearing pre-recession lows with a jobless rate at 4.7%, which is above the 4.0 and 4.5% state and national rates, respectively. However, overall employment numbers have reached a historical high, an attestation to the expansion of the job base, which has bolstered income tax revenues. This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on www.moodys.com for the most updated credit rating action information and rating history. 2
Financial Operations and Reserves: Conservative Budgeting Practices Will Continue to Yield Operating Surpluses Wicomico County has maintained a healthy financial position despite the impact of property value declines, driven in large part because of conservative fiscal policies and practices. The county continued its trend of operating surpluses, increasing the general fund balance to 57.9 million (43.9% of revenues) in fiscal 2016, which is nearly double the 30.9 million (24.4% of revenues) reported in fiscal 2011. The county's available fund balance of 53.9 million or 40.9% exceeds the national median for similarly-rated counties. The 7.0 million surplus in fiscal 2016 was far better than the 6.1 million use of fund balance the county originally projected in its budget. In fiscal 2016, approximately 47% of general fund revenues are derived from property taxes, with an additional 37% generated from the county's local income tax. Preliminary projections for fiscal 2017 estimate a general fund surplus of 1.8 million due to conservative budgeting. The fiscal 2018 budget represents a 5.9% increase over the fiscal 2017 budget and does not include any changes in existing tax rates. The new budget includes the use of 9.6 million of fund balance for capital needs and non-recurring expenditures. The county maintains a limit on property tax revenues whereby the annual increase in revenues derived from the existing real property tax base is limited to the lesser of 2% or the Consumer Price Index for all urban consumers (CPI-U), with an exception for education purposes. Additionally, the county has no additional revenue raising capacity for local income tax as of fiscal 2013 when the rate was increased to the state maximum of 3.2%. The county can raise the recordation tax rate and does not levy a real estate transfer tax, providing moderate additional flexibility. The county's fiscal policies also afford the county adequate financial flexibility, including a requirement to maintain a contingency reserve within general fund balance, equal to 5% of the annual budget. LIQUIDITY The county's liquidity position is ample for the rating category, with 54.3 million (41.1% of revenues) in cash in the general fund as of fiscal 2016. The county has maintained a strong net cash position of 35% of revenues over the last six years, which is in line with the rating category. Debt and Pensions: Moderate Debt Burden Will Remain Manageable Due To Conservative Fiscal Policies The county's debt position will remain manageable given above-average debt retirement and management's adherence to debt affordability guidelines. Post-sale, the direct debt burden will be 2.1% of full value, which is above the median for Moody's-rated Aa2 counties nationwide. However, Maryland counties typically have higher direct debt burdens because they issue debt on-behalf of schools. The county's 109 million 2018-2022 capital improvement program (CIP) is primarily focused on schools (20%), the county airport (19%), and public safety (12%). Approximately 9% of the CIP will be debt financed, with the remaining 81% financed by non-county sources and county pay-go funding. DEBT STRUCTURE All of the county's debt is fixed rate, and amortization of debt is rapid with 65% of principal retired in 10 years and a descending debt service schedule. Fiscal 2016 debt service represents a manageable 10.0% of operating revenues. DEBT-RELATED DERIVATIVES The county is not party to any derivative agreements. PENSIONS AND OPEB The county participates in the Maryland State Retirement and Pension Systems for school and library employees, two multi-employer, defined benefit retirement plans sponsored by the State of Maryland (Aaa stable). The county also maintains a single-employer, defined benefit retirement plan for county employees. The county's combined contributions to the plans in fiscal 2016 totaled 6.3 million, or a modest 4.7% of operating revenues. The combined adjusted net pension liability (ANPL) in fiscal 2016, under Moody's methodology for adjusting reported pension data, was 69.2 million, or a below-average 0.5 times operating revenues. Moody's uses the ANPL to improve comparability of 3
reported pension liabilities. The adjustments are not intended to replace the county's reported liability information, but to improve comparability with other rated entities. The county provides other post-empoyment benefits (OPEB) and adopted an accelerated funding plan to ramp up contributions to meet annually required contributions. Currently, the county contributes slightly more than the pay-go amount for OPEB. Fiscal 2016 OPEB contributions totaled 5.5 million, or a minimal 4.1% of operating revenues. Total fixed costs in fiscal 2016, including debt service, pension, and OPEB, accounted for a moderate 18.3% of operating revenues. If the county made the required contributions, fixed costs would be 15.1% of operating revenues. Management and Governance Maryland counties have an institutional framework score of Aa, or strong. Revenues are moderately predictable, since counties rely on both property and income taxes. Revenue-raising ability is high as there is no statewide cap on property taxes. However, several counties have locally imposed property tax caps and the income tax rate is capped at 3.2%. Expenditures, which are primarily for education and based on a state-mandated maintenance of effort (MOE) requirement, are moderately predictable. Aside from meeting the required MOE for education, counties have a moderate ability to reduce expenditures given a limited union presence and moderate fixed costs. Legal Security The bonds are secured by the county's general obligation pledge, subject to the county's tax cap of the lesser of 2% and CPI growth. Use of Proceeds A portion of the proceeds will be used to refund 11.4 million of the county's outstanding 2009 Build America Bonds for a net present value savings of approximately 793,195 or 7% of par. The remaining portion will be used to fund various capital projects throughout the county. Obligor Profile Wicomico County is located centrally on the Delmarva Peninsula, bordering the state of Delaware (Aaa Stable). The county covers 402 square miles and has an estimated 2015 population of 102,370. Methodology The principal methodology used in this rating was US Local Government General Obligation Debt published in December 2016. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology. Ratings Exhibit 2 Wicomico (County of) MD Issue General Obligation Consolidated Public Improvement and Refunding Bonds of 2017 Rating Type Sale Amount Expected Sale Date Rating Description Rating Aa2 Underlying LT 20,540,000 12/12/2017 General Obligation Limited Tax Source: Moody's Investors Service 4
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