Florida’s municipal bond issuance is expected to fall over the next 10 years even as revenues rise after the COVID-19 pandemic wreaked havoc on state’s economy.
The state’s debt position improved in fiscal 2021 as a result of the favorable interest rate environment, according to the Florida Debt Report released last week by the state Division of Bond Finance. The debt ratio remains under its 6% target, also aided by the reduction in the amount of debt outstanding due to restrained borrowing by the state.
After falling $1.7 billion, or 3.9%, in fiscal 2020, revenues available to pay debt service rebounded in fiscal 2021, the report said. General revenues exceeded pre-pandemic forecasts in fiscal 2021, with revenues available for debt service totaling $47.5 billion, or $6.3 billion, up 15% from the previous fiscal year.
“We’ve had an extraordinarily robust recovery — and that’s just our organic sales taxes, that doesn’t include any of the federal money,” Ben Watkins, Director of the Florida Division of Bond Finance, told The Bond Buyer.
He noted that after the Great Recession, it took the state almost four years to get back to back to pre-financial crises revenue collection levels. Less than two years after the COVID-19 pandemic started, the state is seeing revenues up around 15% in just one year, which he said was amazing.
“That’s largely attributable to the governor doing everything he could to keep things open during the pandemic and giving people an opportunity to go to work,” he said.
Total state direct debt outstanding was $18.4 billion as of June 30, a decrease of $825 million from the prior fiscal year. This continued a downward trend that started in 2011.
Net tax-supported debt for programs supported by state tax revenues or tax-like revenues totaled $14.7 billion while self-supporting debt, secured by revenues from bond-financed facilities, totaled $3.7 billion.
Indirect state debt, secured by revenues not appropriated by the state or debt obligations issued by a separate legal entity, was roughly $9.6 billion.
Over the next 10 years, the report forecasts that about $1.8 billion of net tax-supported debt will be issued, with most of the proceeds going toward transportation projects.
The report’s projections don’t include borrowing for Public Education Capital Outlay (PECO), Everglades Restoration or the Department of Transportation’s public private partnership projects because there is no expected borrowing for these programs.
Projected debt issuance over the next 10 years has dropped by around $844 million compared to the $2.7 billion of projected issuance that was forecast in the 2020 Florida Debt Report. This is mostly due to a decline seen in borrowing for transportation projects.
In the past decade, there has been a significant decrease in projected debt issuance, which reflects less reliance by the state on debt to finance infrastructure. In fiscal 2010, projected debt issuance was $7.2 billion; this compares to the current projected debt issuance of $1.8 billion.
“That’s less than a third of what we were looking at over 10 years ago,” Watkins said.
“And that’s pretty remarkable because we used to do $1.5 billion in new issuance annually, and if you annualize that for 10 years it’s about $15 billion. That’s not our landscape looking forward any longer,” he said.
“Notwithstanding the decrease in debt outstanding over the past decade, the annual debt service payments have remained relatively stable in the $2.0-$2.2 billion range,” the report says. “Annual debt service payments on tax-supported debt decreased by $222 million in FY 2021 to $2.0 billion but increase in FY 2022 to $2.2 billion.”
In fiscal 2021, the state executed 16 refinancing transactions, which generated gross debt service savings of $362 million, or $335 million on a present value basis, the report said. Most of Florida’s debt issuance in the past several years has been to refinance debt at lower interest rates.
Since fiscal 2013, the state has executed 113 refinancings totaling $15.2 billion which have generated gross debt service savings of more than $3.3 billion over the remaining life of the bonds, or $2.6 billion on a present value basis. More than 80% of all state debt has been refinanced to lower interest rates.
Future candidates for refinancing are diminishing. In the next five years there is only $4.4 billion of debt which can be refinanced — and that’s if market conditions remain favorable and interest rates stay low enough to generate debt service savings.
At the end of fiscal 2020, General Fund Reserves, which include the Budget Stabilization Fund, were $7.9 billion — this included the federal CRF funds received under the CARES Act. Without this federal money, the General Fund Reserves would have fallen to $2.4 billion, the report said.
By the end of fiscal 2021, the General Fund Reserves had increased by more than $1.5 billion to $9.4 billion, or 26% of general revenue, which the report said was considered extremely strong by the bond rating agencies.
Florida did not access the Budget Stabilization Fund during the pandemic and transferred a $1 billion balance in the Lawton Chiles Endowment Fund (tobacco reserves) into the BSF for fiscal 2022.
“The discipline of setting aside sufficient funds during times of economic prosperity helped ensure that the state had adequate reserves to mitigate revenue declines caused by COVID-19,” the report said.
By the end of fiscal 2022, General Fund Reserves are projected to be around $10 billion.
Moody’s Investor Service, S&P Global Ratings and Fitch Ratings this year all affirmed their triple-A ratings on the state’s general obligation bonds.
The agencies said their actions reflected the state’s economic recovery and prudent budget management.
In March, Moody’s and S&P revised their sector outlooks for U.S. states to stable from negative. Both agencies noted the state’s stronger-than-expected recovery from the pandemic’s economic impacts.
In their reports, the rating agencies indicate the state will likely see lingering impacts in the leisure and hospitality sectors related to the pandemic; however, they expect the revenue collections to continue to grow as a result of Florida’s robust recovery.
The rating agencies said they expected the state will maintain healthy reserves and continue making timely budget adjustments while keeping structural budget balance.
The rating agencies have incorporated environmental, social and governance (ESG) factors into their analysis.
“While the state has favorable long-term social and governance characteristics, there are vulnerabilities around environmental risks,” the report noted. “Specifically, the rating agencies highlight Florida’s vulnerability to hurricanes, flooding, and sea level rise. Rating agencies are monitoring the state’s actions to plan for and mitigate environmental risks, such as creating Citizens and Cat Fund to provide for a stable insurance market and additional actions taken to address climate resiliency.”
The reported noted that S&P has said the state’s actions to address water quality and climate change as well as appointing a Chief Resilience Officer are all credit positives.
Also this year, the state lowered its investment return assumption for its pension plans to align it with best practices.
The investment return assumption, which over the past seven years had been lowered to 7% from 7.75%, was cut to 6.8% while the amortization policy for the unfunded liability was reduced to 20 years from 25 years.
The reported noted, however, that experts say that between 6.1% and 6.7% is a more realistic return assumption and that other best practices on debt amortization have not been implemented as of yet.
Looking at P3 projects, the state DOT has three agreements with private partners: for the construction of the I-595 corridor improvement project, the Port of Miami tunnel project and the I-4 project going through Orlando. The Miami and I-595 projects have been operational for years.
These P3 projects have combined construction costs of $4.5 billion — $1.3 billion for I-595, $543 million for the tunnel, and $2.7 billion for I-4, the report said.
The capital costs and operations/maintenance expenses of these P3s are paid through mandatory scheduled payments that begin when construction is complete and then continue for 30 to 35 years. The capital costs of these P3 projects are included as outstanding debt of the state.
Separately, state universities have been using their direct support organizations (DSOs) to support various auxiliary functions such as athletics, healthcare and research.
DSOs can also serve as a conduit issuer for universities to finance capital projects, such as campus housing, parking or athletic facilities. DSO transactions don’t require approval by the governor or cabinet, just the university’s board of governors.
Universities have also used DSOs to sell debt for infrastructure projects, the report noted, adding that DSO debt was estimated at $2.8 billion on June 30, making up 77% of all university debt outstanding.
Universities are also entering into P3 agreements for infrastructure projects. Unlike DSO transactions, each university P3 transaction is analyzed by the board of governors and the Division of Bond Finance staff prior to sale. University P3 and DSO debt are excluded from state direct debt totals.
While the P3 partners may have debt associated with the project, the debt is often non-recourse to the state or the university. However, rating agencies have been taking a closer look at university P3 projects and are now incorporating the associated debt obligations in their credit analysis, the report noted.