New Florida budget pressured by coronavirus uncertainty
A scaled down 2021 fiscal year budget signed by Florida Gov. Ron DeSantis will likely need further cuts to withstand potential revenue losses resulting from the ongoing COVID-19 pandemic, according to analysts.
DeSantis signed a $92.2 billion budget in late June, in which he vetoed $1 billion of spending from a fiscal plan passed by the Republican-controlled state Legislature on March 19 as the virus’ outbreak was beginning. The budget cuts became necessary as the Sunshine State suffered severe economic blows resulting from businesses being forced to close, and revenues forecast to fall $1.45 billion from pre-COVID-19 estimates, according the state’s latest monthly financial report, released June 26.
Despite $1 billion of spending cuts, Fitch Ratings analyst Michael Rinaldi said the enacted budget did not take into account the new economic realities of the health crisis, which has recently worsened in Florida with 223,783 cases reported and 3,889 deaths as of July 8. The spike in cases caused Miami-Dade County Mayor Carlos Giminez to shut down indoor dining at restaurants and place restrictions on other non-essential businesses on July 8, less than two months after they were allowed to reopen, which Rinaldi said may also occur in other parts of the state.
“The budget is based off revenue estimates from prior months back,” Rinaldi said. “State sales tax revenues are going to be materially adversely affected.”
Fitch has rated Florida triple-A since 2005, with S&P Global Ratings also assigning the state its top credit mark going back to 2005. Moody’s Investors Service upgraded Florida general obligation bonds one notch to triple-A from Aa1 in June 2018.
Rinaldi said Florida will get more clarity on its 2021 fiscal conditions after state economists meet in August and release updated revenue forecasts. He expects DeSantis to be forced into either unilaterally implementing mid-year spending cuts or convening a special legislative session to determine the necessary reductions. The governor is authorized to enact budget reductions to resolve a revenue shortfall of up to 1.5%, according to Rinaldi.
The finalized budget includes $6.3 billion in total reserves to weather the unknown duration of the pandemic, including a $1.7 billion rainy day fund. S&P credit analyst Carol Spain said Florida built up its reserve position prior to the pandemic, which will give the state more tools to respond to the virus-induced recession, but stressed that spending cuts will also be needed to maintain strong credit conditions.
“For such a highly rated state we would look for a balanced approach,” Spain said. “We expect that the revenue shortfall will be significant and the state will have to cut spending, but in the short-term at least they have reserves to tap into.”
Florida’s revenues are primarily driven by sales tax collections since the state doesn’t levy personal income taxes, which Rinaldi said creates greater uncertainty with forecasting, because of unknowns with how COVID-19 will impact tourism and whether future stay-at-home orders may be needed. Sales tax collections were down $695.4 million through April, according to the state’s latest 2020 fiscal year revenue estimates.
“There are so many question marks with the virus that we cannot determine now, including when there will be a vaccine,” Rinaldi said. “The decline in tourism is going to have a meaningful affect to the state.”
Florida received $4.6 billion of federal CARES Act funding that is limited to use for COVID-19-related expenses and must be spent by Dec. 31. Spain said the state will probably hold off making key decisions for offsetting revenue losses until it is determined whether an additional stimulus package will be approved by Congress and whether rules are changed to allow funding for budget relief.
DeSantis' press office did not immediately respond for comment on the state’s planned strategy for combatting revenue losses caused by the virus. The Republican governor’s budget vetoes were largely focused on local capital projects and included a $134.5 million reduction in aid to municipalities.
“Everyone understands the circumstances have changed,” DeSantis said during a June 29 press conference. “I think we all have to recognize that none of us are going to get everything that we want.”
Florida TaxWatch, a nonprofit organization that oversees government spending, applauded DeSantis for vetoing 81% of previously planned projects it identified as not being properly vetted. Dominic M. Calabro, FTW’s president and CEO, said the group would continue to work with Florida lawmakers to form fiscal policy recommendations.
“Since the record-breaking $93.2 billion budget for FY2020-21 was passed by the Florida Legislature on March 19, the state’s battle against the COVID-19 pandemic has dramatically impacted the financial and physical health of Florida and its communities,” Calabro said in a statement. “These [revenue] losses underscore the need to resist complacency, double down on our resolve to defeat COVID-19, and continue to create and implement innovative solutions that ensure enduring fiscal accountability and strength for the Sunshine State.”
The 2021 Florida budget also designated $9.2 billion for the State Transportation Work Program. The funding includes $2.5 billion for new highway construction, $885 million for transit projects and $400.5 million toward aviation infrastructure improvements.
Florida had $20.6 billion in total direct debt outstanding as of June 30, 2019 compared to $28.2 billion in 2010, according to Fitch. The state’s debt policy targets maintaining debt service payments equal to no more than 6% of revenues.