Fitch Rates $1 Billion State of Maryland GOs 'AAA' Outlook Stable

NEW YORK--(BUSINESS WIRE)--

Fitch Ratings assigns an 'AAA' rating to the following State of Maryland (state) general obligation (GO) bonds, state and local facilities loan of 2013, first series, consisting of:

--$500 million first series A tax-exempt bonds (competitive); and

--$500 million first series B tax-exempt refunding bonds (competitive).

The bonds will be sold via competitive sale on March 6. The par amount for the first series B refunding bonds is approximate and will be determined upon final sale.

In addition, Fitch affirms the following ratings:

--$7.8 billion state GO bonds, at 'AAA';

--$45 million state appropriation bonds, at 'AA+';

--$206.1 million Maryland Stadium Authority lease revenue bonds, at 'AA'.

The Rating Outlook is Stable.

SECURITY

General obligations to which the state's full faith and credit are pledged.

KEY RATING DRIVERS

STRONG DEBT MANAGEMENT: Debt oversight is strong and centralized, and the debt burden is moderate. The state has policies to maintain debt affordability, and the constitution requires GO and transportation bonds to amortize within 15 years.

PENSION FUNDING REFORMS: Pension funding levels have deteriorated, although the state has undertaken extensive pension and other post-employment benefit (OPEB) reforms.

BROAD ECONOMY: The state has a diverse, wealthy economy, benefiting from its proximity to the nation's capital.

CONSERVATIVE FINANCIAL OPERATIONS: Financial operations are conservative, and the state maintains a well-funded rainy day fund. The state took repeated action during the course of the recession to address projected budget gaps, including raising tax revenues, cutting spending, and using rainy day and other balances.

RATING SENSITIVITIES

Sound fiscal management practices and the consistent maintenance of fiscal flexibility, including in the form of budgetary reserves, provides the state with significant ability to respond to near-term economic or fiscal shocks, including from federal budget uncertainty, in a manner consistent with the 'AAA' rating.

CREDIT PROFILE

The 'AAA' rating on Maryland's GO bonds reflects its sound financial operations, a wealthy, diversified economy and strong management of debt. The state's economy has long benefited from proximity to the nation's capital, although the prospect of near-term federal budget austerity poses a degree of uncertainty for the state's large federal agency presence and associated private contracting. Despite this risk and the generally slow pace of economic recovery, the state's diverse and wealthy service-oriented economy remains a source of credit strength. The state's approach to fiscal management has been consistently conservative both through the last recession and during the recovery, with the state relying on spending cuts, revenue increases and the use of non-recurring resources to maintain balance. Maryland retains ample fiscal flexibility, including in the form of a well-funded rainy day fund, the targeted threshold of which the state is elevating in response to federal budget uncertainty. Although pension funded ratios have weakened, the state has undertaken multiple reforms to reverse funded ratio declines.

ECONOMY

The state's economy continued to grow through 2012, albeit at the slow pace that has characterized the current post-recessionary period and below the national average. December 2012 employment rose 0.9% year-over-year, compared to 1.7% nationally. Job gains were widespread, including in construction and professional and business services, although government employment slipped. The state's unemployment rate, at 6.6% in December 2012, was well under the 7.8% national average. Measured on a per capita basis, Maryland's 2011 personal income ranks fourth among the states, at 123% of the U.S. level. Personal income grew in the third quarter of 2012 by 2.9% year-over-year, below the 3.2% national pace of growth for the same period. The state's December 2012 economic forecast anticipates federal budget cuts curbing personal income and job gains near term but otherwise not derailing the state's slow recovery. The forecast estimates annual personal income growth of 2.8% in 2013 and 4.9% in 2014, with employment rising 0.9% and 1.5% in 2013 and 2014, respectively.

FINANCES

Financial operations are conservative, with the state consistently demonstrating a strong commitment to budgetary balance through the downturn, including through repeated spending cuts, fund balance transfers and revenue increases. The state has also maintained flexibility in the form of its rainy day fund (RDF), which remained funded at or near 5% of general fund revenues through the downturn. State financial performance in fiscal 2012, which ended on June 30, was stronger than anticipated, with a general fund balance of $551 million (3.9% of general fund revenues) remaining at year end and a RDF balance of $672 million (4.7% of general fund revenues).

The fiscal 2013 adopted budget closed a gap estimated at nearly $1.1 billion. The plan incorporated $343 million in revenues from various tax rate changes, including personal income tax rate and exemption changes for high earners. Appropriations were reduced $698 million, including through Medicaid savings measures and shifting a portion of the annual contributions for teacher pensions to local school boards. The latter is the first year of a four-year phased-in shift of the normal cost of employer contributions for teacher pensions, estimated to reduce state spending by $217 million by fiscal 2016.

Fiscal 2013 year-to-date collections through January are up 6.9% from the previous year, partly due to timing factors associated with acceleration of income in anticipation of federal tax rate changes. The state's December 2012 revenue forecast assumes fiscal 2013 general fund revenues rise to $15 billion, from $14.3 billion in fiscal 2012. For fiscal 2014, ongoing general fund revenues are forecast to rise 2.3%, to $15.4 billion. The state's revenue forecast builds in a partial implementation of federal sequestration cuts, affecting broader economic activity in the state and thus dampening tax revenue growth rates in fiscal 2013 and 2014.

The governor's proposed fiscal 2014 budget, released in January 2013, assumes direct federal program cuts to the state of approximately 1% in both fiscal 2013 and 2014, or about $94 million each year in the event of sequestration. After modest adjustments to fiscal 2013 appropriations, total general fund uses would rise 1.3% to $15.1 billion, and the year would end with a fund balance of $614 million (4.1% of general fund revenues). Fiscal 2014 general fund uses after proposed adjustments would rise 5.8%. The year is forecast to end with a fund balance of $236 million (1.5% of general fund revenues). The budget also proposes raising the target RDF level to 6% of general fund revenues, from 5%, in response to federal budget risks; given the required deposit of past balances to the RDF, its balance would thus rise to $921 million.

LONG-TERM LIABILITIES

The burden of Maryland's total tax-supported debt is moderate, and its strong and centralized debt management remains a credit strength. Net tax-supported debt as of Dec. 31, 2012, equals approximately $11.4 billion, or 3.8% of 2011 personal income, including the current sale and a recent sale of consolidated transportation bonds. More than two-thirds of tax-supported debt is GO bonds. GO and transportation bonds are constitutionally required to mature within 15 years, ensuring rapid amortization. Debt affordability guidelines include holding tax-supported debt at or below 4% of personal income.

The funding of pensions has deteriorated in recent years, with June 30, 2012 system-wide funded ratios for state employees at 62.5% and teachers at 65.8%. Using Fitch's more conservative 7% discount rate assumption, the employees and teachers' plans would be funded at 57.7% and 60.7%, respectively. On a combined basis, net tax-supported debt and the portion of pension liabilities attributable to the state are estimated by Fitch at about 11.2% of 2011 preliminary personal income, higher than the median of Fitch-rated states. Despite this comparative credit weakness, the state has taken several steps to reduce the burden of pensions in addition to the shift of teacher pension contributions noted earlier. These include reducing benefit accruals and requiring higher state contributions to accelerate funded ratio improvement. Additionally, changes in 2011 to other post-employment benefits are estimated to have reduced the state's OPEB liability to $9.2 billion, from $15.9 billion as of June 30, 2011; the unfunded liability as of June 30, 2012 is $9.4 billion.

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 IHS Global Insight.

Applicable Criteria and Related Research:

--'Tax-Supported Rating Criteria', dated 14 Aug. 2012;

--'U.S. State Government Tax-Supported Rating Criteria', dated 14 Aug. 2012.

Applicable Criteria and Related Research

Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015

U.S. State Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686033

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