BRADENTON, Fla. – Because of refundings and revenue growth, Florida can issue new money bonds over the next decade and not violate the state’s debt cap, an annual affordability analysis says.
That’s partly due to aggressive refinancing and advance refunding activity since 2011 spurred by historically low interest rates, according to Division of Bond Finance Director Ben Watkins. The state’s outstanding debt has also declined during that period by $5.5 billion.
“When you step back and look at the state’s debt portfolio we have refinanced over 62% of all debt outstanding,” he told the state Cabinet, led by Gov. Rick Scott, last week. “Unfortunately, Congress in the tax act is going to make it more difficult for us to save money through refinancing at lower interest rates.”
Watkins has also said that the loss of advance refundings will reduce the state’s resources to finance infrastructure, because the savings can be used to pay for infrastructure.
The Tax Cuts and Jobs Act expected to be signed by President Trump will eliminate advance refundings after Dec. 31.
That will “cost every citizen and taxpayer in the state,” Watkins said.
Going forward, Florida can only rely on current refundings, which he said will require the state to wait until the 10-year call date on municipal bonds to determine if interest rates are advantageous at the time.
“I do anticipate we will have additional opportunities [to refund debt] but we just have to wait until the call date,” he said. “That makes me very uncomfortable because if I can save money now I want to save money.
“Now I’m going to have to sit on my hands until July and see where we are on interest rates.”
Since 2011, Watkins’ division has undertaken 98 refunding transactions totaling $14.1 billion, to generate $2.2 billion of debt service savings on a present-value basis, according to the state’s annual debt affordability report.
In fiscal 2017, the state issued 14 refunding transactions totaling $1.3 billion, generating $247 million of present value savings. So far in fiscal 2018, six refundings have totaled $954.3 million to generate net present value savings of $201 million.
The debt affordability report is prepared each year for the governor and lawmakers to determine bond issuance plans in accordance with the state’s policy.
The state targets the amount of debt issuance annually based on a ratio of debt service costs to available revenue. Lawmakers plan for a ratio up to 6%, with a cap at 7% that can be exceeded if they declare urgency.
Refinancings combined with growth in new revenues and restraint in issuing new money bonds pushed the state’s debt ratio to 5.59% in 2017, compared to 5.46% in 2016.
The ratio is projected to fall to 5.63% in fiscal 2018, and continue declining each year through 2027.
Watkins said the state’s debt ratio is expected to be below 6% for “the foreseeable future, but that depends on restrained debt issuance and continued growth in revenues.”
Scott, a Republican who is term-limited out of the governor’s office after 2018, said whether the debt ratio continues to fall after he leaves office depends on “who you elect.”
Scott has often said he is debt-averse, and has only agreed to use it sparingly during his tenure. While he’s been in office, state policy ended the issuance of bonds for environmental programs, and Florida has issued very little debt for public school construction.
In his last budget, Scott recommended a record $87.4 billion spending plan for fiscal 2019 and $739.1 million of bonds for Department of Transportation projects that he believes will offer a return on investment of more than four-to-one.
The state’s debt increased annually since 1992 and more than tripled by 2010, when outstanding bonds peaked at $28.2 billion, the report said.
Since 2011, Scott’s first year in office, outstanding debt decreased from $27.7 billion to $22.7 billion in 2017.
Annual debt service payments have decreased since 2011, except for upticks in 2015 through 2018 because of how the state records public-private partnerships and the associated obligations, Watkins said.
In the first three to five years, he said typical P3 structures are “lumpy and have large upfront payments during construction.”
In 2015, the uptick in debt was due to the $2.7 billion, I-4 Ultimate Project reconstructing the interstate through the Orlando area and adding express lanes.
As Florida’s largest P3 in 2014, the project was bank-financed by the construction consortium, I-4 Mobility Partners, as well as a $949 million low-interest federal loan through the Transportation Infrastructure Finance and Innovation Act program.
Around 2009 Watkins began including all of Florida’s P3 contracts in the debt affordability report. Most of the projects used bank financing instead of bonding for transportation projects. P3 contracts will add about $6 billion to the state’s direct debt. About $4.3 billion is outstanding.
The DOT Financing Corp. created by the Legislature in 2016 is considering bond financing to advance several projects that will add to the state’s debt, according to the annual report.
The report also includes a review of the Florida Retirement System, which Watkins said is an important issue for credit analysis by rating agencies.
The state pension system has begun reducing its projected rate of return to 7.5% from 7.75%, but the debt report said greater reductions are needed to avoid underfunding the pension system over the long term.
The state has made the actuarially determined contribution over the last five years, and implemented some reform measures. The system’s funded ratio is about 86%, and the adjusted net unfunded liability is $16.53 billion.
“From a business standpoint, we’ve done everything we can to constrain growth in the unfunded liability and that’s a good thing,” Watkins said.
Florida’s general obligation-equivalent rating is AAA from Fitch Ratings and S&P Global Ratings, and Aa1 from Moody's Investors Service, all of which were affirmed in 2017.
General fund reserves, a component of the state’s high ratings, were $2.9 billion or 9.8% of general revenues at fiscal 2017 year end. Reserves are projected to be about $2.7 billion or 8.8% of revenues at the end of fiscal 2018.
The dip in reserves is due to expenses associated with Hurricane Irma, according to the report. The state projects it will spend about $546 million responding to the hurricane, plus $33 million from various trust funds, but expects to get repaid about $300 million from the Federal Emergency Management Agency.
Hurricane Irma also impacted general revenue collections negatively, with collections down $246 million through the end of October, although the state anticipates a potential increase in sales tax revenue from post-Irma rebuilding.
“If there’s a message in this the Legislature needs to leave more unspent general revenue on the table in order to maintain reserves at the appropriate level,” Watkins said.
Most notable in this year’s debt report, he said, is the change in total direct debt outstanding, which declined by $5.5 billion over the last seven fiscal years in addition to repaying $3.5 billion of federal loans to Unemployment Trust Fund.
“We saved a lot through refinancings. We maintained our ratings,” Watkins said. “We’re in a good place right now and the two things I would say we need to pay attention to are maintaining our pensions and adequately funding our reserves.”