Florida’s TIF Case Raises Questions for Bond Insurers

A state Supreme Court decision in Florida pertaining to tax increment financing bonds and certificates of participation has raised questions about the potential impact of the ruling on bond insurance companies. Bond insurers back billions of dollars in outstanding Florida COPs and hundreds of millions in TIF bonds. A trade association of municipal bond insurers and reinsurers said yesterday that the case could impact the ability of school districts and other entities in the state to obtain bond insurance for COPs in the future. The Association of Financial Guaranty Insurers also believes the opinion in its current form will disrupt the market for outstanding Florida TIFs and COPs. “We would also point out that the issuance and insurance of both TIFs and COPs relied on several decades of settled case law that is now being called into question,” AFGI said in a statement. “We hope the court will reconsider its decision and clarify its position on Florida COPs.” On Sept. 6, the Florida Supreme Court in Strand v. Escambia County reversed a 27-year-old prior ruling and said that referendum approval is necessary before TIF bonds can be issued. The opinion included a review of COPs used mostly by Florida school districts and raised uncertainty about the legality of outstanding TIF bonds and COPs not validated by a court. Florida school districts began issuing COPs in the early 1980s, primarily to build new schools. For the period from Jan. 1, 1997, through Sept. 18, 2007, issuers in Florida sold 274 COP issues totaling $18.751 billion, according to Thomson Financial. Bond insurers backed 250 issues amounting to $18.166 billion, or 96.9% of the total. Issuers in Florida sold 23 TIF issues totaling $608.8 million. Bond insurers backed 15 issues for $538.1 million, or 88.4% of the total. Ambac Assurance Corp. feels comfortable with its $3.1 billion of net par exposure to Florida school COPs, said Jerry Durr, who heads up Ambac’s general municipal underwriting group. Durr said the company has monitored the situation several ways, including discussions with bond attorneys. “It’s clear that the court did not intend to shut down the Florida COP market with its decision,” Durr said. “We think this will work itself out through the legal process and clarification will be given by the courts that removes any doubt about the validity of Florida school board COPs.” Financial Guaranty Insurance Co. has not publicly disclosed its exposure to Florida TIF bonds and school COPs, said FGIC spokesman Brian Moore. However, Moore did say that no Florida COP deals are included in the company’s top 50 public finance insured exposures, which FGIC does disclose. “We continue to monitor the situation closely,” Moore said in an e-mail responding to questions concerning the Strand case. “We understand that the Florida financial and legal community is working diligently to arrive at an equitable solution for all parties.” Betsy Castenir, spokeswoman for Financial Security Assurance Inc., said the company has no exposure to Florida TIF bonds. “We do have $3.3 billion of net exposure to Florida COPs, all of which are for school districts,” she said.

While some TIF and COP debt has been retired over the years, a survey of Florida’s 67 school districts found that $12.9 billion of COPs currently are outstanding and districts have plans to sell another $8.1 billion over the next five years, said Wayne Blanton, executive director of the Florida of School Boards Association Inc. Since the Supreme Court’s decision was unclear about how it impacts COPs, Blanton said he thought it was prudent that school districts wait for clarification before filing material event notices. “We hope because of the magnitude of the issue, the court will expedite [clarification] fairly rapidly,” Blanton said. The Strand case “has the potential for tremendous economic impact on the state if we have to go to referendum and for all practical purposes school construction would come to a screeching halt until we can get into the referendum cycle,” Blanton said. That was pointed out in several briefs filed on Monday with the Florida Supreme Court. Hundreds of entities and individuals, including Florida’s attorney general, asked the state’s high court on Monday for permission to file friend of the court briefs to seek clarification of its ruling in the Strand case. The court is not required to entertain friend-of-the-court briefs at this stage, but an expert on Florida’s Supreme Court said it is likely that the justices will review them. On Monday the court designated Strand as a high-profile case “because of significant public and media interest in this matter.” The designation makes filings and dockets available electronically to the public at http://www.floridasupremecourt.org/pub_info/index.shtml. In addition to Blanton’s organization others filing briefs on Monday included the Florida League of Cities, the Florida Association of Counties, the Florida Association of District School Superintendents Inc., and a number of individual school districts. Most of the briefs cited turmoil in the credit markets as a result of the Strand decision and noted that Standard & Poor’s placed all of Florida’s TIF and school district-issued COPs on watch with negative implications. Fitch Ratings placed all Florida TIF bonds that it rates — and that were not validated — on negative watch. Another major issue cited by the Florida League of Cities brief filed on Monday concerns the tax exemption of outstanding debt. “If this court does not modify or clarify the initial opinion, many Florida local governments’ debt may be deemed unconstitutional, leading the Internal Revenue Service to revoke their tax-exempt status,” said the brief filed on behalf of the league by Randall Hanna, managing shareholder at Bryant Miller Olive PA. “Issuers of non-validated debt will face dramatically increased interest costs and risk default of their debt obligations, as the legality of using the tax increment revenue to pay the debt is now called into question,” Hanna’s brief said. “Both the taxpayers and the bondholders will be penalized. Just as egregious, the capital markets that buy local governments’ debt may shun all issues of Florida public debt, not just those that are structured as tax increment financing.” Others pointed out that such a default scenario could prompt bond insurers to make debt payments for COPs and TIF bonds they have insured and such payments could be deemed taxable if the debt is determined to be invalid. To date, only a few issuers have filed material event notices telling bondholders about the situation and most have been from entities that sold TIF bonds. “I think this situation illustrates exactly why the SEC should be concerned about muni disclosure,” Municipal Market Advisors senior analyst Matt Fabian said yesterday. “The fact that a bond’s issuer does not have to automatically disclose that the state Supreme Court may well have ruled that that bond is unconstitutional is a dramatic failing of our sector’s disclosure requirements.” “Issuers and their lawyers that choose not to disclose show little regard for bondholder interests, and we feel cannot be trusted to do the right thing in the future,” Fabian continued. “For an individual investor with little access to market information, this is a good reason not to buy a particular issuer. Further, in-state issuers’ failure to disclose adverse events supports our general theme of avoiding new Florida exposure at present.” On Monday, Fabian said he believed the court would grandfather all outstanding debt issues, including those not validated. In the meantime, Fabian said COP owners “are likely better served by not selling right now.” However, he strongly recommended that investors avoid any Florida-issued COPs or TIFs for which the issuer has not disclosed the current situation as a material event. Fabian also said if the ruling stands and referendums are required for future COP financings, he believed school districts would have a more difficult time accessing the capital markets. That could mean that the state would “be forced to boost local aid spending, impacting its budget, and threatening state ratings, Fabian said.