Florida's Leaders Bask in State's Fiscal Health

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BRADENTON, Fla. — Florida's fiscal health is in better shape than it has been in years thanks to state spending policies, restraint in using debt, and the rebound of revenues due to the economic recovery, officials said.

Over the last four years, state direct debt has gone down by $4 billion as a result of a fundamental change in the use of bond financing, combined with refundings because of historic low interest rates that resulted in gross savings of $1.25 billion, Florida Division of Bond Finance Director Ben Watkins told the state's Cabinet Tuesday.

As a result of those factors, Florida's ratio of debt service costs to available revenue fell to 5.6% in 2014, as the state maintained triple-A implied general obligation bond ratings from Fitch Ratings and Standard & Poor's, and Aa1 from Moody's Investors Service.

While it was the first time in seven years that the ratio has been below the 6% target that lawmakers like to see, the ratio currently is projected to remain under 6% for the next decade, according to the annual Debt Affordability Study prepared by Watkins.

"This is the most significant improvement in our benchmark debt ratio of any year," Watkins told The Bond Buyer after his presentation to the Cabinet. "The debt going down $4 billion in four years, and the savings from the refinancings, is really where our gain has been."

Some $6.8 billion of bonds, nearly one-third of the state's debt portfolio, have been refinanced over the past four years. Of that, nine refundings totaling $713.9 million in fiscal 2014 generated gross savings of about $100 million.

In 2014, the state issued $457 million in new money bonds, a decrease of 80% compared to the average historic annual issuance of $2.4 billion between 2004 and 2010.

Watkins' bosses were impressed with the fiscal report, and took a moment to gloat over some states they felt had a less stellar financial picture.

"This is not magic act," said Republican Jeff Atwater, the state's elected chief financial officer. "These are very deliberate, thoughtful, and difficult choices."

Atwater, a cabinet member, said the state's financial picture is the result of a "philosophy of governance," and he credited the fiscal success and job recovery to regulatory, tax, litigation, spending and debt policies instituted by Republican Gov. Rick Scott and the GOP-led Legislature.

"Any time New York or New Jersey would like to revisit capitalism in the free markets they are more than welcome to do that," he said. "I would just mention that if New York had our debt ratio and our credit ratings they would be saving $1.3 billion a year in debt service."

With the debt service savings and lower cost of funds, New York could pay 37,000 teachers, build 62 elementary schools, and construct 200 miles of highway every year, said Atwater.

"Let's not do anything to put at risk the incredible reputation that Florida has," he said, urging state lawmakers to continue their efforts to act quickly and make tough budgetary choices.

Scott, who was re-elected to his second term Nov. 4, agreed with Atwater's assessment.

"We have a very good Legislature and the Cabinet has done a good job," said Scott. "People are moving to the state, jobs are open, unemployment has dropped, and we're paying off debt so it's an exciting time."

Dipping below the 6% benchmark for debt service costs to available revenue should open bonding capacity for state officials to finance infrastructure needs.

However, it is unlikely that lawmakers or Cabinet members will take advantage of the financing as most of them have preferred to use cash since Scott first took office in January 2011, even as revenues began to rebound following the recession.

In addition to the lower debt ratio, Watkins reported Tuesday that Florida's general fund reserves were $3.5 billion as of June 2014 or 13.4% of general revenues.

The debt study, however, projects that reserves could drop to $2.8 billion or 10.3% of revenues by the end of fiscal 2015. The final amount will depend on whether there are unspent revenues at the end of the year, which must be placed into reserve.

While pleased that the benchmark ratio and amount of debt are down, Cabinet member and Agriculture Commissioner Adam Putnam said he is concerned about the projected decrease in revenue for emergencies and unplanned expenses.

"The yellow flag I see is the decline in reserves," said Putnam. "We've got to really keep an eye on that."

Watkins said he believed 10% in unrestricted reserves would be adequate to protect the state's ratings, but that officials also can tap reserves in various trust funds for emergency needs, if necessary.

"More reserves are always better," he said, adding that he expects lawmakers to consider that when developing the state budget.

Watkins also stressed that state pension systems have become a valuable part of state ratings.

In a comparison of 11 peer states, the debt study showed that in 2013 Florida had the third-lowest adjusted net pension liability at $18.6 billion, and second-lowest adjusted pension liability as a percentage of revenues at 27.3%.

The study found that Florida had $24.2 billion of outstanding direct debt as of June 30, 2014, a decrease of about $4 billion over the last four years primarily due to principal repayments on existing debt that exceeded new money bond issuance and refinancings.

Annual debt service payments for net tax-supported debt increased nearly 50% over nine years to $2.2 billion in 2013 from $1.5 billion in 2004.

Fiscal 2014 debt service decreased by $300 million to a total of $1.9 billion due to final retirement of Preservation 2000 bonds in 2013.

The benchmark debt ratio, which by legislative policy is targeted at 6%, increased from just over 5% in 2006 to an all-time high near 8% in 2009 due to declining revenues.

The debt affordability study now goes to lawmakers to be used in approving new debt and formulating the state budget for fiscal 2016. Florida's annual legislative session begins March 3 and runs through May 1.

The formulation of the budget will be based, in part, on the state economist's projections of revenues. A revenue estimating conference is scheduled for Friday to develop the current forecast for general revenue funds that will be available in the next few years.

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