BRADENTON, Fla. — When Moody’s Investors Service released its first round of rating recalibrations for states Monday, Florida failed in its “gilt-edged” quest to win triple-A scores from all three major rating agencies.
Under the recalibration, Moody’s maintained its Aa1 general obligation equivalency rating on the state but did change the credit outlook to stable from negative.
When Moody’s was asked what it would take for Florida to have received a Aaa rating, analyst Nicole Johnson said in an e-mail that this week’s “recalibration was just that — not a change in our opinion of the credit risk.”
Johnson then referred to Florida’s last credit report on March 8.
That report cited a number of challenges that Florida faces, including an increasing reliance on non-recurring revenues following consecutive downward revenue revisions in recent years, heavy dependence on economically sensitive sales taxes, uncertainty stemming from the timing and strength of its recovery, significant population decline from in-migration since 2006, and being prone to hurricane damage.
But earlier this month, Fitch Ratings recalibrated its ratings and elevated the state to AAA from AA-plus, while Standard & Poor’s has rated the state AAA since February 2005.
Both Fitch and Standard & Poor’s have negative outlooks on Florida’s credit, citing some of the same recession-related concerns as Moody’s.
It would have been beneficial for the state to have triple-As from all three major rating agencies, but what it might take to win get top marks from Moody’s “may be impractical in the current economic climate we’re in,” said Ben Watkins, director of Florida’s Division of Bond Finance.
“It would have been nice to be recognized for the responsible actions that the state has taken in order to prudently manage its finances through the worst crisis in 30 years, because I think we’ve done pretty well,” Watkins said. “The removal of the negative outlook is better than nothing, but not what we had hoped for.”
Watkins did not think there would be an immediate sea change in the way analysts and investors view the recalibrated ratings in the municipal market, and it will take time to assimilate the information, he said.
“The practical effect is it’s jammed most of the states into the double-A category or near about,” Watkins said. “There’s clearly not as wide a dispersion of state ratings from bottom to top like there had been before the recalibration.”
Watkins said state officials would keep working to become gilt-edged across the board, “that’s for sure.”
But Florida continues to be one of the hardest hit states in the recession. The difficulties are heightened because the state has no personal income tax and its budget relies heavily on more volatile sales and use taxes.
And while coveted triple triple-A remains elusive to Florida, so does the state’s use of Build America Bonds, which were designed to be a federal stimulus program for state and local government issuers in the recession. Under the program, the federal government provides a 35% interest subsidy to municipal issuers.
Florida last sold BABs on March 9.
Two days later, Watkins announced he had suspended the use of BABs until concerns relating to the extent of potential federal offsets were resolved.
“My Blackberry vibrated off the table that day,” Watkins said. “I had no idea it would cause such a stir. Some people really didn’t get why I cared.”
That’s why he posted a material event notice for the bond market on March 26 on the Municipal Securities Rulemaking Board’s Electronic Municipal Market Access website, he said.
Along with explaining why Florida suspended its BAB program, the notice stated that the federal government had not offset any BAB subsidy payments due to Florida.
It also assured the market that should an offset occur, it would not affect the payment of Florida’s debt service on the BABs it has sold so far.
“This isn’t going to affect the security for any debt,” Watkins said. “It’s just a question of whether I get paid to realize the deals that I’m making a decision on. BABs are only better [than tax-exempt bonds] if you get paid.”
In response to Watkins’ concern, federal officials have said the potential for offset was known when BABs were first sold last year.
Watkins said he knew about the possibility of offsets for tax liabilities, such as payroll taxes. “I’m positive we always pay payroll taxes,” he said.
But when The Bond Buyer reported Feb. 19 that an unnamed issuer had a BAB subsidy docked to pay a federal tax liability, Watkins said his concern about offsets broadened and he began asking questions.
“What I did not understand is that the offset can be for any amount we may owe the federal government, not just for tax liabilities,” he said. “That’s an entirely different matter.”
The potentially bigger risk has prompted Watkins’ bond division to begin an inquiry into all of Florida’s state agencies.
“I’m still in the process of evaluating all the programs that get federal money and where disagreements are occurring, and where there have been disallowances” of federal payments to those programs, Watkins said. “I’ve also learned more about the offset program and I understand the answers to my questions, but they are not favorable to me in resolving this issue.”
He said it may take two weeks to a month to finish his evaluation and make a recommendation regarding future use of BABs.
In the meantime, Florida has new-money transactions it has delayed because of the BAB offset issue, and others are planned.
“I’ve got to get this resolved,” Watkins said, referring to the need to sell new debt. “Either we’ll assess the risk and feel comfortable with it, or we’re not comfortable and I’ll just sell every transaction tax-exempt.”
If the state determines that the risk is too great, and stops using BABs, an alternative may be to contact federal lawmakers and pursue changing the law to alleviate the offset risk, Watkins said.
Either way, he promised to announce his ultimate decision about BABs to the market.