TEXT - Fitch affirms Florida's AAA general obligation bonds
Jan 23 - 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: --$330.125 million PECO 2013 series A refunding bonds The bonds are expected to sell the week of January 28 for bids on 18 hours notice. In addition, Fitch affirms the following ratings: --Approximately $13.6 billion in outstanding Florida full faith and credit bonds at 'AAA'. --Approximately $1.0 billion in outstanding Florida appropriation backed bonds issued by the Department of Management Services at 'AA+'. The Rating Outlook is Negative. SECURITY Florida's full faith and credit bonds are secured first by specific revenues, in this case, a second lien on utility gross receipts taxes deposited into the state public education fund. Florida's full faith and credit are also pledged and provide the basis for the rating. SENSITIVITY/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 slow recovery and the housing market remains weak. 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. SATISFACTORY RESERVES: Reserves remain satisfactory and improved in fiscal 2012 although still greatly 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 well funded. REDUCED FLEXIBILITY: The negative outlook reflects Florida's reduced financial flexibility as it emerges very slowly from the recession. Reserves, while still satisfactory, have been significantly reduced and budget balancing remains challenging. WHAT COULD TRIGGER A RATING ACTION STABILIZATION: The rating could be stabilized at the 'AAA' level based on an established trend of economic stabilization and continued positive financial operations, including passage of a structurally balanced fiscal 2014 budget. The recent Florida Supreme Court decision regarding pension funding was favorable toward the state and a positive rating factor. NEGATIVE FINANCIAL RESULTS: The rating could be revised downward if there is evidence of a weakening of the state's slow economic and revenue recovery or a material reduction in reserves. CREDIT PROFILE The 'AAA' rating on Florida's GO bonds recognizes the state's strong financial management practices, moderate debt burden, well-funded pension system, solid long-term economic prospects, and still satisfactory reserves. The negative outlook reflects the severity of the state's economic decline and reduced financial flexibility as well as lingering uncertainty associated with the pace of the economic and, therefore, revenue recovery. STRONG ECONOMIC FUNDAMENTALS BUT SLOW EMERGENCE FROM RECESSION Until the recession, the Florida economy was 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. Strong underlying fundamentals remain, including a relatively low cost of living, attractive tourist and retirement destinations, and favorable geographic location; however, there is still uncertainty regarding the near term economic outlook and economic performance during the recession was among the weakest of the states. The state's natural amenities include 2,200 miles of tidal shoreline, proximity to Latin American and Caribbean markets, some of the world's most popular tourist destinations, large convention venues, and major cruise ship ports. 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 decline in employment exceeded that of the nation between 2008 and 2010. Although Florida matched the national growth rate of 1.1% in non-farm employment in 2011, growth since has consistently lagged the national rate with year-over-year employment growth of 0.9% in December 2012 once again falling short of the national rate of 1.4%. Construction employment, which is less than half what it was in 2006, continues to decline, albeit at a slower rate. The state's unemployment rate, has declined significantly from its historical high of 11.4% in January 2010, and is 103% % of the U.S. rate at 7.8% in December 2012. The disproportionate impact of Florida's poor economic performance is evident in wealth levels that are growing more slowly than the national average. Florida's per capita income was 100.5% of the national average in 2006, preceding the recession. Five years later, per capita income has fallen to 95% of the national average and ranks Florida 26th 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) have been 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. At the end of FY 2011, these balances totaled $1.0 billion, or 4.5% of FY 2011 general fund revenues. The combined balance increased to $2 billion as of June 30, 2012 (unaudited). Trust fund balances, an additional source of financial flexibility, have also been reduced over the past five fiscal years, from $3.8 billion at the end of FY 2006 to $2.0 billion at fiscal year-end 2012. The trust fund balances are projected to be further reduced by the end of fiscal 2013 as monies are added to the general fund and stabilization fund balances. The enacted fiscal 2012 budget, which totaled $69.2 billion, a reduction of $1.5 billion (2.1%) from the fiscal 2011 budget, closed a projected $3.6 billion gap with spending reductions and a requirement that employees begin making contributions to retirement plans, a provision that was challenged by the teachers' union. The recent Florida Supreme Court decision in favor of the state's position, which will be final as of January 25th if no motions to rehear are filed, is a credit positive for the state. The contribution requirement allowed the state to reduce ongoing annual spending by over $1 billion. After steep declines during the downturn, revenue performance has begun to improve with steady, slow growth in fiscal 2012 and an upward revenue revision for fiscal years 2013 and 2014. Fiscal 2012 unaudited general revenues increased 4.7% year-over-year and were $407 million (1.8%) higher than forecast growth. Sales tax revenues increased 4.7% year-over-year and were 0.9% above estimate. Through the first five months of fiscal 2013, general revenues have increased 7.8% year-over-year and are 2.8% ahead of forecast. The adopted budget for fiscal 2013 assumes 5.4% revenue growth and increases general revenue fund spending 7%. This, in part, reflects an increase in education funding required by enrollment gains as well as a shift to state funding per formula as local property tax values have declined. The increase in K-12 funding is partially offset by a reduction in state funding to higher education, prison consolidation, and other reductions. The governor's proposal to reform Medicaid was not acted upon although savings are expected to be achieved through lower reimbursement rates. The most recent general revenue estimating conference, held in December 2012, revised projected fiscal 2013 and 2014 revenues upward by $240 million, reflecting the positive performance year-to-date as noted above. 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 $21.6 billion equal to 2.9% of 2011 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 July 1, 2011 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 3.9% of 2011 personal income, the eighth lowest such burden for states rated by Fitch and well under the median. 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 second lien on utility gross receipt taxes and ultimately by Florida's full faith and credit pledge. A closed first lien accounts for less than 1% of debt service.