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Florida's Debt Affordability Report Shows Revenues Are Recovering

JAN 2, 2013 3:24pm ET
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BRADENTON, Fla. — Florida does not have capacity to issue any significant new debt within minimum policy guidelines in fiscal 2014, though financial metrics show that the Sunshine state's revenues have recovered better than anticipated, according to an annual Debt Affordability Report.

The report, prepared for the governor and Legislature to use to make annual budget and borrowing decisions, examines the state's policies for measuring, monitoring, and managing outstanding debt and issuing new bonds. This year's annual legislative session begins March 5 and runs through May 2.

The Debt Affordability Report is prepared by the Division of Bond Finance.

It is based on the amount of projected state revenues and existing debt service requirements. It also considers bonds that were authorized in prior legislative sessions but have not been issued. That amount totals $5.9 billion over the next decade.

The state's policy targets 6% as the "benchmark" ratio for the amount of debt service to be supported by the revenues that are estimated to be available each year.

The 6% ratio can be exceeded if the Legislature determines additional bonds are in the state's "best interest" up to cap of 7%. The 7% cap can be exceeded only to address a critical state emergency.

However, declining revenues during the economic downturn have largely caused the state to exceed the 7% cap in recent years, though new-money issuance has also declined dramatically.

In fiscal 2012, the ratio of debt service to revenues improved to 7.14% from 7.46% in fiscal 2011 because of increased revenues received by the state, according to the report authored by Ben Watkins, the state's director of bond finance.

Revenues available to pay debt service in fiscal 2012 totaled $30.7 billion or about $1.15 billion more than fiscal 2011.

"Florida's economy continues to stabilize and recover from the Great Recession, fueling growth in base revenues," Watkins' report said. "For the first time in five years, the benchmark debt ratio is projected to fall slightly below the 7% policy cap in fiscal year 2013, one year earlier than projected in last year's Debt Affordability Report."

Based upon current revenue projections and existing borrowing plans, there is no debt capacity available within the 7% cap until fiscal 2014, and after the final retirement of the state's environmental Preservation 2000 bonds. After those bonds are paid off, $3.7 billion in new capacity will be available.

Another factor contributing to an increase in debt capacity is a decline in new-money issuance and refundings for savings. Between 2002 and 2010, the state's outstanding direct debt increased from $19.2 billion to $28.2 billion.

In the last two fiscal years, total direct debt has decreased by $500 million in 2011 and $1.5 billion in 2012 primarily because principal amortizations on existing debt exceeded new debt issuance.

Currently, outstanding direct debt is $26.2 billion, and annual debt service payments have leveled out at $2.2 billion.
From 2002 through 2010, new bonds sales averaged $2 billion a year.

That trend declined after the 2011 election of Republican Gov. Rick Scott, who is openly averse to the use of debt along with members of the Republican-controlled Cabinet and Legislature.

In fiscal 2011, the state sold $888.3 million of bonds. In fiscal 2012, only $415.9 million was sold.

"This is the first consecutive yearly decline in debt we've had for at least the last 30 years," Watkins told Scott and the Cabinet last month. "The reduction in debt reverses a long-term trend of annual increases."

The state also has actively marketed refundings for debt-service savings.

Over the last five years, nearly $7 billion of bonds have been refinanced to generate $790 million of present value savings.

"With our debt going all the right way, down, I think it's a real success story," said Jeff Atwater, the state's chief financial officer and a Cabinet member. "Debt is a tax on the people of Florida."

As part of last month's presentation of the debt report, Watkins reviewed the state's reserves and ratings.

"One of the most important metrics used by rating analysts in the municipal market is the level of reserves," he said.

The state ended fiscal 2012 with $2 billion in reserves or about 8.5% of general revenues.

Fiscal 2013 is expected to end with $2.6 billion in reserves or approximately 10.6% of general revenues, according to Watkins.

During fiscal 2012, the three major rating agencies affirmed the state's general obligation ratings at AAA by Fitch Ratings and Standard & Poor's, and Aa1 by Moody's Investors Service.

"Florida is only one of nine states with triple-A ratings from Fitch Ratings and Standard & Poor's," Watkins said.

Analysts said the state's credit strengths include conservative financial practices, progress in restoring structural budget balance, financial flexibility provided by sizable reserves, relatively strong pension funding levels, and a large and diverse economy.

Watkins said analysts remain concerned about Florida's slow economic recovery, maintaining structural budget balance in light of continuing budget pressures, and the potential negative fiscal and economic consequences of a catastrophic hurricane.

Though Florida's total unfunded pension liability is about $19 billion, pension liabilities and management of the long-term funded status of the pension system has become increasingly important to credit analytics, Watkins told state officials.

Florida's combined $41 billion of debt and pension liabilities fall well below the average amount of $66 billion for the largest peer states, "which is primarily due to Florida's fairly well-funded pension system and decreasing net tax-supported debt," according to the Debt Affordability Report.

"Rating agencies have given Florida positive marks for responsibly funding its pension system and modifying benefits to manage the liability over the long term," the report said.

"However, over the last two fiscal years, the state has deviated from its historical discipline by failing to make material contributions towards amortizing the [unfunded] liability."

Pension funding is in limbo because two years ago the Legislature, with Scott's backing, instituted an across-the-board contribution from state employees that was subject to a legal challenge. The case is pending before the Florida Supreme Court.

"We're doing the right thing on debt, but the biggest issue is the pension liability," Scott said at last month's presentation. "It's growing and not coming down."

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