Fitch Rates Santa Clara County, California's $490MM 2013B GOs 'AA+'

SAN FRANCISCO--()--Fitch Ratings has assigned the following rating to Santa Clara County, California's (the county) general obligation (GO) bonds:

-- $490 million GO bonds (election of 2008), 2013 series B 'AA+'.

The Rating Outlook is Stable.

The bonds are expected to sell via competition during the week of Jan. 21, 2013. Proceeds of the sale will support the rebuilding and seismic improvement of the county-owned Santa Clara Valley Medical Center (SCVMC).

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. Assessed values saw a single year of decline during the recent downturn. However, they have since returned to growth. Additionally, wealth and income levels of residents are well above national averages.

ADEQUATE FINANCIAL POSITION: The county experienced moderate financial pressures during the recent downtown. As a result, unrestricted fund balance levels were reduced by roughly half between 2008 and 2011. Employee concessions helped the county to add to reserves in 2012. However, fund balances remain well below pre-recession peaks.

EXCEPTIONAL REVENUE RAISING ABILITY: Santa Clara County voters have shown strong support for county services. This was evident in high approval rates for GO debt in 2008 and the more recent adoption of a general sales tax increase. 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.

EXPOSURE TO HOSPITAL OPERATIONS: The county's hospital enterprise requires substantial ongoing general fund subsidies and has a lengthy record of operating losses. Recent management reforms show promise in improving the financial performance of this enterprise, along with capping the county's exposure. That said, overruns remain the responsibility of the general fund.

MANAGEABLE CARRYING COSTS: County costs for debt service, pension, and other post-employment benefits (OPEBs) are affordable. Overlapping debt levels are moderate but amortization of direct debt is slow.

CREDIT PROFILE

STRONG ECONOMY AND TAX BASE

Santa Clara County is located in the heart of Silicon Valley 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.

The county's economy has benefited directly from the presence of the technology industry with increasing employment levels and a growing tax base. Total employment rose by 3.7% year-over-year as of October 2012. This was more than double the state rate and 71% higher than the national rate of employment growth.

Unemployment rates remained above national levels due to an increasing labor force size. However, the 7.9% unemployment rate as of October 2012 was well below the state rate of 9.8%. Assessed values saw improvements as well, with 4.2% cumulative growth since fiscal 2011, when the county experienced a modest single-year decline of 2.3%. The housing market has shown similar strength. As of mid-2012 single family home prices had increased by 8.8% (compared to one year earlier).

ADEQUATE FINANCIAL POSITION

The county's financial position is currently adequate, though it has experienced strain recently. County spending requirements exceeded revenues during the downturn, resulting in three consecutive years of operating deficits before a return to operating surpluses in fiscal 2012. Fund balance levels were reduced roughly in half during this period. Unrestricted fund balance recovered to 11.4% of general fund spending at the end of 2012, but remained well below 2008's 19% unreserved fund balance.

The county appears poised for further fund balance improvement in fiscal 2013. This will be largely due to recent expenditure controls and revenue gains in addition to renewed management focus on increasing reserve levels. Current reserve levels are adequate, but somewhat below levels typical for this rating category. Further declines in unrestricted balances could increase downward rating pressure.

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. This is 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. This is expected to provide approximately $500 million in new revenue over a ten-year period. The county also benefits from an ongoing, pre-Proposition 13 property tax override that generates more than $100 million annually for county pension costs.

EXPOSURE TO HOSPITAL OPERATIONS

The county is also distinguished by its strong commitment to health care, as reflected in ongoing general fund support for SCVMC. Although structured as an enterprise in the county's financials, SCVMC receives annual operating subsidies from the county that reached almost $200 million (9% of general fund spending) in fiscal 2010. Net operating subsidies were much reduced in 2011 at $94.7 million (4.5% of general fund spending). However, they rose to $126.7 million (6.4% of general fund spending) in 2012.

County management has expressed the intent to cap future annual subsidies at $100 million while continuing to seek operational improvements at SCVMC. An improvement in SCVMC's bottom line would likely benefit the county's general fund. However, the county bears SCVMC's downside risks as well.

MANAGEABLE CARRYING COSTS

County costs for debt service, pension, and OPEBs are affordable and accounted for 18% of general fund spending in fiscal 2011. The county participates in a state-sponsored pension plan with a funding ratio of 83% as of June 30, 2011, or 76% under Fitch's assumption of 7% investment returns. Overall debt levels are moderate at 3.2% of TAV and $5,396 per capita. Additionally, amortization for the county's direct debt is slow with 26% of principal repaid within 10 years.

Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

In addition to the sources of information identified in Fitch's Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope, University Financial Associates, S&P/Case-Shiller Home Price Index, and National Association of Realtors.

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

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