The 'A' rating reflects significant improvement in financial operations and management after two years of negative general fund balances, a moderately low debt profile with rapid amortization of principal, as well as the town's narrow economic base centered on the health care and retail sectors. Fiscal management and financial flexibility have been strengthened by establishment of a budget stabilization fund, adoption of several financial management policies, and the addition of two key government positions in the town. These corrective actions, combined with other improved fiscal controls, have led to positive operating results and solid reserve levels in the general fund. Sound budgeting practices and financial management are expected to continue producing stable operating results and healthy fund balance levels, despite pressure from an economic slowdown and the town charter's limits on tax-rate increases for operations; the tax rate levied for repayment of debt service is unlimited.

The town of Easton is located in Talbot County (GO bonds rated 'AA+, Stable Outlook by Fitch) in Maryland's Eastern Shore region, and has an estimated 2007 population of 14,379. The local economy is somewhat narrow, focused in health care and retail trade. The town's largest employer, Shore Health System (1,200 employees) is expected to grow over the next 10 years, and several of the town's leading employers are in the retail sector, including Wal-Mart and Lowes Home Center. Unemployment rates for the county, the closest proxy available, have been at or below state and national levels since at least 1998.

The town's commitment to improved fiscal health is evident in the operating results for fiscal years 2007 and 2008. The unreserved general fund balance equaled approximately $5 million and 33% of spending at the close of fiscal 2008, with additional financial flexibility totaling $1.2 million in the budget stabilization fund. Creation of this additional reserve was one of several corrective measures taken after two years of negative general fund balances. Other remedial actions included adoption of a fund balance policy, formation of positions for a Town Manager and Finance Director, an amendment to the town charter raising the cap on the tax rate for town operations, and controls on hiring and overtime management.

The town charter limits the operational tax rate to $0.55 per $100 of assessed valuation (AV), although the tax rate levied for repayment of debt service is unlimited. While the increased tax cap does provide additional financial flexibility over the old cap of $0.40 per $100 of AV, the adopted rate of $0.50 for fiscal 2009 is nearing the limit. As in previous years, the town received a payment-in-lieu-of-taxes (PILOT) from the Easton Utilities Commission (EUC) in fiscal 2008, equal to roughly 8% of total general fund revenues. The EUC provides electric, gas, water, wastewater, cable television, and high-speed internet service to the town and portions of the surrounding area, and has been a stable factor in Easton's financial operations and economy for many years. While recent results suggest a positive trend in financial operations, reserves, and management, Fitch will continue to monitor Easton's performance in light of a slowing economy, softening housing market, and restricted revenue raising capacity.

The town's direct debt burden is low, increasing to a more moderate level when overlapping debt from Talbot County is included. Amortization of principal is above average, with approximately 65% retiring within ten years. The town's general government capital plan for fiscal years 2009-2014 totals a manageable $16.4 million. Capital needs associated with the EUC total roughly $43 million through fiscal year 2013; however Fitch credits debt associated with the EUC as self-supporting. The town has taken proactive measures to address retiree benefits, and implemented several changes to pension and health care provisions that should help to limit the town's pension and OPEB liabilities.

Fitch issued an exposure draft on July 31, 2008 proposing a recalibration of tax-supported and water/sewer revenue bond ratings, which, if adopted, may result in an upward revision of this rating (see Fitch Research on 'Exposure Draft: Reassessment of Municipal Ratings Framework'). Fitch has deferred its final determination on municipal recalibration due to market conditions and plans to revisit the recalibration in the first quarter of 2009 (see press release 'Fitch Defers Final Determination on U.S. Municipal Ratings Recalibration,' dated Oct. 7, 2008).

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