Overview

Maryland county and municipality (or local government [LGs]) credit conditions remain stable and strong, in S&P Global Ratings' view, supported by robust economic growth, particularly associated with the Washington-Arlington-Alexandria and Baltimore-Columbia-Towson metropolitan statistical areas (MSAs), below-average unemployment, above-average wealth and income metrics, and typically very strong reserves.

S&P Global Ratings expects Maryland LGs' credit quality will remain stable over the next year. Management teams in Maryland generally adhere to formalized policies and procedures, supporting stability in financial performance. In addition, although a number of LGs in Maryland have coastal exposure from either the Atlantic Ocean, Chesapeake Bay, or the Potomac River, historically this risk has been mitigated by strong management teams with considerable resilience planning and policies.

Personal income in Maryland currently stands at $69,817 per capita or 109% of the national level, which is among the highest in the nation. In addition to generally strong economic conditions, Maryland counties and municipalities benefit from the lack of state restrictions on increasing property tax rates, providing significant revenue-raising flexibility.

S&P Global Ratings maintains credit ratings on 19 counties and 12 municipalities in the State of Maryland. All Maryland counties and more than 80% of the state's municipalities have high investment-grade ratings ('AA-' or above). In addition, 43% of Maryland LGs are rated 'AAA'. Since Jan. 1, 2022, there have been no upgrades or downgrades, demonstrating considerable stability in this sector. Two LGs were placed on CreditWatch with negative implications, one of which was due to lack of timely information, and remains on CreditWatch. We resolved the other CreditWatch placement by affirming the rating and assigning a stable outlook.

What We Are Watching In 2023 And Beyond

In 2022, most Maryland LGs experienced strong economic recoveries following the onset of the COVID-19 pandemic, which is a function of resilient, mature, and diverse economic activity within the state. This resiliency, combined with typically conservative budgeting and strong overall financial policies and practices, has generally led to sizable reserve increases. In particular, property tax revenue growth has been fueled by a strong residential real estate market, with steady price appreciation.

Income tax revenues also remained strong for Maryland LGs. Income tax rates in in the state are set by counties and Baltimore City, and income tax revenues are shared with cities and towns. Although unemployment rates increased during the pandemic, these temporary increases to local unemployment rates were offset by large stimulus payments, which in turn increased resident incomes and consumption levels, thereby bolstering tax revenues. Likewise, corporations have seen increased revenues spurred by federally strengthened consumer spending.

Maryland's 0.6% average annual population growth over the past decade should continue to spur economic growth longer term. In addition, the state and local governments within Maryland, along with school systems and other agencies, were allocated approximately $12.3 billion in American Rescue Plan Act funds, which will be spent over the next couple of years. Specifically, the state was allocated $9.5 billion, while LGs were allocated $2.8 billion. We believe this federal stimulus will help municipalities ward off the impacts of a potential recession on revenues and capital spending.

Spotlight On Environmental, Social, Governance Factors

Maryland LGs, particularly those located along or near the coast, face a host of climate risks throughout the year. According to Office for Coastal Management, 72% of Maryland residents live in coastal areas including 3,190 miles of shoreline. Some of the environmental issues the state faces include polluted stormwater runoff in Chesapeake Bay, the nation's largest estuary; sea-level rise, particularly for Maryland's southern counties; flooding; and extreme hurricane events intensified by warming Atlantic Ocean waters. In our view, LGs are likely to face increasing expenses from implementing resiliency efforts to combat these climate risks.

Although just two states border Chesapeake Bay (Maryland and Virginia), the bay's watershed--or the area that drains into the bay--covers parts of six states, consisting of Delaware, Maryland, New York, Pennsylvania, Virginia, and West Virginia, as well the District of Columbia (DC). According to the Chesapeake Bay Foundation, significant measures are necessary to reduce pollutants and restore the bay. The Chesapeake Clean Water Blueprint, a roadmap for improving the bay's water quality and environment, calls for the six states and DC to reach milestones by 2025 to achieve significantly reduced levels of pollution. Each of the states and DC have committed to various milestones. However, the 2022 State of the Bay Report indicates progress to date has been insufficient and these states and DC are not on track to reduce pollution to levels needed for a healthy bay by 2025.

Furthermore, Maryland suffered a setback in efforts to reduce pollutants given operational challenges at two of the state's largest wastewater treatment plants located in Baltimore. We understand the State of Maryland filed a lawsuit against Baltimore pertaining to inadequately treated wastewater discharged into the Chesapeake Bay, resulting in a number of regulatory violations. We understand both state and city management have taken steps to remediate operational vulnerabilities.

Some scientific reports indicate sea-level rise in Chesapeake Bay could surpass two feet by the year 2050 because of melting glaciers and ice caps and increasing temperatures. Sea-level rise allows for storms to creep further inland, thereby eroding land. To combat this erosion, we understand the Army Corps of Engineers works with LGs in the state and continuously undertakes a host of dredging and beach renourishment projects.

We currently view social risks for Maryland LGs as neutral. The state maintains above-average income and wealth levels compared with those of the nation, as well as moderate population growth averaging nearly 9% each decade since 1990. We understand that, according to state projections, population growth is expected to continue in the long term, but at a slower rate, averaging an estimated 4%-5% each decade through 2040. Although the state's unemployment rate is currently slightly above the national level, historically over the past decade Maryland's unemployment rate has remained closely tied to the national level.

We view governance factors as strong and as an opportunity for Maryland LGs, which have considerable revenue-raising ability and can increase tax rates without voter approval. We note the state as well as its LGs maintain a strong S&P Global Ratings' institutional framework score, indicating the legal and practical environment in which the state and LGs operate is strong. Furthermore, the vast majority of Maryland LGs maintain either a good or strong FMA, indicating governments maintain formalized and well-embedded financial practices and policies, in addition to strong internal controls. Lastly, retirement expenses and liabilities are typically very affordable with manageable liabilities.

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