News Column

Fitch Rates Florida's $25MM GO Refunding Bonds 'AAA'; Outlook Stable

February 24, 2014

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings assigns an 'AAA' rating to the following state of Florida full faith and credit state board of education capital outlay bonds:

--$24.57 million 2014 series A.

The bonds are expected to sell competitively as soon as Feb. 25, for bids on 18 hours' notice.

In addition, Fitch affirms the following ratings:

--Approximately $12.8 billion in outstanding Florida full faith and credit bonds at 'AAA';

--Approximately $1 billion in outstanding Florida appropriation-backed bonds issued by the Department of Management Services at 'AA+'.

The Rating Outlook is Stable

SECURITY

Florida's full faith and credit bonds are secured first by specific revenues; in this case, a lien on motor vehicle license taxes distributed to school and state college districts. Florida's full faith and credit are also pledged and provide the basis for the rating. The state's appropriation-backed bonds, rated one notch below the state's GO rating, are secured by lease rental payments paid by Florida state agencies, subject to annual appropriation.

KEY RATING DRIVERS

SOLID LONG-TERM ECONOMIC PROSPECTS: Long-term economic fundamentals are strong with future growth expected; however, income levels have declined relative to the nation and region due to the recession and initial slow recovery. The housing market remains weak but is showing signs of improvement.

ECONOMIC AND REVENUE STABILIZATION: Economic performance continues to show improvement, with related improvements in financial flexibility. Reserves, while reduced from previous levels, are satisfactory and growing, and revenue performance has been positive.

STRONG FINANCIAL MANAGEMENT PRACTICES: The state employs sound financial management practices, including the use of consensus revenue estimating, and has a history of prompt action to maintain fiscal balance and reserves.

SATISFACTORY RESERVES: Reserves remain satisfactory and have increased over the past two fiscal years although they are still reduced from the peak reached prior to the recession. These reserves offset risks associated with an economically sensitive revenue system vulnerable to declines in the rates of population growth, consumption, and activity in the housing market.

MODERATE LIABILITIES: The state's debt burden is moderate and pensions are adequately funded.

RATING SENSITIVITIES

The rating is sensitive to continued stability in economic and financial performance.

CREDIT PROFILE

The 'AAA' rating on Florida's GO bonds recognizes the state's strong financial management practices, moderate debt burden, adequately-funded pension system, solid long-term economic prospects, and still satisfactory reserves. The Stable Outlook reflects the established trend of economic stabilization and continued positive financial operations, including passage of a structurally balanced budget for fiscal 2014.

IMPROVING ECONOMY

The economic recovery in Florida has begun to accelerate. Having emerged slowly at first from the national recession, the labor market is showing signs of a stronger recovery - employment is up and the unemployment rate down, the housing market is improving, and collections of economically sensitive state revenues are increasing.

Non-farm employment growth has been approximately equal to or above the national rate since 2011, following a revision to statistical data that indicate the recovery was stronger than initially reported. The pace of growth began to accelerate midway through 2012, leading to an annual increase of 1.8%, slightly higher than the national rate of 1.7%. Employment growth continued to be strong in 2013 with year-over-year growth of 2.6% reported in December, as compared to the 1.7% U.S. rate, and growth in virtually all employment sectors other than government. The unemployment rate, which was atypically higher than the national rate between 2008 and 2012, is once again lower at 6.2% in December 2013 compared to the 6.9% national rate.

The Florida economy has been characterized by rapid growth, economic broadening, and diversification as it was transformed from a narrow base of agriculture and seasonal tourism into a service and trade economy, with substantial insurance, banking and export components. Florida's poor economic performance in the downturn and its slow recovery from the recession largely reflect the state's severe housing market correction following an historic run-up. The housing market is improving, although prices and housing starts are still well below pre-recession levels. The homeowner vacancy rate is declining and construction activity has resumed, with housing starts on track for much faster growth. Foreclosure activity remains much higher than the national average but is down substantially from its peak.

Strong underlying fundamentals remain, including a relatively low cost of living, attractive tourist and retirement destinations, and favorable geographic location. The state's natural amenities include 2,200 miles of tidal shoreline, proximity to Latin American and Caribbean markets, and the presence of some of the world's most popular tourist destinations, large convention venues, and major cruise ship ports. Construction employment, which is less than half what it was in 2006, has resumed growth, increasing 1.8% in 2012 and up 8.4% year-over-year as of December.

The disproportionate impact of Florida's poor economic performance during the recession is evident in wealth levels that are growing more slowly than the national average. Florida's per capita personal income was 100.5% of the national average in 2006, preceding the recession. Six years later, per capita personal income has fallen to 95% of the national average and ranks Florida 27th by this measure, down from 18th in 2006.

SOUND FINANCIAL MANAGEMENT

Florida's revenue sources (primarily a sales tax, but also a documentary stamp tax in large part based on real estate transactions) were especially susceptible to the state's steep housing market correction; the state has no personal income tax. The Florida legislature consistently and promptly addressed numerous large negative revenue estimate revisions during the downturn, maintaining budget balance and an adequate reserve position. The state has begun to rebuild reserves, which remain well below their pre-recession peak.

The combined unencumbered general fund and budget stabilization (rainy day) fund balance totaled $6 billion at the end of FY 2006, or 22.4% of general fund revenues. As the state drew down reserves during the recession, the combined balance declined to a low of $905 million, or 4.3% of fiscal 2009 revenues. With positive budget performance and some reallocation of reserves from various trust funds to the general fund, the combined balance increased to $3.6 billion as of June 30, 2013, or 14.2% of general fund revenues. Trust fund balances, an additional source of financial flexibility, have also been reduced, from $3.8 billion at the end of FY 2006 to $2.4 billion at fiscal year-end 2013. The trust fund balances are projected to be further reduced by the end of FY 2014 as monies are added to the general fund and stabilization fund balances.

After steep declines during the downturn, revenue performance has begun to improve with steady growth and upward revenue revisions in FYs 2012, 2013 and now 2014. FY 2013 general revenues increased 7.2% year-over-year and were $683 million (2.8%) higher than the forecast upon which the budget was based. Sales tax revenues increased 5.7% year-over-year and were 1.5% above estimate.

The adopted budget for FY 2014 increases overall spending 6% to $74.2 billion and the general revenue budget 7.9% to $26.7 billion. The budget funds increases in education and Medicaid and also fully funds pension contributions, in contrast to FY 2013. The budget did assume a reduction in reserves, utilizing some of the surplus generated in fiscal 2012 and 2013. Revenue performance has been positive year-to-date, with upward revenue revisions in August and December 2013 totaling $274 million. Through December, general revenue collections have increased $513.4 million (4.4%) year-over-year and are $59 million above even the December revenue estimate.

The Governor's budget proposal for FY 2015 would keep overall spending flat at $74.2 billion but, with general revenues projected to increase 4.9%, increases the general revenue budget 3.1% to $27.5 billion. In keeping with prior budget proposals, the budget proposes reductions in a variety of revenue sources, principally a reduction in motor vehicle license fees, and keeps tight restrictions on debt issuance. The budget would fund increases in education and Medicaid, continue to fully fund pension contributions, and provide some funding for performance based one-time employee bonuses.

MODERATELY LOW LIABILITIES

The state's debt position and structure are conservative. Debt represents a moderate burden on Florida's resources with net tax-supported debt of about $20.4 billion equal to 2.6% of 2012 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 FY 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 85.9% as of July 1, 2013 on a reported basis. On a combined basis, net tax-supported debt and unfunded pension obligations attributable to the state, as adjusted for a 7% return assumption, total 3.6% of 2012 personal income, the fifth lowest such burden for states rated by Fitch and well under the 7% median.

Additional information is available at 'www.fitchratings.com'.

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. 14, 2012;

--'U.S. State Government Tax-Supported Rating Criteria', dated Aug. 14, 2012.

Applicable Criteria and Related Research:

Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015

U.S. State Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686033

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=821495

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.



Fitch Ratings

Primary Analyst

Karen Krop, +1-212-908-0661

Senior Director

Fitch Ratings, Inc.

One State Street Plaza

New York, NY 10004

or

Secondary Analyst

Laura Porter, 1-212-908-0575

Managing Director

or

Committee Chairperson

Marcy Block, 1-212-908-0239

Senior Director

or

Media Relations

Elizabeth Fogerty, +1-212-908-0526

elizabeth.fogerty@fitchratings.com

Source: Fitch Ratings


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