Fitch Rates Annapolis, MD's GOs 'AA+'; Outlook Revised to Stable

  Fitch Rates Annapolis, MD's GOs 'AA+'; Outlook Revised to Stable

Business Wire

NEW YORK -- May 7, 2014

Fitch Ratings affirms the following ratings on Annapolis, Maryland's (the
city) general obligation (GO) bonds:

--$104.2 million GO bonds at 'AA+'.

The Rating Outlook is revised to Stable from Negative.

SECURITY

The full faith, credit, and taxing power of the city are pledged for the
payment of debt service.

KEY RATING DRIVERS

STABILIZING OPERATING ENVIRONMENT: Revision of the Rating Outlook to Stable
from Negative reflects Fitch's expectation of continued management action to
improve the city's structural position following several years of undue
reliance on nonrecurring resources. The city has enhanced revenues, cut
spending and continues to execute its plan to reach full funding of the
pension annual required contribution (ARC) over the near term.

ADDITIONAL REVENUE FLEXIBILITY: Consecutive tax rate increases and spending
cuts have helped improve the city's financial position and offset fairly sharp
assessed value (AV) declines in recent years. The city retains important
revenue raising flexibility; the tax rate remains very competitive and the
city is not subject to a cap on the tax levy or rate.

SOLIDLY PERFORMING ECONOMY: Recent job growth has been solid and unemployment
remains low relative to the state and nation. Per capita income levels are
high. Fitch will closely monitor defense spending cuts given the large
presence of the U.S. Navy.

MODERATE DEBT BURDEN: Overall debt levels are expected to remain moderately
low and carrying costs affordable.

WELL-FUNDED PENSION: Pension funded ratios remain sound despite the city's
decision to underfund the police and fire pension ARC since the recession. A
combination of increased employer and employee contributions are forecast to
increase the funded ratio over the near term if investment gains meet plan
assumptions.

RATING SENSITIVITIES

OPERATING STABILITY:

The rating is sensitive to the city's continued progress toward structural
balance, which includes avoiding overreliance on one-time resources, achieving
scheduled full ARC funding in the police and fire pension plan, and
maintaining adequate internal liquidity.

CREDIT PROFILE

Annapolis is located approximately 25 miles from both Baltimore and
Washington, D.C. with an estimated 2011 population of 38,585.

POSITIVE OPERATIONS SUPPORTED BY ON-GOING REVENUES

Audited general fund results for fiscal 2013 were strongly positive for the
third consecutive fiscal year following three consecutive property tax rate
increases. An operating surplus of $8.9 million or 12% of spending followed an
$11.9 million or 22% surplus in fiscal 2012. The fiscal 2013 unrestricted
general fund balance of $27.5 million equates to a very healthy 35.2% of
spending.

Fitch views the city's recent operating performance with some caution, as
surplus results were achieved by minimally funding the ARC for the police and
fire pension plan.

PENSION FUNDING REMAINS SOUND DESPITE ANNUAL UNDERFUNDING

The city administers a defined benefit pension plan for police and fire
employees, and all general employees are part of the state retirement plan
(the State Retirement and Pension System of Maryland).

The police and fire pension plan was overfunded before the recession.
Investment losses in the downturn lowered the funded ratio, and the city was
slow to absorb the resulting larger ARCs, further eroding the pension's funded
ratio.

After several years of suspending its pension contributions to the police and
fire pension plan, the city contributed $200,000 towards the $7 million ARC in
fiscal 2012 and $1.57 million towards the $4 million ARC in fiscal 2013. Fitch
considers this practice highly uncommon among the vast majority of
investment-grade-quality issuers.

Somewhat offsetting this concern is the still-high funded ratio of the pension
plan, which is equal to 85% using Fitch's more conservative 7% discount rate
assumption, and the relatively low Fitch-adjusted unfunded actuarial accrued
liability of $25.7 million (0.3% of taxable market value). On a reported basis
the plan is 90% funded and uses a 7.5% discount rate assumption.

The city has increased its pension contribution to $1.98 million in fiscal
2014 - still below the projected ARC of $2.66 million, although the city
forecasts further contribution increases until full ARC funding is achieved in
fiscal 2017. Fitch notes positively the city recently negotiated an increase
in the employee contribution to pension beginning in fiscal 2014.

The city also contributes to the state pension system, totaling a manageable
$1.57 million in fiscal 2013. The funding of the state's pensions has
deteriorated in recent years, which could result in higher contributions over
time.

The city funds its other post-employment benefit (OPEB) on a pay-as-you-go
basis, which was equal to $1.3 million (2% of spending) or 27% of the ARC in
fiscal 2013. The OPEB UAAL was $48.4 million or 0.8% of taxable market value.

Total carrying costs for debt service, pensions and OPEB, assuming full
funding of the city's pension ARC, are currently manageable at 17% of total
governmental fund expenditures.

CONTINUED DEPENDENCE ON NON-RECURRING SOURCES A CONCERN

The adopted fiscal 2014 general fund budget projects an increase in reserves
of $2 million; however, management has stated it plans to end the year with a
higher $2.5 million operating surplus. The fiscal 2014 budget includes
approximately $10.5 million in transfers (equal to 15% of spending) from
several enterprise funds representing repayment of prior year advances and
indirect charges for services provided by the general fund.

The fiscal 2015 mayor's budget shows a $1 million operating surplus for the
general fund. The budget includes a reduced $8.4 million of transfers-in, no
short-term borrowing and $7.3 million in cuts.

ECONOMIC STABILITY

The city is the state capital of Maryland and the county seat of Anne Arundel
County (GO bonds rated 'AA+'; Stable Outlook by Fitch). Annapolis' population
is highly educated with 43.9% of its residents having completed a bachelor's
degree or higher, compared to 36.1% in the state and 28.2% nationwide.
Annapolis' December 2013 unemployment rate remains low at 4.4%, while per
capita money income is 20%-50% above the state and U.S. Recent employment
growth has been modest, with job gains of 0.8% on a year-over-year basis as of
December 2013.

The local economy is anchored by federal and state government employment, with
added depth from tourism and maritime industries due to the city's location on
the Chesapeake Bay. While government centers and the United States Naval
Academy (USNA) generate significant year-round visitation, the marinas and the
historic district attract leisure travelers from around the region. The city's
largest private employers include TeleCommunication Systems, Inc. (650) and
Constellation Energy Group (500).

TAX-BASE PRESSURES PERSIST

Properties subject to triennial assessment have declined by 15% between fiscal
2012 and 2014 to $5.68 billion. The city's fiscal 2015 AV is estimated to
increase by 2.8% supported by several residential and commercial projects in
the pipeline.

MODERATELY LOW DEBT BURDEN

The city's key debt metrics are moderate with net overall debt equivalent to
2.3% of market value or $3,674 per capita. The overall debt burden is heavily
influenced by obligations of overlapping Anne Arundel County.

The city's proposed fiscal 2015-2020 capital improvement program (CIP) totals
approximately $113 million or 1.47% of market value, and is higher than prior
plans. Maintenance of city facilities and infrastructure projects are the
largest components of the CIP. Projects are financed through debt, operating
pay-as-you-go financing, and grant funds.

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

In addition to the sources of information identified in Fitch's 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, National Association of Realtors, Real Estate
Business Intelligence.

Applicable Criteria and Related Research:

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

--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 14, 2012).

Applicable Criteria and Related Research:

Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015

U.S. Local Government Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314

Additional Disclosure

Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=829058

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Contact:

Fitch Ratings
Primary Analyst
Evette Caze, +1-212-908-0376
Director
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Jessalynn Moro, +1-212-908-0608
Managing Director
or
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