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Fitch Affirms Talbot County, Maryland GO at 'AAA'

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings takes the following rating action on Talbot County, Maryland:

--$32.63 million general obligation (GO) bonds affirmed at 'AAA'.

The Rating Outlook is Stable.

SECURITY

The bonds are a full faith and credit obligation of Talbot County, payable from ad valorem taxes on all taxable property within the county. However, property tax revenue growth is capped each year by charter at the lesser of 2% or general inflation. New construction and funding the local board of education's budget are not subject to the charter limitations.

KEY RATING DRIVERS

STRONG FINANCIAL FLEXIBILITY DECLINING: Despite recent substantial declines in reserve levels to fund operations, the county continues to maintain low tax rates and sizable reserves. However, the combination of reduced reserves and increased tax rates would be a concern for Fitch if it persists.

LOW DEBT BURDEN: Debt levels are expected to remain low given the county's modest capital improvement plan, and rapid amortization.

STABLE RURAL ECONOMY: The county's economy is limited with concentrations in travel and leisure, as well as healthcare. Unemployment rates are below the national average, but tax base declines have emerged in the last two fiscal years.

WHAT COULD TRIGGER A RATING ACTION

INABILITY TO ACHIEVE STRUCTURAL BALANCE: The county's ability to regain structural balance in the near term is important to maintaining the current rating.

CREDIT PROFILE

AMPLE RESERVES DESPITE RECENT FUND BALANCE DRAWS

Between fiscal 2010 and 2011, the county has recorded a cumulative $17.3 million operating deficit (11% of annual spending) mainly due to declining income tax revenue receipts. Income tax revenue, which represents over 30% of revenues, declined 41% between 2009 and 2011. The county has utilized general fund balance to offset revenue declines. Although, at fiscal year-end 2011, the general fund unrestricted balance (the sum of assigned, unassigned and committed under GASB 54) remained ample at $23.86 million or 28.7% of general fund spending and transfers.

The fiscal 2012 budget was adopted with a $1.35 million general fund balance appropriation and a $1 million transfer from the capital projects fund in addition to $0.016 cent tax rate increase to $0.448 per $100 of assessed value (AV), the allowable rate under the charter cap, to help offset the continuing decline in income tax revenues. A charter imposed revenue limit, approved by county voters and effective in fiscal 1997, constrains the county's property tax revenue growth to the lesser of the consumer price index or 2%, excluding revenue from new construction. The budget also includes reductions from all areas of the budget including the elimination of OPEB funding above the pay-go amount and funding for Talbot County Public Schools below the state maintenance of effort level.

Management expects actual year-end results will reflect an increase in income tax revenues for the first time since fiscal 2009 or a $1 million positive variance relative to the budget. Estimated year-end operations are expected to show a modest $350,000 (less than 1% of spending) use of reserves.

2013 BUDGET

The fiscal 2013 adopted budget includes a higher $1.49 million general fund balance appropriation, $812,000 transfer from the capital projects fund, a $850,000 transfer from the development impact fund, and a real estate tax rate increase of 4.3 cents ($0.491 per $100 of AV), which includes a $0.026 educational supplement to cover maintenance of effort. The property tax increase is above the charter limit but is permitted under newly passed (fiscal 2013) state legislation that allows increases above the cap for maintenance of effort education funding. The budget also includes an income tax rate increase from 2.25% to 2.4% ($600,000 in additional revenue in fiscal 2013) below the maximum rate of 3.2%. Despite the budgeted use of fund balance, unassigned general fund reserves are expected to remain above the 15% reserve policy for fiscal emergencies.

SUBSTANTIAL REMAINING FINANCIAL FLEXIBILITY

Although the county increased its property tax rate in fiscal 2012 and 2013, the county still maintains the lowest property tax rate in the state, affording significant financial flexibility. Also, the county has the second lowest income tax rate in the state despite the recent increase. Along with the ample amount of general fund reserves, the county had a $16 million fund balance in its capital projects fund at year-end 2011. The estimated fiscal year-end 2012 balance is $10.2 million, or over 20% of the 2012 budget. The decline in fund balance is mainly due to pay-go capital funding and transfers to the general fund. The fund balance is comprised of excess funds from prior general fund transfers for capital projects. In fiscal 2012, the county gained authorization to transfer funds back to the general fund as needed.

LIMITED EMPLOYMENT BASE FOCUSED ON TOURISM, AGRICULTURE AND HEALTHCARE

Talbot County is located in Maryland's Eastern Shore region, approximately 30 miles from the Chesapeake Bay Bridge, which connects the area with the Baltimore and Washington, D.C. job markets. The county population is showing steady growth, although at an estimated 2011 population of 38,025, Talbot is among Maryland's smallest counties.

While agriculture is economically important, the county's main attraction is its 600 miles of waterfront property, with the leisure and hospitality industry representing 13.6% of the employment base. In addition to hospitality, other important employment sectors include health care (20% of the employment base), retail trade, and services.

The county's leading employer, Shore Health System, is in the planning stages for a $250 million Medical Complex to service the Upper Shore Region, which is projected to add approximately 220 new jobs. Unemployment rates are typically at state levels and well below national levels. Per capita personal income ranks third in Maryland and is 139% of the national average.

FAVORABLE DEBT PROFILE

Overall debt levels are low at roughly $2,134 per capita and 0.9% of market value, and amortization is rapid at 68% in 10 years. The county's fiscal years 2013 - 2017 capital improvement plan totals just $19.88 million of which the county expects to issue approximately $4 million for a new radio system and $1.8 million for a Chesapeake college project. The balance of the CIP will be funded with state grant moneys.

MODEST PENSION AND OPEB COSTS

Long-term liabilities related to employment benefits are not expected to pressure future operations. The county provides pension benefits to its employees through the State of Maryland Employees Retirement and Pension System. The county contributes 100% of the annual required contribution (ARC), which accounts for a modest 3% of spending. Pension costs for county employees are expected to remain stable.

Beginning fiscal 2013, teachers' pension costs will be shifted from the state to local governments over a four-year phase-in process. The state is expected to offset the majority of the costs with increases in various revenue streams such as income tax, indemnity mortgage recordation tax and local income reserve relief. However, for fiscal 2013, the county was conservative and did not budget for receipt of any enhancements to offset the $629,000 payment.

The county also provides other postemployment benefits (OPEB) to its retirees. During fiscal 2012 the county established a $7 million OPEB trust, which was previously accounted for in the committed general fund balance. The county funds OPEB on a pay-go basis which represents less than 1% of spending.

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 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, Maryland Department of Business & Economic Development, Maryland Department of Labor, Licensing and Regulation, Real Estate Business Intelligence, and Maryland Department of Planning.

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

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Fitch Ratings
Primary Analyst
Evette Caze, +1-212-908-0376
Director
Fitch, Inc.
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New York, NY 10004
or
Secondary Analyst
Sara Ketchum, +1-212-908-0744
Associate Director
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Committee Chairperson
Amy Laskey, +1-212-908-0568
Managing Director
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Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

Source: Fitch Ratings