NEW YORK--()--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:
--$286.4 million PECO 2012 series A refunding bonds.
The bonds are expected to sell competitively as soon as January 31, for bids on 18 hours notice.
In addition, Fitch affirms the following ratings:
--Approximately $14.3 billion in outstanding Florida full faith and credit bonds at 'AAA'.
The Rating Outlook is Negative.
KEY RATING DRIVERS
SOLID LONG-TERM ECONOMIC PROSPECTS: Long-term economic prospects are solid, although current economic performance remains weak. Economic fundamentals are strong with future growth expected; however, the housing market remains weak and the unemployment rate above average.
STRONG FINANCIAL MANAGEMENT PRACTICES: The state employs sound financial management practices, including the use of consensus revenue estimating and a history of prompt action to maintain fiscal balance.
SIGNIFICANT RESERVES: Florida has maintained large reserves, totaling more than $3.46 billion as of fiscal 2011 year-end. These reserves offset risks associated with an economically sensitive revenue system that is 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.
WHAT COULD TRIGGER A RATING ACTION
--Inability to maintain budget balance while preserving an adequate reserve position.
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.
CREDIT PROFILE
Florida's 'AAA' general obligation (GO) rating recognizes the state's strong financial management practices, moderate debt burden, well-funded pension system, solid long-term economic prospects, and still significant reserves, including various trust funds. The Negative Outlook reflects the severity of the state's economic and revenue decline as well as continuing uncertainty associated with the economic and revenue outlook.
Until the recent 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 a 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 significant 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, and the presence of 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, one of the most negative among the states, reflects the state's severe housing market correction following the historic run-up. State employment was down 3.5% in 2008, compared to a 0.6% loss for the nation, another 6.2% in 2009, much worse than the 4.4% loss for the U.S., and a further 1.1% in 2010, when the U.S. declined 0.8%. Year-over-year performance has been improving and state employment has grown each month since the start of calendar 2011, the first year-over-year growth since June 2007.
Employment growth is trending positive with December non-farm employment increase up 1.6% year-over-year, surpassing the U.S. rate for the fourth consecutive month. Construction employment, which is less than half what it was in 2006, is stabilizing, dropping only 0.5% year-over-year in December. The state's unemployment rate, although down from a historical high of 12% in December 2010, was 116% of the U.S. rate at 9.9% in December 2011.
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. A large budget gap for fiscal 2010 was closed primarily through the use of federal stimulus monies and some trust fund balances, spending reductions, and significant fee and tax increases ($1.9 billion, including about $850 million from a $1/pack cigarette tax increase). Except for those increases, the state has not relied on revenue measures to close budget gaps. The budget for fiscal 2011 addressed a gap of about $2.8 billion with federal stimulus funds, reserve draws, spending control, and $433 million from a gaming compact with the Seminole Tribe.
The enacted fiscal 2012 budget, which totals $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. The budget, as enacted, is structurally balanced and does not use non-recurring revenues to support on-going spending. It is projected to generate an operating surplus that would be used to add to general fund and budget stabilization reserves. General revenue collections through the first half of fiscal 2012 met projection and grew 3.3% year-over-year. The most recent estimating conference, held in January, projected 3.1% general revenue growth in fiscal 2012 followed by 5.4% growth in fiscal 2013.
Reserves at fiscal 2011 year-end remained significant with $1.03 billion (unaudited) in general fund reserves, including the budget stabilization fund of $281.3 million, and trust fund balances of $2.4 billion, including $769 million in the Lawton Chiles Endowment Fund. Although aggregate reserves are sharply reduced from the peak of $9.9 billion in fiscal 2006 and down from original expectations for the year, the state's maintenance of a solid reserve position in such a strained financial environment has been notable and a key credit strength. The fiscal 2012 budget as enacted would add to reserves and begin the rebuilding of the budget stabilization fund as required by law after a drawdown.
The state's slow economic recovery, however, continues to have an effect on revenues as is indicated by a $600 million (2.5%) downward revision in expected revenues for fiscal 2012 as of the October revenue estimating conference. This revenue shortfall is expected to be accommodated through the use of general reserves, which were $289 million higher than anticipated during budget preparation. General Fund revenue is still expected to grow 2.9% on a year-over-year basis. Revenues through October were 0.2% above estimate and 2.2% higher year-over-year. The governor's proposed budget for fiscal 2013 would further reduce appropriations to $66.4 billion and increase allocations to education while reducing spending on Medicaid and corrections. Per pupil education funding would rise 2.3% to $6,372 from the current $6,230, still well below the fiscal 2008 peak of $7,126.
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 $22.9 billion equal to 3.1% of 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, 2010.
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.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
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'(Aug. 15, 2011);
--'U.S. State Government Tax-Supported Rating Criteria' (Aug. 15, 2011).
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648898
U.S. State Government Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648897
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