Silicon Valley's economic growth boosts county's rating
Santa Clara County, California, received a Moody's Investors Service upgrade based on an operating surplus, the county’s economic strength and its fully-funded other post-employment benefits.
Moody's upgraded the county's general obligation bond rating to Aa1 from Aa2, lease revenue bonds to Aa2 from Aa3 and pension obligation bonds to Aa3 from A1. The county has $1.8 billion in outstanding debt, of which $887.8 million is rated by Moody's. The outlook was also revised to stable from positive.
Located at the southern end of the San Francisco Bay, the county is home to Silicon Valley, and has grown more than 7.7% since 2010 to a population of 1.9 million people, according to Moody's analysts.
The county's decision to purchase two of the bankrupt Verity Health System’s hospitals was factored into the one-notch upgrade.
The county is waiting for final approval by the U.S. bankruptcy court for its bid to purchase O'Connor Hospital, Saint Louise Regional Hospital and the DePaul Clinic.
"While this transaction has not been finalized and does pose some additional risks, we have incorporated this likely expansion and the additional, moderate risks of the county's hospital operations into the rating assignment and outlook," Moody's analysts Alexandra Cimmiyotti and Eric Hoffmann wrote.
The county has achieved its fourth operating surplus and recently fully funded its annual required OPEB contribution for retirment benefits other than pensions, Moody’s said.
“The Aa1 rating also incorporates recent years above average tax base and economic growth, resulting in an exceptionally large and diverse tax base that is poised for additional moderate growth going forward,” Moody’s said. “The rating also reflects the county's low debt burden and moderate pension and OPEB burdens.”
The Aa2 lease revenue bond rating is one notch lower than the county's Aa1 GO rating. The one notch reflects a standard legal structure for a California abatement lease financing and leased assets that we view as "more essential." The notching also reflects the strong legal features of California general obligation bonds that are not shared by lease revenue debt.
The Aa3 pension obligation bond rating is two notches lower than the county's Aa1 GO rating. The two notch distinction reflects both the stronger, secured nature of the GO security compared to the narrower POB pledge and the very poor, though limited, history of weak recoveries on pension obligation bonds when in default.