Moody’s Downgrades Santa Clara County’s Ratings

Approximately $1.6 Billion in Debt Affected

New York, July 06, 2012 — Moody’s Rating

Issue: Lease Revenue Bonds (Capital Projects) 2012 Series A; Rating: A1; Sale Amount: $84,890,000; Expected Sale Date: 7/25/12; Rating Description: Lease Rental: Abatement


Moody’s Investors Service has assigned an A1 rating to Santa Clara County’s Refunding Lease Revenue Bonds (Capital Projects) 2012 Series A, issued by Santa Clara County Financing Authority. In conjunction with this rating assignment, we have downgraded to Aa2 from Aa1 the County’s General Obligation bond rating; downgraded to Aa3 from Aa2 the rating on the County’s Pension Obligation Bonds; and downgraded to A1 from Aa2 the ratings on the County’s outstanding lease backed obligations. The outlook on these ratings is stable.

Rating Rationale

The downgrades reflect the County’s significantly weakened financial position, following three consecutive years of General Fund deficits (2009-2011), and the limited prospects for rebuilding the county’s balance sheet in the current economic environment. The county’s operating deficits have reduced its year-end General Fund balance and liquidity to very low levels, even for the new ratings. The assigned ratings also reflect the county’s very strong tax base, solid long-term economic fundamentals, and above average socioeconomic profile. The County’s favorable debt position–which despite the county’s aggressive borrowing in recent years, remains manageable–and its generally favorable pension and retiree health positions also figure positively in the ratings. The county’s recent, now amicably resolved dispute with the City of San Jose regarding property tax distributions to the city’s former redevelopment agency was not a factor in the rating action.

The two notch, rather than one notch, downgrade of the lease backed obligations is the result of the county’s weakening financial position. The County’s previously strong financial position, coupled with the then low lease burden, had lead to an atypical, one notch distinction between the GO rating and the rating on lease backed obligations. With the weakening of the county’s financial position this atypical distinction no longer applies. The current two notch distinction represents Moody’s standard notching for California abatement lease-backed obligations. Broadly speaking the two notches reflect the risk of abatement and the narrower, general fund security pledge for leases compared to the very strong, voter-approved unlimited property pledge securing general obligation bonds.

Bond proceeds will be used for a new health information system at Santa Clara Valley Medical Center and other technological needs. The leased asset will be County jail, the value of which is estimated to be in excess of the amount of the bonds.

Key Strengths

• Large county with Assessed Value (AV) well in excess of the median for the rating level.

• Wealth and income levels well in excess of the median for the rating level.

• Largest employers and tax payers include among the best known technology firms in the world.

• Easily manageable debt position.

• Recovery of the labor market

• Large OPEB reserve and retiree health trust fund.

Key Challenges

• Weakened reserve position with reserves well below the median for the rating level.

• Still high unemployment rate.

• Continued, substantial general fund operating subsidy required for the county’s medical center


The outlook on Santa Clara County’s long-term ratings is stable. The stable outlook reflects the likelihood that the County will stabilize its GF balance, which when combined with the strong economic indicators, will comfortably maintain the County’s current credit quality.

What Could Cause the Rating to Go Up

• Significant improvement in the County’s financial position

• Increases in fund balances coupled with plans to restore reserves to pre-downturn levels

What Could Cause the Rating to Go Down

• Continued deterioration of the financial position

• Significant amount of additional debt


The principal methodology used in this rating was General Obligation Bonds Issued by U.S. Local Governments published in October 2009. Please see the Credit Policy page on for a copy of this methodology.


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