Florida's new governor will inherit plentiful debt capacity
Florida trimmed $1.6 billion of debt off the state’s balance sheet in fiscal 2018, even without the ability to do advance refundings for half of the year, according to the state’s annual debt analysis.
As a result of refundings and limited financings under the current administration, the Sunshine State has the ability to issue $21.1 billion of new money bonds over the next decade, the analysis said.
With another conservative governor taking office, the state’s policy on the use of debt over the next four years isn’t known yet, said Ben Watkins, director of the Division of Bond Finance.
Gov.-elect Ron DeSantis, a 40-year-old Republican who was propelled to office with the help of supportive tweets and in-state campaign appearances by President Trump, will be sworn in Jan. 8.
“I will say this, we’re in a very good position because of what’s been done over the last eight years so there’s capacity within the confines of the benchmark and the target debt ratios,” said Watkins, who hasn’t met with DeSantis.
DeSantis, a Florida native, a Navy veteran and former attorney with the Judge Advocate General’s Corps, was elected to Congress three times. He resigned from office Sept. 1 to run for governor.
Watkins, whose division issued the latest Debt Affordability Report on Friday, said it primarily is based on the policies implemented by departing Republican Gov. Rick Scott.
“If I had to reflect on what transpired over the last year I’d say No. 1, which was very important to the governor, was paying down debt,” said Ben Watkins, director of the Division of Bond Finance.
Since Scott took office in 2011, Watkins said the state has reduced debt by $7.1 billion or 25%.
Scott often spoke of being debt-averse and only approved the limited use of bond financing, mostly for refundings and transportation projects. He will be term-limited out of office in January. In the midterm election, Scott defeated Democratic U.S. Sen. Bill Nelson, who held the seat since 2000. Scott will be sworn in as a U.S. senator on Jan. 8.
Watkins’ division prepares a debt report 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 future borrowing plans kept the state’s debt ratio in 2018 to 5.59%, the same as it was in 2017.
Based on current revenue projections and existing borrowing plans primarily for transportation projects, the report said debt capacity is available within the 6% ratio. The ratio is projected to remain “consistently below the 6% through 2028.”
Projected future debt issuance, primarily for transportation, totals $3.6 billion. Florida had $21 billion in total direct debt outstanding as of June 30. That total consists of $17.5 billion of net tax-supported debt and $3.5 billion of self-supporting debt.
The debt report also discusses events that factored into the analysis this year, including a long-sought upgrade to Aaa by Moody's Investors Service in June.
“It’s very much a positive thing,” Watkins said. “It’s the first time in history we’ve ever had three triples.”
Moody’s raised the state’s general obligation bond rating from Aa1, making it the third rating agency to assign its highest rating to the debt. Florida has been rated AAA by S&P Global Ratings since 2005, and AAA by Fitch Ratings since 2010.
“The GO upgrade reflects a sustained trend of improvement in Florida's economy and finances, low state debt and pension ratios, and reduced near-term liability risks via the state-run insurance companies,” Moody’s Vice President Genevieve Nolan said at the time. “Florida's economy is performing strongly in terms of job growth, and long-term growth prospects are favorable despite the challenges posed by an aging population base.”
Although Florida cannot by law issue general obligation bonds, the GO ratings cover about $12 billion of outstanding bonds backed by the state’s full faith and credit.
The state’s indirect debt secured by revenues, including those issued by other agencies, totaled $9 billion, a decrease of $1.2 billion in fiscal 2018.
Borrowings by the state’s nonprofit insurance-related entities, Citizens Property Insurance Corp. and the Florida Hurricane Catastrophe Fund Finance Corp., make up 43% of the indirect debt.
As of June 30, Citizens had $1.6 billion of debt outstanding and the Catastrophe Fund had $2.2 billion outstanding.
The state views the insurance entities as completely independent and responsible for their own obligations, but the debt report said rating agencies consider their bonds “integral to the state’s overall credit and debt analysis due to the fiscal impact” they could have on Florida’s residents.
Citizens is an insurer of last resort for homeowners who can’t find property insurance coverage from commercial carriers, while the Cat Fund provides low cost reinsurance to commercial carriers.
Both of the state insurers have significant cash resources to deal with risks related to liabilities from hurricanes, Watkins said.
“The other thing that’s a testament to our conservative financial management is having ample reserves to deal with losses from Hurricane Irma and Hurricane Michael without taking a significant financial hit to our financial strength,” he said.
Irma made landfall Sept. 10, 2017, cutting a south-to-north path of damage starting in the Florida Keys and then moving across the peninsula. This year, Hurricane Michael made landfall in the Florida Panhandle on Oct. 10 severely damaging 16 counties that were already economically distressed before the hurricane struck.
General fund reserves were approximately $3.1 billion or 9.8% of general revenues at the end of the 2018 fiscal year, the debt report said.
The fiscal impact for Hurricanes Irma and Michael-related expenses, including individual assistance costs and the state’s share of county costs for Hurricane Irma, are projected to be $1.6 billion. After reimbursements from the Federal Emergency Management Agency, the hurricanes’ combined costs are projected to have a net impact of $770 million on the general fund, with an additional $95 million coming from the various trust funds.
The report also said that over the past three years, lawmakers used more than $600 million of reserves to fund the budget. It recommended that the Legislature establish a more formal policy for using reserves. The state’s reserves are projected to be $2.8 billion by June 30, 2019.
Florida’s pension system is relatively well-funded with a funded ratio of 83.9% as of June 30, 2017, according to the report. Since fiscal 2014, Florida has fully funded its actuarially determined contribution to the pension system following a period of underfunding for budget relief during the most recent recession.
Over the past five years, the state has incrementally lowered the return on investment assumption to 7.4% from 7.75%, but “more progress needs to be made,” said the report.
The Florida Retirement System Actuarial Assumption Conference, which sets the assumptions used to calculate the required contribution, has recommended lowering the investment return rate to 7.10%.
“We continue to make progress toward lowering the investment return assumption, and our message embedded in all that is that the system has been well managed last 20 years, but we seem to be lacking what professionals consider to be the appropriate target on investment performance,” Watkins said. “We need to continue to make progress.”
The 7.4% return being used now will require a $30 to $35 million cost increase for the pension fund contribution in fiscal 2019.
Watkins says the section on pensions is incorporated into the debt affordability report because of the focus on the issue by rating agency analysts.
“Fortunately, we’ve been very well managed and have a very strong pension fund relatives to all states and our peer group,” he said. “We’ll see what the new administration’s policies and ideas are going to be.”