Fitch Rates Florida's $308MM GO Refunding Bonds 'AAA'; Outlook Stable
Fitch Ratings has assigned an 'AAA' rating to the following state of Florida full faith and credit state refunding bonds:
--$307.745 million State Board of Education Public Education Capital Outlay (PECO) refunding bonds, 2015 series E.
The bonds are expected to sell competitively as soon as Aug. 12, 2015 for bids on 18 hours' notice.
In addition, Fitch affirms the following ratings:
--$12.2 billion in outstanding full faith and credit bonds at 'AAA';
--$944 million of appropriation backed debt issued by the Department of Management Services at 'AA+'.
The Rating Outlook is Stable.
Florida's full faith and credit bonds are secured first by specific revenues. For PECO bonds, a first lien on utility gross receipts taxes deposited into the state public education trust fund secures the bonds. Florida's full faith and credit are also pledged and provide the basis for the rating.
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 continues to show signs of improvement.
ECONOMIC AND REVENUE STABILIZATION: Revenue performance has improved along with the economy providing the state with increased financial flexibility.
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 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.
The rating is sensitive to continued stability in economic and financial performance.
The 'AAA' rating on Florida's general obligation (GO) bonds recognizes the state's strong financial management practices, moderate debt burden, adequately-funded pension system, solid long-term economic prospects, and satisfactory level of reserves.
The economic recovery in Florida continues to accelerate, having emerged slowly at first from the national recession. The labor market continues to show signs of a stronger expansion; employment is up and the unemployment rate is 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. Most recently, year-over-year growth of 3.5% was reported in June 2015, well above the 2.1% U.S. growth rate, and consistently higher through 2015. As of June, Florida had recovered 100.2% of prior peak employment, slightly below the U.S. rate of 102.5%. Growth is reported in all employment sectors. 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 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 recession and its initial slow recovery largely reflected the state's severe housing market correction following an historic run-up. The housing market continues to improve, 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. Construction employment increased 7.3% year-over-year in June 2015, indicative of the improving housing market. Foreclosure activity is down substantially from its peak but remains much higher than the national average as foreclosure activity is slowly cleared through the judicial process.
Strong underlying fundamentals include 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.
The disproportionate impact of Florida's poor economic performance during the recession is evident in wealth levels that had 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 92.4% of the national average in 2014; ranking Florida 28th by this measure, down from 18th in 2006.
SOUND FINANCIAL MANAGEMENT
Florida has consistently demonstrated sound financial operations, taking action to balance budgets and rebuilding and maintaining solid reserves. 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.
After steep declines during the downturn, revenue performance has returned to steady growth and there have been upward revenue revisions during each of the last four fiscal years. Fiscal 2015 revenues increased an estimated 5.7% on a year-over-year basis, reflecting strong sales tax collections. Revenue growth is conservatively estimated to increase 1.6% in fiscal 2016, inclusive of $420 million in a variety of tax reductions, the largest of which is $226 million reduction in the communications service tax.
The adopted budget for fiscal 2016 increases overall spending 1.7% to $78.4 billion and the general revenue budget 4.3% to $28.7 billion. The budget funds a sizeable increase in Medicaid, reflecting in part a reduction in federal funding for non-compensated care. Education spending is also increased and pension contributions are fully funded.
The state has successfully rebuilt reserves as the economy has recovered, having substantially reduced them during the recession for budget balancing purposes. 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.
Balances have rebounded with positive budget performance and some reallocation of reserves from various trust funds to the general fund. The combined unencumbered general fund and rainy day fund balance totaled $3.3 billion as of June 30, 2015, or 12% of general fund revenues. Trust fund balances, an additional source of financial flexibility, are lower than they were at their peak ($3.8 billion at the end of FY 2006) but remain stable at $2.4 billion as of fiscal 2015.
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 billion equal to 2.5% of 2014 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.
With positive investment returns and five-year asset smoothing that now fully incorporates the deep losses of 2009, the funded ratio has improved to 86.6% as of July 1, 2014 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 median for U.S. states. Reflecting GASB 67 requirements, the system reported a 96.1% ratio of net plan assets to liabilities.
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. The bonds ultimately backed by Florida's full faith and credit pledge.
Additional information is available at 'www.fitchratings.com'.
Tax-Supported Rating Criteria (pub. 14 Aug 2012)
U.S. State Government Tax-Supported Rating Criteria (pub. 14 Aug 2012)
Dodd-Frank Rating Information Disclosure Form
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