Prince - Fitch Rates Prince George's County's (Maryland) $30MM GOs 'AA+'; Outlook Negative

Fitch Ratings assigns an 'AA+' rating to Prince George's County's (the county) $29,635,000 general obligation (GO) bonds, consisting of $25,080,000 taxable qualified school construction bonds series 2009A and $4,555,000 tax-exempt school construction bonds, series 2009B. The bonds are scheduled for a negotiated sale on Dec. 2, 2009 with proceeds funding school construction.

Fitch also affirms the following outstanding ratings:

--Prince George's County $1.1 billion GO bonds at 'AA+';

--Maryland National Capital Park and Planning Commission (M-NCPPC) (Prince George's County) $96.6 million GO bonds at 'AA+';

--Maryland Local Government Insurance Trust (Prince George's County) $6.7 million GO bonds at 'AA+';

--Maryland Transportation Authority lease revenue bonds (Metrorail Parking Projects), series 2004 at 'AA-'.

The Rating Outlook is Negative.

The 'AA+' rating reflects the county's limitations on increasing the real property tax rate, solid though declining reserves, economic and projected tax base growth, and moderately low debt levels.

The Negative Outlook reflects the county's decreased financial flexibility and the challenges towards obtaining a structurally balanced budget. The county has experienced general fund budget deficits and consequent reductions in reserve levels since fiscal 2007. In response, the county has implemented stringent expenditure controls, utilized one-time revenue enhancements, including the reserves of other funds, and raised tax rates. Fitch is concerned that spending pressures, the property tax rate cap, and an income tax recently raised to the maximum level will restrict the county's ability to maintain reserves and achieve structural balance through recurring revenues at levels appropriate for the rating category. Economic prospects are strong, as several major commercial and residential developments are under way, likely providing additional tax revenue for several years due to Maryland's three-year phase-in of property assessments. The county's debt burden should remain affordable given its rapid amortization and projected tax base growth. Further deterioration of reserves and the inability to implement a budget that minimizes the use of one-time revenue enhancements will place downward pressure on the rating.

Located adjacent to Washington, D.C., the county has an economic base that is centered on vital governmental bureaus and higher education, including Andrews Air Force Base and the University of Maryland. Completion of the initial phase of the $2 billion National Harbor project along the Potomac River and development of other hotel and retail areas mark a significant breakthrough for a county historically underserved by these sectors. Mixed economic indicators include wealth levels at or above the nation's and at or below those of the wealthy state, although these figures may be skewed by the large military and student population, and the September 2009 unemployment rate of 7.3%, slightly above the state level and below the nation's 9.5%. Although over the past year the county has accounted for about one-third of all foreclosure events in the state, there has been limited revenue effects and assessed valuation (AV) growth is projected to remain sound through at least fiscal 2011, partly attributable to the three-year phase-in of reassessment growth and the homestead tax credit. Fitch expects demand for housing in the county to remain strong given the prime location and relative affordability in the Washington D.C. metropolitan area.

The county's general fund reserves have declined. A charter mandated tax cap and other limitations have curbed the county's revenue raising ability. Revenue enhancements, often consisting of the utilization of non-recurring revenues, and stringent expenditure controls have proved insufficient in obtaining a structurally balanced budget. Fiscal 2007, 2008, and projected 2009 general fund balance decreases reflected the inherent challenges of maintaining positive financial operations given limited rate raising flexibility and increased budgetary pressure. While the county raised its income tax rate to the 3.2% maximum, it was unsuccessful in its attempt to obtain state approval to increase the Homestead Tax Credit and the transit tax; consequently, revenue enhancements in fiscal 2009 included the use of one-time sources. Additional one-time revenue enhancements were necessary to balance the fiscal 2010 budget, including appropriating $25 million of undesignated fund balance and budgeting $30 million of fund balance from M-NCPPC (Prince George's County). Projections indicate that fiscal 2010 unreserved fund balance levels would be around 15% of general fund spending, given unreserved designations that approximate those of fiscal 2008, a fully funded charter contingency at 5% of the budget, and a stability reserve equal to 2% of the budget. Fitch believes that the county's limited financial flexibility, given the property tax cap and current income tax rate, and pressures to curtail spending will hamper its financial position if revenues fail to meet the budget or if the county must absorb further reductions in state revenue.

Conservative debt management, including frequent affordability reviews, rapid amortization, and the ability to reduce capital improvement costs in periods of economic stress have contributed to moderately low debt levels. The county's overall debt burden should remain moderate over the life of the $2.1 billion fiscal year 2010-2015 capital improvement plan (CIP) given the projections for future tax base growth and the county's rapid principal amortization rate of approximately 66% of debt retiring within 10 years. Overall debt levels, including general obligations (GOs) of the Maryland National Capital Park and Planning Commission that carry an unlimited ad valorem tax guaranty from the county, are moderately low at 1.3% of market value and $1,725 per capita. The county's funded position of its pension systems for police and fire is well below average at approximately 67% and 61%, respectively. Fitch will continue to monitor the funded status of the plans and expects the county to continue its past practice of fully funding its annually required contributions.

The unlimited taxing power of most local government general obligation pledges is the broadest security a U.S. local government can provide to the repayment of its long-term borrowing, and therefore is the best indicator of its overall credit quality. The average local government general obligation rating is 'AA-' with approximately 56% rated at or above 'AA-' and 7% rated 'BBB+' or below. The relatively high ratings reflect local governments' inherent strengths: the authority to levy property taxes, nonpayment of which can result in property foreclosures; additional taxing power that can include sales, utility, and income taxes; and essentiality of and lack of competition for services provided by local governments. Those with low investment-grade or below-investment-grade ratings generally have a combination of a limited or highly volatile economic base, high levels of long-term liabilities including debt and post-employment benefits, and/or unusually limited financial flexibility. For additional information on these ratings, see 'U.S. Local Government General Obligation Rating Guidelines' dated March 22, 2007.

Additional information is available at 'www.fitchratings.com'.

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