Fitch Rates Florida's $42.4MM Capital Outlay 2008A Bonds 'AA+'; Outlook Stable

NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned an 'AA+' rating to approximately $42.4 million State of Florida (the state) full faith and credit state board of education capital outlay bonds, 2008 series A. The bonds are expected for bids on 18 hours notice, as early as this week. In addition, Fitch has affirmed the rating on approximately $13.2 billion outstanding Florida full faith and credit bonds at 'AA+'. The Rating Outlook is Stable.

Florida's 'AA+' debt rating and Stable Outlook is based on a moderate debt burden, sound financial management practices, fully funded pension systems, and a broad service-based economy, although contraction has begun reflective of the state's severe housing market correction. The weakened economy has led to precipitous revenue losses that resulted in austere budgetary measures taken by the legislature to balance the current and next fiscal year. The state's reserve funds, including various trust funds, were built-up during the earlier bounding economic expansion and are projected to be substantially maintained through the next fiscal year. Fitch believes these reserves provide sufficient cushion for additional budgetary action in the event that revenues deteriorate further than forecasted currently.

The state's revenue sources - primarily a sales tax, but also a documentary stamp tax (in large part based on real estate transactions) - are vulnerable to declines in the rates of population growth and consumption and have proven especially susceptible to the decline in housing market activity. While general fund balances have been reduced, the state has taken corrective action this fiscal year and combined general and reserve fund balances are projected to remain notable at the close of fiscal 2008; approximating $1.7 billion or 6.9% of forecasted revenues.

Debt represents a moderate burden on Florida's resources, as the state targets debt service levels equal to 6% of revenues. As of March 1, 2008, net tax-supported debt approximated $20.1 billion or a moderate 2.9% of estimated 2007 personal income. Debt is two-thirds full faith and credit general obligations.

Following revenue surges over several fiscal years, Florida accumulated large surpluses and reserves that were used judiciously for additional operating expenditures and hurricane relief. The state closed with combined general and reserve fund balances of $6.1 billion or 22.5% of revenues in fiscal 2006 and $4.7 billion or 17.7% of revenues in fiscal 2007. However, fiscal 2007 general fund collections were 2.5% below fiscal 2006 receipts, representing the first year-over-year decline in more than 30 years, as revenue collections softened during the course of the fiscal year. Primarily reflecting the weakened Florida real estate market and its pervasive effect on business and consumer spending, the state's revenue estimating conference reduced forecasted fiscal 2008 revenue by a combined $3.2 billion. In response, legislative action has had the combined effect of offsetting $1.4 billion of the shortfall, primarily through spending cuts. With the ending fund balance expected to absorb the remaining imbalance, fiscal 2008 is now projected to end with combined general and reserve fund balances of $1.7 billion or 6.9% of expected revenues, consisting mostly of the fully funded $1.35 billion reserve fund.

The fiscal 2009 budget, which awaits governor signature, reduces all funds spending by 5.8% from the current fiscal 2008 levels, with funding for primary and secondary education receiving a sizable reduction. The budget maintains a fully funded general reserve fund and leaves largely untapped the various state trust funds' balances that have accumulated to over $2 billion, not including a tobacco reserve account. The budget is based on general fund revenues stabilizing in fiscal 2009 and growing 0.4% above estimated fiscal 2008 receipts. While many of the general fund revenue sources are estimated to be down in fiscal 2009, the sales tax is expected to rise 2.5% in fiscal 2009 - an assumption that Fitch believes places some risk to the forecast given economic trends. The budget authorizes the governor working with the legislative budget commission to use up to 50% of the general fund reserve and $1 billion of the tobacco reserve account if necessary in the event of a revenue shortfall in fiscal 2009.

As the fourth most populous U.S. state and one of the fastest growing this decade, Florida boasts a broad service-based economy. Service industries, trade, and construction have an above average presence in the economy. Reflecting the correcting housing and real estate markets, the state experienced an abrupt slow down in total employment growth in 2007, rising only 0.5% from 2006. This dramatic slow down in growth compares with prior robust years that saw growth of 4% and 2.6% in 2005 and 2006, respectively. More recently Florida experienced job loss as state employment dropped 1% in March 2008 from March 2007 levels, compared to 0.4% national employment growth. Year-over-year construction employment has declined each month since January 2007 and was down 13.6% in March 2008 versus March 2007. Growth has continued in two of state's important sectors, with the educational and health services and leisure and hospitality and the sectors up 3.2% and 1.3%, respectively, in March 2008. Personal income per capita for 2007 grew 5.8%, compared to the 6.2% national rate, and measured 99.6% of the U.S. level, ranking Florida 20th among all states.

Florida's full faith and credit bonds are secured by specific revenues. The capital outlay bonds are secured by a lien on first revenues of motor vehicle license taxes distributed to school and community college districts. The license taxes are distributed by formula to districts for capital outlay, including debt service, with excesses dedicated to state transportation-related uses. For participating districts, the number of enrollment-based instruction units is established to generate revenue, via formula, of at least 1.12 times (x) attributed debt service. This coverage level also is reflected in the additional bonds test. Fiscal 2007 license taxes given in aggregate to districts covered maximum annual debt service (MADS) following this issuance by 1.24x. Total license taxes grew from $636.6 million in fiscal 2006 to $648.1 million, or 6.82x MADS, in fiscal 2007.

The bonds are scheduled to mature Jan. 1, 2009-2028 and callable beginning Jan. 1, 2018 at 101%.

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