Florida Brushes Up Against Cap

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BRADENTON, Fla. — Based on current revenue projections and existing borrowing plans, Florida does not have capacity to issue debt for new programs for the next two fiscal years and stay within its self-imposed debt cap.

The state's annual debt affordability study released earlier this month measures the ratio of debt service to available revenues and calculates the capacity for bond issuance within legislatively imposed targets. The state uses a 6% target debt service to revenue ratio as the goal and sets 7% as the cap.

The 7% cap has been exceeded in recent years due to the precipitous decline in state revenues created by the credit crisis and the recession, said the annual study's author, Ben Watkins, director of the Division of Bond Finance.

"If you look at the projections, the benchmark ratio gradually improves over time," he said. "But that depends on realizing the revenue growth that's being predicted."

State economists have seen some improvement this year in revenue collections, but at a much slower pace of recovery than anticipated. They predict that it will take years for revenues to reach the levels achieved at the height of the real estate bubble.

"The real story on the deterioration of the benchmark ratio is the dramatic decline due to the great recession, and it's going to take us a while to get back," Watkins said. "We got outside the [ratio cap] not because of what was done on the debt side, but because there was significantly less revenue."

The ratio caps have been exceeded for the last three consecutive years — the first time that has happened in decades, he said.

The latest debt study has been forwarded to the State Board of Administration, which oversees the Division of Bond Finance, and legislative leaders for use in determining how much debt will be authorized in the coming fiscal year.

The study factors in the amount of authorized but unissued debt and the traditional amount of bonds sold each year for essential service programs such as public school construction and typical transportation-related projects.

Over the last two years, the study has incorporated Department of Transportation contracts resulting from public-private partnerships based on "availability" payments, which are annual payments the DOT will make from the state transportation trust fund to private contractors.

To date, the DOT has entered two concession contracts based on availability payments — the Interstate 595 Corridor Improvement Project in south Florida and the Port of Miami Tunnel project. Those contracts have combined project costs of $1.8 billion and availability payments over 35 years totaling $3.5 billion.

"The important thing from a policy perspective is that we identified those projects and included them in the evaluation of what our long-term commitments are," Watkins said.

Despite suffering a significant drop in revenues the past few years, Florida has retained AAA ratings from Standard & Poor's and Fitch Ratings, and an Aa1 rating from Moody's Investors Service.

Florida had $28.2 billion of debt outstanding as of June 30. The state does not issue general obligation debt, but some tax-backed bonds are sold with the state's full faith and credit.

Debt-service payments total $2.1 billion a year. In fiscal 2010, debt-service requirements increased by $37 million. Based on projected bond issuance, annual debt-service payments are estimated to increase to $2.3 billion over the next three years.

Projected revenues available for debt service in fiscal 2010 were $28.3 billion, which was an increase of $2.3 billion over fiscal 2009. However, the projection included $1.8 billion of federal reimbursements pledged to grant anticipation vehicle revenue bonds, or Garvees, that were not issued in 2010 as expected.

"The substantial declines in historical revenues available for debt service experienced in the prior three fiscal years abated in fiscal year 2010, and collections exceeded fiscal year 2009 by $500 million," the debt study said.

The state issued $2.6 billion of new-money bonds in fiscal 2010 — a higher amount than typical due to pent-up demand as a result of the credit crisis when the bond market essentially froze out new issuance for a period during fiscal 2009, Watkins said.

Another $2 billion of refunding bonds were sold to reduce debt service by $258 million over the life of the refunded bonds.

"We needed the money, and we were coming back into the market when conditions were very favorable," he said. "It was a good time to borrow money, and we did so with a vengeance."

Of the new debt that was sold, $1.6 billion was issued as taxable Build America Bonds. Because of the 35% federal subsidy, the BABs are expected to save $235 million over what the cost would have been if sold as tax exempt bonds.

The issuance in fiscal 2010 took a good chunk out of the authorized-but-unissued amount, Watkins said.

Though future issuance is not expected to be as accelerated as it was in fiscal 2010 due to reduced levels of revenues, Watkins said there are signs that the decline appears to have "touched bottom."

However, the recovery for documentary stamp taxes on real estate sales could be much slower. For years, those revenues have been pledged to bonds issued for environmental programs that were incorporated into the debt affordability study as a traditional financing program of the state.

Because those revenues declined significantly, the Legislature has not authorized new debt for environmental programs the past few years, and those have been removed from the debt study.

"Currently, we do not have the capacity within the confines of the existing revenue stream to do any more environmental bonds as a result of the drop in documentary stamp taxes," Watkins said.

The state's future plans include one pending bond sale — $155 million of tax-exempt public education capital outlay bonds that could sell competitively as early as next week.

The PECO bonds will be secured by gross receipts taxes and the state's full faith and credit. They have been rated Aa1 by Moody's and AAA by Fitch and Standard & Poor's.

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