Fitch Ratings has assigned an 'AAA' rating to the Washington Suburban Sanitary District, Maryland's (the district) approximately $165 million consolidated public improvement bonds, series 2009. Proceeds will be used to fund a portion of the district's capital improvement program. The bonds will sell competitively on Jan. 27, 2009 and are ultimately secured by an unlimited ad valorem tax pledge of all taxable property within the district, encompassing most of Montgomery and Prince George's counties, Maryland. At this time, Fitch also affirms the 'AAA' rating on the district's $1.1 billion in outstanding general obligation (GO) bonds. The Rating Outlook is Stable.
The long-term 'AAA' rating primarily reflects the wealth and extraordinary diversity of the district's two-county tax base, Montgomery and Prince George's counties (GO bonds rated 'AAA' and 'AA+', respectively, by Fitch). While the Washington Suburban Sanitary Commission (WSSC), which oversees operations of the district, could if necessary levy unlimited ad valorem taxes to cover bond debt service, it does not have any plans to utilize this taxing power. WSSC is embarking upon the first phase of a 30-year infrastructure plan, though Fitch believes the district's unused GO taxing ability, affordable rates relative to local income levels, and above-average debt amortization provides significant financial flexibility needed to complete the program.
A consistent trend of conservative budgeting practices, healthy financial reserve policies, and multiyear forecasting of both operating and capital needs has strengthened the district's financial flexibility. System maintenance efforts have long been extensive and well planned, and as a result, capital needs are now moderate, compared with peer utilities regionally and nationally. Despite its ability to levy ad valorem taxes in the member jurisdictions, WSSC covers district debt service from a stable water and sewer revenue base. Financial operations remain positive, and liquidity levels are strong.
After holding water and sewer consumption charges constant from 1999-2004, WSSC has boosted rates each year since, with minimal increases at or close to 3% for fiscal years 2005-2007. For fiscal 2009, a more sizeable 8% rate increase was enacted to meet rising energy and operational costs, as well as greater pay-as-you-go funding for capital. Officials anticipate raising rates by about 9% in fiscal 2010. While the proposed fiscal 2009 budget included the institutionalization of a 10-year monthly infrastructure renewal fee of $20 that would have been dedicated to pay-as-you-go funding for water and sewer main replacement, the district's commission voted to eliminate the fee from the budget. Without the additional revenue source, Fitch believes sizeable annual rate increases comparable to those enacted in recent years will continue to be called upon to fund growing capital costs and debt service obligations.
The district's debt burden is moderate, due in large part to manageable capital needs and rapid debt retirement. System leveraging, as measured by the ratio of debt to net plant, has declined from 70% in the late-1980s, when the district expanded capacity and improved environmental compliance, to approximately 40% at the end of fiscal 2008. With approximately 80% of principal retired in 20 years, debt amortization is above average, particularly for a utility system. Capital financing, totaling $1.8 billion over the next six years, is needed primarily to address ongoing projects related to a sanitary sewer overflow (SSO) consent decree and extensive water and sewer main replacement and rehabilitation. The district is reportedly in compliance with all milestones associated with the SSO consent decree. Slightly more than half of the capital improvement project will be debt financed, including the current borrowing, with the balance of funding derived from system development charges, developer contributions, and federal and state grants.
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