Fitch Rates Montgomery County, MD's GOs 'AAA'.

Business Editors

WASHINGTON--(BUSINESS WIRE)--May 8, 2003

Fitch Ratings assigns a 'AAA' rating to Montgomery County, MD's (the county) $155,000,000 consolidated public improvement bonds of 2003, series A and $53,390,000 consolidated public improvement refunding bonds of 2003, series A. The offering is scheduled for a competitive sale on May 14. Dated May 1, 2003, the new bonds mature serially May 1, 2004-2023 and the refunding bonds mature serially July 1, 2004-2011. Proceeds of the new bonds will finance school construction and improvements; enhance storm drainage facilities; and, other various general government improvements. The refunding bonds will refund a portion of the consolidated public improvement refunding bonds of 1993, Series A. The bonds are backed by the county's full faith and credit pledge. Fitch also affirms the 'AAA' rating on the county's $1.2 billion of outstanding general obligation debt. The Rating Outlook is Stable.

The 'AAA' rating reflects Montgomery County's broad and diverse economy, enhanced by the U.S. government's extensive presence and residual expansion of the information and biotechnology industries, strong fiscal management, and manageable debt levels with rapid amortization. Over the past few fiscal years as the economy slowed, the county still enjoyed strong revenue collections relative to budget which allowed it to reach the maximum allowable level in its revenue stabilization fund while still maintaining sizable general fund reserves.

However, due to fiscal 2003 reductions in state aid, a slowing of various tax receipts, and increased capital needs, the county is facing fiscal pressures over the near term. As a result, in order to maintain essential services and increase funding for school and transportation needs, the county plans to moderately reduce its future financial flexibility by raising the income tax to its maximum level, temporarily diverting pay-go capital financing to operations, and temporarily reducing its budgeted total reserve (operating margin of tax supported funds plus the revenue stabilization fund (RSF)) to 5%, below its policy of 6% of total resources. The county's multi-year plan calls for restoration of the 6% reserve by fiscal 2006. The county faced similar budgetary pressures during the early 1990's recession and took similar actions, but today has the additional financial flexibility of the revenue stabilization fund which is remaining untapped, stronger growth in the housing market, a broader economic base, and lower unemployment rates.

Montgomery County, with a 2000 population of 873,341, borders Washington D.C. and Northern Virginia. The county's wealthy suburban economy is fueled by a large U.S. government presence, which provides some stability during slower economic times. Among procurement, wages, and direct payments, the federal government is responsible for approximately $10 billion of the county's economic output. The biotech sector continues to expand, drawing on the county's strong well-educated labor force, growing 10.8% between second quarters 2002 and 2001.

Unemployment rates remain below state and national averages in January 2003, averaging 2.5%. Office vacancies for Class A rentals, which fell to a record low in 2000 of 2-1/2%, increased to 10% in March 2003 reflecting the slowing demand for commercial property uses, but remains below the 14.5% recorded in 1993. However, overall AV growth has averaged a steady 3.9% annually since 1998 and Maryland's three-year phase-in of annual AV increases should contribute to solid tax base growth over the next several years. In 2001, the county was ranked 11th in the nation on a per capita income basis, up from 13th place in 2000.

The county's financial condition remains strong despite budget constraints associated with a reduction in income tax receipts, investment income, and state aid, coupled with increasing service demands. In 2002, the unreserved fund balance equaled 9.9% of expenditures and transfers out, with a fully funded revenue stabilization fund (RSF), a separate special revenue fund. Operating results to date for 2003 fiscal year-end indicate revenues and expenditures are on budget. Since the county is not projecting an increase in any revenues above budgeted amounts as it has over the past six fiscal years, it will not make a mandatory transfer to the RSF, but will still be within its policy of maintaining 6% of total resources in reserve.

However, in fiscal 2004, the county executive's recommended budget reduces that level to 5%. Additionally, in order to continue to fund education needs, the recommended budget plans to increase the income tax rate to the maximum 3.2% level, up from 2.95%. Also planned is a property tax increase of $.03/$100 to aid in funding the $1 billion 10-year Go Montgomery! transportation plan. The county council is deliberating the executive's recommended budget and may alter the revenue-raising strategies to some degree.

Although the county reduced pay-as-you-go financing for capital projects over the short term which slightly increases future debt issuance, debt levels should remain moderate because of very rapid amortization, 73.2% in 10 years. Excluding debt of the Washington Suburban Sanitary Commission (WSSC), secured by property taxes but actually payable from assessments on properties served, overall debt equals $2,514 per capita, or 2.8% of market value. If WSSC debt were counted, overall debt would remain a moderate $3,660 per capita or 4.1% of market value. The 2004-2009 county-wide capital plan of $1.9 billion, includes general obligation bond funding of about 55%, with pay-go funding contributing 12%.