Fitch Rates Florida's $225MM GO Refunding Bonds 'AAA'; Outlook Stable

NEW YORK--()--Fitch Ratings has assigned an 'AAA' rating to the following state of Florida full faith and credit state board of education public education capital outlay refunding bonds:

--$225.41 million bonds, 2015 series B.

The bonds are expected to sell competitively as soon as Feb. 16, 2015, for bids on 18 hours notice.

The Rating Outlook is Stable

SECURITY

Florida's full faith and credit bonds are secured first by specific revenues, in this case, a first lien on utility gross receipts taxes deposited into the state public education trust. 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 resulting in greater 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 although they are 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 adequately funded.

RATING SENSITIVITIES

The rating is sensitive to continued stability in economic and financial performance.

CREDIT PROFILE

The 'AAA' rating on Florida's GO bonds recognizes the state's strong financial management practices, moderate debt burden, adequately-funded pension system, solid long-term economic prospects, and satisfactory reserves.

IMPROVING ECONOMY

The economic recovery in Florida continues to accelerate. Having emerged slowly at first from the national recession, the labor market is showing signs of a stronger recovery - employment is up and the unemployment rate 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. The pace of growth began to accelerate midway through 2012, leading to an annual increase of 2.0%, above the national rate of 1.7%. Employment growth continued to be strong in 2013 with year-over-year growth of 2.5%, as compared to the 1.7% U.S. rate. Most recently, year-over-year growth of 3.0% was reported in December 2014, well above the 2.1% U.S. growth rate, and consistently higher through 2014. 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 downturn and its initial slow recovery from the recession largely reflected the state's severe housing market correction following an historic run-up. The housing market is improving, 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 8.9% year-over-year in December 2014, indicative of the improving housing market. Foreclosure activity remains much higher than the national average but is down substantially from its peak.

Strong underlying fundamentals remain, including 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 have 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 93% of the national average and ranks Florida 27th 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) were 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 enhanced reserves, although they remain below their historically high 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. 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 balance increased to $3.5 billion as of June 30, 2014, or 13.4% 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 $2.5 billion as of fiscal 2014.

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 year-to-date through December are slightly above the forecast adopted in December 2014 by $72 million, reflecting strong sales tax collections and have increased $653 million (5.4%) on a year-over-year basis. The adopted budget for fiscal 2015 increased overall spending 3.8% to $77 billion and the general revenue budget 5.0% to $27.9 billion. The budget funded increases in Medicaid and transportation work projects, fully funded pension contributions, and raised education spending. The budget relies on continued solid revenue growth, offsetting approximately $500 million in tax cuts, primarily motor vehicle license taxes and adjustments to the sales tax. Although the budget does assume a reduction in reserves, utilizing some of the surplus generated over the last two fiscal years, strong revenue collections may reduce that reduction.

The governor's proposed budget for fiscal 2016 reflects the improved revenue environment and would reduce taxes, including $640 million from the General Revenue Fund. It will be taken up by the legislature for review in the legislative session that begins in March.

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 $20.0 billion equal to 2.5% of 2013 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. Due to market losses and assumption changes to reflect the results of a 2009 experience study the funded ratio dropped. 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 6.1% median for U.S. states.

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 and ultimately by Florida's full faith and credit pledge.

Additional information is available at 'www.fitchratings.com'.

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. 14, 2012);

--'U.S. State Government Tax-Supported Rating Criteria' (Aug. 14, 2012).

Applicable Criteria and Related Research:

Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015

U.S. State Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686033

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=979394

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Contacts

Fitch Ratings
Primary Analyst
Karen Krop
Senior Director
+1 212-908-0661
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Laura Porter
Managing Director
+1 212-908-0575
or
Committee Chairperson
Douglas Offerman
Senior Director
+1 212-908-0239
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Karen Krop
Senior Director
+1 212-908-0661
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Laura Porter
Managing Director
+1 212-908-0575
or
Committee Chairperson
Douglas Offerman
Senior Director
+1 212-908-0239
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com