BRADENTON, Fla. — The Florida Legislature will consider implementing the state’s first-ever intercept program designed to provide credit enhancement for municipal bonds.
The act is an initiative of the Florida League of Cities to provide credit enhancement at a time when it continues to be difficult for smaller or lower-rated cities and counties to afford the expensive, limited bond insurance available today, supporters said.
At least 24 states have various kinds of intercept programs, and there is recent proof that they can improve credit quality.
On Monday, Standard & Poor’s assigned a AA-plus enhanced program rating to the Gilmer County School District’s 2010 general obligation bonds. Analysts said the rating reflected the district’s participation in the Georgia State Aid Intercept Program. The school district’s issuer credit rating is A-plus.
The proposed measure in Florida is in response to the difficulties state and local governments have faced in the last three or four years, with voter-imposed limitations on taxes, declining revenue, and the housing crisis that is driving property values down, according to Craig Hunter, public finance director for the Florida League of Cities whose most recent private-sector job was as a public finance banker with Bank of America from 2000 to 2006.
Work began on crafting the proposed act last year but it took time study other state programs and their effect on credit ratings, and to vet the league’s proposal with various officials, experts, and the state’s Department of Revenue.
The DOR would be responsible for administering the intercept program.
“It’s a voluntary program but the league was looking for any way we could to provide a mechanism for local government to improve credit,” Hunter said. “There are a lot of triple-A credits that won’t need this, but in case the economy doesn’t improve for a long time, local governments could use this to boost their ratings.”
Hunter called Florida’s proposal a hybrid of other intercept programs that is intended to act as a pre-default mechanism that may boost credit ratings one or two notches.
He stressed that it is anticipated the program would be used by issuers selling plain-vanilla transactions backed by such revenue as local government half-cent sales taxes, a local option fuel tax, revenue sharing funds, and gas and communication service taxes — not bonds tied to riskier payment structures.
The law, as proposed, would authorize the DOR at the request of the trustee or paying agent to intercept certain revenues that flow from the state to the issuer.
If a local government chooses to use the intercept program, the department could “intercept available revenues collected or held by the state for the local government and use the revenues to replenish the debt service reserve or other similar payment account” that has been tapped to make a debt service payment.
Bonds tied to the intercept program must also fund a one-year debt service reserve to act as a guarantee that funds will be available to make a debt service payment if the issuer is delinquent, according to Kraig Conn, legislative counsel for the Florida League of Cities.
Conn said rating agency analysts were consulted about the proposed measure, but no agency was paid to review it so no commentary from analysts has been made available.
“We made some reasonable determinations as to the effect this could have if it was enacted and a city or county went through the process to provide the credit enhancement, and the word we’ve gotten back is this will be beneficial,” he said. “But we’re going to have to wait until the law passes and it’s engaged to see how exactly it’s accepted in the market.”
In addition to studying other state programs to develop Florida’s approach, Hunter and Conn said there were discussions with analysts and other bond professionals, as well as studies of rating agency presentations about intercept programs.
For example, Moody’s Investors Service analysts reviewed various intercept programs in
Nathan Cook, the legislative assistant for Constantine, said there’s only one reason the senator sponsored SB 1130.
“It’s to save local government’s money, that’s the bottom line,” he said. “With this program, if it was in place today, no local government would have been required to have the DOR exercise its intercept authority in the last 30 years.”
Cook said Constantine has been a strong advocate for local government, where his roots in public service began 25 years ago as a planning council member and later as mayor of Altamonte Springs, just north of Orlando in central Florida.
“If you are talking about saving taxpayer’s money why not” sponsor the bill?” Cook said. “If it doesn’t do harm and it secures the taxpayers’ pocketbooks then it makes sense.”
The House and Senate intercept bills began making their way through committees this week.
