Fitch Rates Florida's $92MM GO Bonds 'AAA'; Outlook Stable

NEW YORK--()--Fitch Ratings has assigned a 'AAA' rating to the following state of Florida full faith and credit bonds:

--$91.565 million Department of Transportation Right-of-Way (ROW) Acquisition and Bridge Construction Bonds, series 2016B.

The bonds are expected to sell competitively as soon as the week of June 20, 2016 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. For ROW bonds, a first lien on motor and diesel fuel taxes. Florida's full faith and credit are also pledged and provide the basis for the rating.

KEY RATING DRIVERS

Florida's 'AAA' general obligation (GO) rating and Issuer Default Rating (IDR) recognize its strong financial management practices, moderate debt burden, adequately-funded pension system, solid long-term economic prospects, and satisfactory level of reserves. Long-term economic fundamentals are strong with future growth expected. Revenue performance has improved along with the economy providing the state with increased financial flexibility.

Economic Resource Base

Florida's strong economic resource base reflects rapid growth, diversification of the economy, and favorable migration trends that continue to be source of growth. The economic recovery in Florida continues to accelerate, having emerged slowly at first from the national recession.

Revenue Framework: 'aa' factor assessment

Florida's revenues, primarily a sales tax, tend to exhibit more economic sensitivity than that of the states on average. Fitch anticipates Florida revenues will grow on a real basis with continued economic expansion but will likely continue to exhibit greater weakness during economic downturns.

Expenditure Framework: 'aaa' factor assessment

The state maintains ample flexibility with low carrying cost burden and the broad expense-cutting ability common to most U.S. states. Medicaid and education remain key expense drivers and will likely keep expenditures growing at or above inflation.

Long-Term Liability Burden: 'aaa' factor assessment

Florida's long-term liability burden is low and well managed. Liabilities are well below the median for U.S. states with modest debt issuance and well-funded pensions. Debt issuance is carefully managed both through statutory limits and a debt affordability process.

Operating Performance: 'aaa' factor assessment

The state employs sound financial management practices and has a history of prompt action to maintain fiscal balance and reserves. The state is well positioned to address economic downturns with ample budget flexibility and reserves.

RATING SENSITIVITIES

Stable Credit Characteristics: Florida's ratings and Stable Outlook assume continued strong prospects for economic growth and ample fiscal flexibility, both in terms of fiscal management and maintenance of reserves.

CREDIT PROFILE

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. 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.

Florida's strong economic resource base reflects rapid growth, diversification of the economy, and favorable migration trends that continue to be source of growth. The economic recovery in Florida continues to accelerate, having emerged slowly at first from the national recession.

Revenue Framework

Florida has a consumption and investment-oriented revenue base. The main revenue source is a statewide sales tax, which typically comprises over 70% of general revenue fund revenues; the state constitution prohibits a personal income tax although there is a corporate income tax. Documentary stamp taxes, which are based on real estate transactions, were significant during the state's housing boom, fell dramatically, but are growing again as the housing market recovers.

Historical growth, adjusted for policy changes, significantly lagged economic growth and inflation. However, a resumption of population growth and stronger economic expansion provides the basis for revenue growth prospects that will outperform the state's own recent experience. Florida's revenue performance was exceptionally weak during the recession, reflecting in part the steep housing market correction.

The state has an almost unlimited ability to raise revenues, with the exception of a constitutional restriction on levying a personal income tax.

Expenditure Framework

Florida has had high rates of growth for Medicaid and school funding spending due to demographics and population growth.

Spending growth is expected to remain within projected revenue growth. Spending has been increasing as the state's resources have expanded, reflecting growth in Medicaid spending as well as in education. State responsibility for funding K-12 education is shared with local school districts, with the state share of total overall cost increases being tempered as local property tax bases have recovered.

State has had a budget cutting bias rather than relying on revenue increases when necessary to maintain budgetary balance, even in core spending areas. During the last recession, the state reduced spending for education, required state and local government employees to make pension payments previously covered by the state, and shifted to managed care to reduce Medicaid spending. Florida's carrying cost for liabilities is below the median for states and is expected to remain low given the states well-funded pensions and generally debt-averse environment. The state maintains a debt service policy cap of 7% of revenues and targets maintaining debt service equal to no more than 6% of revenues.

The governor is authorized to make budget reductions for the executive branch to resolve a revenue shortfall of up to 1.5%. A larger shortfall requires legislative action to resolve.

Long-Term Liability Burden

The state's debt position and structure are conservative and overall liabilities are well below the median for U.S. states. Pensions are well funded although deep recessionary losses ended a long period when retirement system assets far exceeded liabilities, with the state responding by implementing wide ranging reforms to benefits and contributions. Although the funded ratio has stabilized since then, progress toward higher funded ratios has been limited in part due to a lack of full actuarial contributions during the fiscal 2011-2013 period. Pension contributions have matched the actuarial required level since fiscal 2014.

Florida's debt portfolio does not include derivatives and variable-rate debt is negligible at less than 0.5% of net tax-supported debt. OPEBs are limited and funded by a statutorily determined rate. Florida law, which permits reducing or eliminating benefits if contributions are insufficient, provides a cash payment directly to retirees to help defray health insurance costs. The state does not borrow for cash flow purposes.

Operating Performance

The results of Fitch's Analytical Sensitivity Tool (FAST) indicate a fairly steep drop-off in revenues (-5.6%) in a moderate recession. This reflects the sensitivity of Florida's sales tax based revenue system to the economy. During the most recent recession, the state reduced spending and drew significantly on reserves to close budget gaps. Prior to the recession, Florida had available reserves totaling $8.4 billion (36.6% of general fund revenues). During the course of the recession, Florida drew down heavily on these reserves, to $2.8 billion in fiscal 2009. Since then, the state has prudently added to reserves, bringing the total to $6 billion as of Fiscal 2015 (21.9% of general fund revenues). Fitch expects that in a downturn scenario, Florida would again reduce spending and utilize reserves to achieve fiscal balance.

Florida has consistently demonstrated sound financial operations, taking action to balance budgets and rebuilding and maintaining solid reserves. Reserve 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 $3.7 billion as of June 30, 2015, or 13.3% 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.

After steep declines during the downturn, revenue performance has returned to steady growth. Fiscal 2015 revenues increased 5.7% on a year-over-year basis, reflecting strong sales tax collections. Revenue growth is estimated to increase 2.1% in fiscal 2016, inclusive of a variety of tax reductions that were estimated to have an aggregate impact of $420 million.

The enacted 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. Year-to-date revenue performance continues positive trend. Through April, revenues are meeting forecast and have increased 2.5% on a year-over-year basis.

The recently enacted $82.3 billion all-funds ($30.3 billion GRF) budget for fiscal 2017 reflects the expectation for strong revenue growth and continues to reduce taxes. The budget increases spending by approximately 5% from fiscal 2016, funding ample increases in K-12 education, higher education, health and human services, and transportation. Pension contributions are fully funded.

In addition to the sources of information identified in Fitch's applicable criteria specified below, this action was informed by information from Lumesis and InvestorTools.

Applicable Criteria

U.S. Tax-Supported Rating Criteria (pub. 18 Apr 2016)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=879478

Additional Disclosures

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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
+1-212-908-0889
Additional information is available at 'www.fitchratings.com'.
or
Media Relations:
Elizabeth Fogerty, New York, +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
+1-212-908-0889
Additional information is available at 'www.fitchratings.com'.
or
Media Relations:
Elizabeth Fogerty, New York, +1 212-908-0526
elizabeth.fogerty@fitchratings.com