Fitch Ratings has assigned an 'AA+' rating to the state of Florida's $155,100,000 full faith and credit state board of education public education capital outlay (PECO) bonds, consisting of 2009 series E tax-exempt bonds and 2009 series F Build America Bonds (federally taxable-issue subsidy). The bonds are expected to sell competitively as soon as the week of Nov. 23, for bids on 18 hours notice. In addition, Fitch has affirmed the rating on approximately $13 billion of outstanding Florida full faith and credit bonds at 'AA+'. The Rating Outlook is Negative.
Florida's 'AA+' general obligation (GO) rating continues to recognize the state's moderate debt burden, strong financial management practices, well-funded pension systems, solid long-term economic prospects, and still significant reserves, including various trust funds. The Negative Outlook reflects the severity of the state's continued economic and revenue decline as well as the significant uncertainty associated with the economic and revenue outlook. The state's fiscal 2010 budget maintained substantial reserves, providing cushion for revenue underperformance; however, meaningful deterioration beyond what is assumed in current state forecasts could result in negative rating action.
Florida's weakened economy has led to precipitous revenue losses, with the state's revenue sources (primarily a sales tax, but also a documentary stamp tax in large part based on real estate transactions) proving especially susceptible to the decline in housing market activity. The state has no personal income tax. Based on the most recent revenue forecast, from August 2009, general revenues are estimated to have plummeted 12.8% in fiscal 2009 and are expected to drop another 1.6% in fiscal 2010, even after significant revenue-raising actions in the fiscal 2010 enacted budget. This follows year-over-year declines of 2.5% in fiscal 2007 and 8.7% in fiscal 2008.
The Florida legislature has consistently and promptly addressed numerous large negative revenue estimate revisions in the current downturn, maintaining budget balance and an adequate reserve position. The fiscal 2009 budget reduced general fund spending by 7.5% from fiscal 2008 levels, with primary and secondary education funding receiving a sizable reduction. Additional austere budgetary measures followed over the course of the year. Fiscal 2009 closed with total reserves of about $2.2 billion, more than 10% of general fund revenues.
A budget gap of almost $6 billion for the fiscal 2010 budget was closed primarily through the use of federal stimulus monies ($2.5 billion), fee and tax increases ($1.9 billion, including about $850 million from a $1/pack cigarette tax increase), use of trust fund balances ($582 million), and some spending reductions. Including about $300 million from a yet-to-be-finalized tribal gaming compact, the budget incorporated an unencumbered ending general fund balance of $1 billion. On Aug. 31, 2009 the governor signed a gaming compact with the Seminole Tribe. The compact, which departs in several ways from the outline laid out by the legislature in the Spring, requires ratification by the legislature.
At the time of budget adoption total reserves at fiscal 2010 year-end were projected at $2.5 billion, almost 13% of revenues. Although sharply reduced from the peak of $9.9 billion in fiscal 2006, maintenance of this reserve position in such a strained financial environment was notable and a key credit strength. The state released a revised revenue forecast on Aug. 11, 2009. The forecast lowered the revenue estimate for fiscal 2010 by $150 million, less than 1%, a significantly smaller revision than has been the norm in the current downturn. Following the August revision, offset by the slight fiscal 2009 revenue overperformance, the projected fiscal 2010 ending balance drops by less than $70 million. Revenues were slightly ahead of forecasts through September.
Florida's poor economic performance, one of the most negative among the states, reflects the state's severe housing market correction. State employment was down 3.2% in 2008, compared to a 0.4% loss for the nation. The nonfarm employment decline of 4.4% in October 2009, compared to October 2008, reflected a drop of 15.1% in construction employment and declines in all sectors but education and health services. The state's unemployment rate of 11.2% in October 2009 was 110% of the U.S. rate. Personal income performance has been weak, growing just 30% of the U.S. rate at 0.9% in 2008, based on revised figures. Personal income declined 2.3% and 3.7%, respectively, in the first two quarters of 2009, significantly worse than U.S. and regional averages. Based on revised estimates released in November 2009, the state forecasts personal income down 1.5% in fiscal 2009 and another 1.4% in fiscal 2010.
Debt represents a moderate burden on Florida's resources. Net tax-supported debt of about $20.3 billion equals 2.8% of personal income. Debt is two-thirds full faith and credit general obligations. Pensions are among the most well funded of all the states.
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.
The 2009 series E bonds will be due June 1, 2010-2019 and the 2009 series F bonds will be due June 1, 2020-2039. The bonds are callable starting June 1, 2019.
Considerations for Taxable/Build America Bonds Investors
The following sector credit profile is provided as background for investors new to the municipal market.
State General Obligation Bonds:
The general obligation full faith and credit pledge is the broadest security a U.S. state government can provide to the repayment of its long-term borrowing, and therefore is the best indicator of its overall credit quality. State ratings generally fall within the two highest rating categories of 'AAA' or 'AA', with a few outliers. The top tier ratings reflect states' inherent strengths: states generally have broad economic and tax base resources and all possess sovereign powers under a federal government system, with substantial, although varying, control over revenue raising and spending. Given these inherent strengths, in only a few instances have economic concentration and long-term structural decline or the inability or unwillingness to address large financial challenges led to ratings below the 'AA' category. For additional information on State ratings, see U.S. State General Obligation Bond Rating Criteria dated April 25, 2008, available on the Fitch web site at 'www.fitchratings.com'.
Additional information is available at 'www.fitchratings.com'.
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Contacts:
Fitch Ratings, New York
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Karen
Krop, +1-212-908-0661
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cindy.stoller@fitchratings.com