Fitch Ratings assigns an ‘AAA’ rating to the following state of Florida full faith and credit state board of education public education capital outlay (PECO) bonds:
–$200 million PECO bonds, 2008 series E.
The bonds are expected to sell competitively as soon as the week of Oct. 18, 2010, for bids on 18 hours notice.
In addition, Fitch affirms the following ratings:
–Approximately $14 billion in outstanding Florida full faith and credit bonds at ‘AAA’.
The Rating Outlook is Negative.
–Sound financial management practices, including consensus revenue estimating and management of reserves, are well ingrained.
–Long-term economic prospects are solid, although current economic performance remains weak.
–Florida’s revenue sources are vulnerable to declines in the rates of population growth, consumption, and activity in the housing market, which continues its severe correction following a historic run-up.
–The state’s debt burden is moderate, and pensions are well funded.
WHAT COULD TRIGGER A DOWNGRADE?
–Inability to maintain budget balance while preserving an adequate reserve position;
–Economic performance weaker than what is assumed in current state forecasts.
Florida’s full faith and credit bonds are secured by specific revenues. The bonds being sold are secured by a second lien on utility gross receipts taxes deposited into the state public education fund as well as Florida’s full faith and credit, the latter of which is the basis for the rating.
Florida’s ‘AAA’ general obligation (GO) rating recognizes the state’s strong financial management practices, moderate debt burden, well-funded pension system, solid long-term economic prospects, and still significant reserves, including various trust funds. The Negative Outlook reflects the severity of the state’s economic and revenue decline as well as remaining uncertainty associated with the economic and revenue outlook, despite some signs of stabilization. The state has increased its revenue estimates modestly in recent forecast revisions, most recently on Aug. 12, 2010, breaking a pattern of negative forecast revisions in recent years, many of which were steep. Fiscal 2010 is reported to have ended with revenue growth of 2.4% compared to fiscal 2009, reflecting significant revenue-raising actions in the fiscal 2010 enacted budget. This follows three straight years of significant revenue declines, with revenues down 12.8% in fiscal 2009, 8.7% in fiscal 2008, and 2.5% in fiscal 2007. The state does not expect revenues to regain their fiscal 2006 peak until fiscal 2014. Florida’s revenue sources (primarily a sales tax, but also a documentary stamp tax in large part based on real estate transactions) have been especially susceptible to the decline in housing market activity. The state has no personal income tax.
The Florida legislature consistently and promptly addressed the numerous large negative revenue estimate revisions in the downturn, maintaining budget balance and an adequate reserve position. A large budget gap for fiscal 2010 was closed primarily through the use of federal stimulus monies and some trust fund balances, spending reductions, and significant fee and tax increases ($1.9 billion, including about $850 million from a $1/pack cigarette tax increase). But for those increases, the state has not relied on revenue measures to close budget gaps. Total reserves at fiscal 2010 year-end are now reported at $3.2 billion. Although sharply reduced from the peak of $9.9 billion in fiscal 2006, maintenance of this reserve position in such a strained financial environment is notable and a key credit strength.
The budget for fiscal 2011, which began on July 1, 2010, addressed a gap of about $2.8 billion with federal stimulus funds, reserve draws, spending control, and $433 million from a gaming compact with the Seminole Tribe. The compact, the culmination of lengthy negotiations, is expected to generate more than $150 million per year in recurring revenue. Total reserves are expected to remain solid at more than 10% of net general revenue. The August 2010 revenue forecast assumes fiscal 2011 revenue growth of 6.7% compared to actual fiscal 2010 results. Revenues through the first two months of the fiscal year were below budget, although collections of the important sales tax were up 1% over the prior year.
Florida’s poor economic performance in the downturn, one of the most negative among the states, reflects the state’s severe housing market correction. State employment was down 3.5% in 2008, compared to a 0.6% loss for the nation, and dropped another 6.1% in 2009, much worse than the 4.3% loss for the U.S. Year-over-year performance has been improving this year and state employment grew 0.3% in both July and August 2010, the first year-over-year growth since June 2007. Construction employment continues to drop, albeit at a slower pace (down 4.8%, year-over-year, in August). The state’s unemployment rate, although down from a historical high of 12.3% in March 2010, was 122% of the U.S. rate at 11.7% in August 2010. As of its July 2010 forecast, the state expects nonfarm employment to increase 1.1% in fiscal 2011. Unemployment is projected to peak at 11.7% in fiscal 2011.
Personal income performance has been below average, with growth equaling 60% of the U.S. rate at 2.4% in 2008 and a drop of 2.3% in 2009. Personal income is reported to have increased 1.3% in the first two quarters of 2010. Based on the July 2010 estimate, the state forecasts personal income up 3.7% in fiscal 2011. In 2009, Florida’s personal income per capita equaled 98% of that of the U.S.
Debt represents a moderate burden on Florida’s resources. Net tax-supported debt of about $22.4 billion equals 3.1% of personal income. Florida’s debt portfolio does not include derivatives and variable-rate debt is negligible at less than 0.5% of net tax-supported debt. Pensions had been overfunded since fiscal 1998, but due to market losses and assumption changes to reflect the results of a 2009 experience study the funded ratio dropped to a still solid 87% as of June 30, 2009.
Florida’s full faith and credit bonds are secured by specific revenues. PECO bonds are the state’s primary method to fund school construction. A second lien on utility gross receipt taxes and Florida’s full faith and credit secure the PECO bonds now being issued. A closed first lien accounts for less than 1% of debt service.
In addition to the sources of information identified in the report ‘Tax-Supported Rating Criteria’, this action was additionally informed by information from IHS Global Insight.
Applicable Criteria and Related Research:
–‘Tax-Supported Rating Criteria’, dated Aug. 16, 2010;
–‘U.S. State Government Tax-Supported Rating Criteria’, dated Oct. 8, 2010.
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
U.S. State Government Tax-Supported Rating Criteria