SAN FRANCISCO--(BUSINESS WIRE)--Fitch Ratings assigns a rating of 'AA' to the following Santa Clara County Financing Authority, California bonds:
--$100.2 million refunding lease revenue bonds (multiple facilities projects) 2015 series P.
In addition, Fitch affirms the following rating on Santa Clara County (the county):
--$485.6 million general obligation (GO) (election of 2008), 2013 series B bonds at 'AA+'.
The Rating Outlook is Stable.
The bonds are scheduled to sell competitively during the week of May 18 and will refund outstanding debt for interest savings.
SECURITY
The lease revenue bonds are supported by the county's covenant to budget and appropriate lease rental payments for the use of essential facilities. The GOs are backed by an unlimited 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.
SOUND FINANCIAL POSITION: The county generated operating surpluses for three consecutive years through fiscal 2014 and appears on track for a similar performance in 2015. Revenue growth has been strong following the recession and reserves remain healthy.
EXPOSURE TO HOSPITAL RISKS: Hospital operations account for a substantial share of government-wide activities and present an ongoing risk to general fund balance. General fund subsidies to the county's hospital enterprise declined in fiscal 2015 but remain substantial.
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 offsets a substantial portion of its pension costs.
MANAGEABLE CARRYING COSTS: Costs for debt service, pension, and other post-employment benefits (OPEBs) are affordable, but likely to increase over the next several years. Overlapping debt levels are high on a per capita basis but moderate relative to TAV, while amortization of direct debt is slow.
APPROPRIATION RATING LOWER: The one-notch distinction between the county's GO and lease debt is based on the requirement for annual appropriation of debt service on the latter security.
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 been recognized for its ability to attract startup businesses.
STRONG ECONOMY AND TAX BASE
The county's economy has benefited significantly from the presence of the technology industry, as evidenced by increasing employment levels and a growing tax base. Year-over-year employment has increased for 63 consecutive months and has exceeded state and national growth rates by substantial margins. Unemployment rates have dropped correspondingly, falling to 4.3% as of February 2015 (compared to 6.8% for the state and 5.8% for the nation).
The county's strong economy is also reflected in its booming property market. Median home values reported by Zillow.com reached $877,200 in April 2015, 12.1% above prior-year levels. TAV increased by 6.8% for 2015 to $358.5 billion following an 8.4% increase in 2014, and experienced only a single year of modest decline during the downturn.
STABLE FINANCIAL POSITION
The county's financial position remains strong and has benefited from recent growth in property and sales taxes. A $295 million unrestricted general fund balance at the end of fiscal 2014 represented a healthy 12.8% of general fund spending. Further additions to fund balance appear likely based on preliminary results for 2015. While fund balances are below pre-recession levels, they remain adequate to address potential cyclical fluctuations in revenue.
Tax revenues in the county's general fund rose by an impressive 18% in fiscal 2014, supported by a booming real estate market and the first full year of a voter-approved 1/8% sales tax. Management has strategically directed new revenues towards investments in capital needs and technology, increased funding of long-term liabilities, and selected service restorations. Revenue growth will also support climbing labor costs following the completion of five-year agreements with most of the county's unions. Management estimates that wages will increase by a cumulative 17% over the term of the contracts, which could pressure operating balance if revenues fail to keep pace.
EXPOSURE TO HOSPITAL RISKS
The county is recognized for 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 financial statements, SCVMC accounts for nearly one-third of primary government expenses and receives a substantial operating subsidy from the county's general fund. More than two-thirds of the county's direct debt was issued for SCVMC-related projects.
Management projects that operating subsidies to SCVMC will decline to $145 million in fiscal 2015 (equal to 6.3% of 2014 general fund spending), approximately $22 million below fiscal 2014 levels. SCVMC subsidies are projected by management to remain at or below 2015 levels on an ongoing basis due to improved operating performance resulting from implementation of the Affordable Care Act. However, operating challenges for the enterprise likely will pose an ongoing risk to the general fund.
EXCEPTIONAL REVENUE RAISING ABILITY
The county has achieved notable success in gaining voter approval for major revenue measures. The 2008 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 appears likely to raise more than $500 million over its 10-year life. The county also benefits from an ongoing, pre-Proposition 13 property tax override that generated more than $130 million for county pension costs in fiscal 2014.
MANAGEABLE CARRYING COSTS
Carrying costs for debt service, pension, and OPEB accounted for a moderately high 22% of governmental expenditures in fiscal 2014. Such costs are likely to grow over the next several years due to rising pension contributions and escalating debt service, as well as the county's progress in fully funding the actuarially required OPEB contribution.
The county participates in a state-sponsored pension plan with a reported funding ratio of 73% as of June 30, 2013, or 69% under Fitch's assumption of 7% investment returns. Overall debt levels are high on a per capita basis at $6,609 but moderate relative to the county's substantial tax base at 3.5% of fiscal 2015 TAV. Amortization of the county's direct debt is very slow with 16% of principal repaid within 10 years.
APPROPRIATION RATING LOWER
The lease revenue bonds are supported by a master lease arrangement that provides for a pool of essential government facilities backing the majority of the county's lease debt. The one-notch distinction from the county's GO debt reflects the risk of non-appropriation, despite enhanced security provided by the master lease.
Additional information is available at 'www.fitchratings.com'.
In addition to the sources of information identified in the Tax-Supported Rating Criteria, this action was additionally informed by information from CreditScope and Zillow.com.
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
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=984289
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.