SAN FRANCISCO--(BUSINESS WIRE)--Fitch Ratings has affirmed the following rating on Santa Clara County, California's (the county) general obligation (GO) bonds:
--$490 million GO bonds (election of 2008), 2013 series B at 'AA+'.
The Rating Outlook is Stable.
SECURITY
The bonds are secured by an unlimited pledge of ad valorem tax on all property subject to taxation in the county.
KEY RATING DRIVERS
STRONG ECONOMY AND TAX BASE: The county benefits from a strong economic base with substantial employment growth and investment in the high technology industry. Taxable assessed values (TAV) continue to experience steady growth and wealth and income levels are well above national averages.
IMPROVING FINANCIAL POSITION: The county has added to reserve levels over the past several years following steep drawdowns during the recession. Operating balance will continue to be challenged by multi-year labor agreements and service restorations, but prospects for continued revenue growth appear strong.
RISING HOSPITAL SUBSIDIES: General fund subsidies to the county's hospital enterprise increased sharply in fiscal 2014 with the implementation of the Affordable Care Act (ACA) and related reforms. Hospital operations account for a substantial share of government-wide activities and present an ongoing risk to general fund balance.
EXCEPTIONAL REVENUE RAISING ABILITY: Santa Clara County voters have shown strong support for county services. A 10-year general sales tax for county operations was approved by voters in 2012 and the county's GO bonds were approved by a substantial margin in 2008. In addition, the county retains a permanent, pre-Proposition 13 voter-approved tax override that raises more than $100 million annually for employee pension costs.
MANAGEABLE CARRYING COSTS: County costs for debt service, pension, and other post-employment benefits (OPEBs) are affordable. Overlapping debt levels are high on a per capita basis but moderate relative to TAV, while amortization of direct debt is slow.
RATING SENSITIVITIES
STRONG FUNDAMENTALS: The rating is sensitive to shifts in the county's fundamental credit characteristics, including its strong economy and stable financial operations. The Stable Outlook reflects Fitch's expectation that such shifts are unlikely in the upcoming credit review cycle.
CREDIT PROFILE
Santa Clara County is located in the heart of Silicon Valley, with a county seat in San Jose, and benefits from the technology industry's substantial levels of investment and ongoing wealth generation. Many of the nation's most prominent technology companies are headquartered in the county, which has also achieved fame for its ability to attract startup businesses.
STRONG ECONOMY AND TAX BASE
The county's economy has benefited directly from the presence of the technology industry with increasing employment levels and a growing tax base. Year-over-year employment has increased for 53 consecutive months and has exceeded state and national growth rates by substantial margins. Unemployment rates have dropped correspondingly, falling to 5.2% as of September 2014, as compared to 6.9% for the state and 5.7% for the nation.
The county's strong economy is also reflected in its booming property market. Median home values reported by Zillow.com reached $825,700 in October 2014, 9.5% above prior-year levels and 10.5% above the pre-recession peak. Taxable assessed values increased by 6.8% for 2015 following an 8.4% increase in 2014, and experienced only a single year of modest decline during the downturn.
IMPROVING FINANCIAL POSITION
The county's financial position has continued to improve in the wake of the recession. Unrestricted fund balances rose to 12.9% of general fund spending in fiscal 2013 and further additions appear likely based on preliminary results for 2014. Fund balances remain below pre-recession levels but are adequate to address potential cyclical fluctuations in revenue.
The county's budget for fiscal 2015 is balanced and includes modest service restorations and increased funding of capital needs. Labor costs will also rise with the end of concessions negotiated during the downturn and the anticipated completion of five-year agreements with most bargaining units. Employee salaries are expected to rise by 3% or more annually during the term of these contracts, which could pressure operating balance if revenues fail to increase at a similar pace.
RISING HOSPITAL SUBSIDIES
The county is distinguished by its strong commitment to health care, as reflected in ongoing general fund support for Santa Clara Valley Medical Center (SCVMC). Although structured as an enterprise in the county's financials, SCVMC accounts for nearly one-third of primary government expenses and receives substantial operating subsidies from the county's general fund. Approximately two-thirds of the county's direct debt is in support of SCVMC.
Operating subsidies to SCVMC rose to a projected $151 million in fiscal 2014 (equal to 7.4% of 2013 general fund spending), the highest level of general fund support since fiscal 2010. Management cites implementation challenges related to the ACA as the basis for this increase. The county's budget for fiscal 2015 assumes a $10 million reduction in subsidy levels, but financial challenges for SCVMC pose an ongoing risk to the general fund.
EXCEPTIONAL REVENUE RAISING ABILITY
The county stands apart from most of its peers in California as a result of its success in gaining voter approval for major revenue measures. 2008's GO authorization for SCVMC received support from 78% of voters, an unusually high margin of approval and a rare achievement for a California county. In addition, local voters approved a general sales tax increase for county services in November 2012 that is expected to raise approximately $500 million over its ten-year life. The county also benefits from an ongoing, pre-Proposition 13 property tax override that generates more than $100 million annually for county pension costs.
MANAGEABLE CARRYING COSTS
County costs for debt service, pension, and OPEBs are affordable and accounted for 17% of governmental expenditures in fiscal 2013. The county participates in a state-sponsored pension plan with a funding ratio of 83% as of June 30, 2012, or 78% under Fitch's assumption of 7% investment returns. Overall debt levels, including tax increment debt, are high on a per capita basis at $6,606 but moderate relative to the county's substantial tax base at 4.0% of TAV. Amortization of the county's direct debt is slow with 21% of principal repaid within 10 years.
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 and Zillow.com.
Applicable Criteria and Related Research:
--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 14, 2012).
Applicable Criteria and Related Research:
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=924175
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