News Column

Fitch Rates Florida's $214MM GO Refunding Bonds 'AAA'; Outlook Stable

August 18, 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 public education capital outlay refunding bonds:

--$214.095 million bonds, 2014 series C.

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

In addition, Fitch affirms the following ratings:

--Approximately $11.9 billion in outstanding Florida full faith and credit bonds at 'AAA';

--Approximately $878 million 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 first lien on utility gross receipts taxes deposited into the state public education trust. 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. The pace of economic growth has accelerated and the housing market is showing signs of improvement.

ECONOMIC AND REVENUE STABILIZATION: Economic performance continues to show improvement, with related improvements in financial flexibility. 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 although they are 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 structurally balanced budgets for fiscal years 2014 and 2015.

IMPROVING ECONOMY

The economic recovery in Florida continues 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 2%, above the national rate of 1.7%. Employment growth continued to be strong in 2013 with year-over-year growth of 2.5%, as compared to the 1.7% U.S. rate. Most recently, year-over-year growth of 2.9% was reported in July 2014, well above the 1.9% U.S. growth rate, and growth is reported in virtually all employment sectors other than government. The unemployment rate, which was atypically higher than the national rate between 2008 and 2012, has essentially matched the U.S. rate since 2012.

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 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 at its lowest point during the recession was less than half what it was in 2006, has resumed growth, increasing 7.7% in 2012 and up 10.9% year-over-year as of July.

The disproportionate impact of Florida's poor economic performance during the recession is evident in wealth levels that have been growing more slowly than the national average, although recent performance has improved. Florida's per capita personal income was 100.5% of the national average in 2006, preceding the recession. Post-recession, per capita personal income has fallen to 94% 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 below their pre-recession peak.

The combined unencumbered general fund and budget stabilization (rainy day) fund balance totaled $6 billion at the end of fiscal year (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 $2.5 billion at fiscal year-end 2013. Although reserves are estimated to have been slightly reduced as of the end of fiscal 2014, they are higher than forecast, with the combined general and budget stabilization funds equaling 12.4% of revenues and total reserves equaling approximately 21% of fiscal 2014 revenues.

After steep declines during the downturn, revenue performance has returned to steady growth and upward revenue revisions in fiscal years 2012, 2013 and 2014. Fiscal 2014 general revenues increased 3.5% year-over-year, meeting forecast. Sales tax revenues increased 7% year-over-year and were 1.7% above estimate. The adopted budget for fiscal 2015 increases overall spending 3.8% to $77 billion and the general revenue budget 5% to $27.9 billion. The budget funds increases in Medicaid transportation work projects, fully funds pension contributions, and raises education spending. The budget relies on continued solid revenue growth, offsetting approximately $500 million in tax cuts, primarily motor vehicle license taxes and adjustments to the sales tax. The budget does assume a reduction in reserves, utilizing some of the surplus generated over the last two fiscal years.

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 2.5% of 2013 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 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 3.3% of 2013 personal income, the ninth lowest such burden for states and well under the 6.1% median for U.S. states.

Florida's full faith and credit bonds are secured first by specific revenues. PECO bonds, which are the state's primary method to fund school construction, are secured first by a first lien on utility gross receipt taxes and ultimately by Florida's full faith and credit pledge. The prior first lien bonds have matured.

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=853154

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.

33 Whitehall Street

New York, NY 10004

or

Secondary Analyst

Laura Porter, +1 212-908-0575

Managing Director

or

Committee Chairperson

Douglas Offerman, +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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