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Florida has debt capacity if revenues hold up amid the pandemic

Even with the novel coronavirus pandemic taking a hit on Florida's revenues, the state projects it will have debt capacity available to finance capital needs over the next decade.

The Sunshine State can borrow up to $6.6 billion in fiscal 2022 and up to $34.1 billion over the next 10 years if Revenue Estimating Conference projections on collections hold up, according to the 2020 Debt Report released by the Division of Bond Finance Dec. 15.

Despite lower state revenues, Florida has plenty of headroom to issue new debt, said Bond Finance Director Ben Watkins.

Bloomberg News

The annual report shows that the ratio between the amount of debt service to be paid and the revenues available to make bond payments will be 5.49%. The Legislature sets a cap of 6% for new money issuance, although it can be raised if it's in the best interest of the state.

"While it's higher than we expected to be this time last year because of lower revenues...we've still got plenty of headroom," for new borrowing, Bond Finance Director Ben Watkins told the governor and Cabinet Dec. 15.

The 29-page Debt Report said revenues available to pay debt service in fiscal 2020 totaled $41.2 billion, about $1.7 billion or 3.9% less than in fiscal 2019.

"Revenues were down because of the economic impact caused by the COVID-19 pandemic," said the report. "The August 2020 the Revenue Estimating Conference revised prior estimates to incorporate the realized impacts of COVID-19 and the REC’s outlook for future revenue collections."

Revenues collected in fiscal 2021 are projected to be $3.4 billion lower than the revenue forecasts used earlier in the year by lawmakers to create the state budget.

Collections have improved during the first quarter of 2021 from the steep decline in the last quarter of 2020, based on the revised projections.

To help soften the impact, Florida received $5.9 billion from the Coronavirus Aid, Relief, and Economic Security Act. Of that allocation, $4.6 billion was the state's share while $1.3 billion was sent to local governments that didn't qualify to receive direct federal support, the report said.

The federal funds have been used to pay for eligible expenses related to the state’s response to COVID-19. As of Oct. 22, the state had reported a total of $3.8 billion in eligible CARES Act expenditures to the U.S. Treasury.

Florida, whose full faith and credit bonds are rated triple-A by Fitch Ratings, Moody's Investors Service and S&P Global Ratings, could see headwinds in maintaining those ratings because of the pandemic, the report warns.

"The state faces an ongoing vulnerability to maintaining Florida’s triple-A credit ratings as a result of the fiscal and economic impacts of COVID-19," it says. "Revenue declines, coupled with sizable additional borrowing, may put downward pressure on the state’s credit ratings."

The report said rating agencies have indicated that credit direction will depend largely on a state’s willingness to make fiscal and budget adjustments and maintain structural budget balance.

"The state should not rely too heavily on non-recurring, one-time solutions such as federal government stimulus or borrowing; instead, the state should focus on restrained and prudent spending in order to mitigate the uncertain depth and duration of the impacts of COVID-19," it said.

General fund reserves, which were $4 billion in fiscal 2019, declined by more than $2.1 billion to $1.9 billion at the end of fiscal 2020.

"Reserves were used to support budgeted spending in fiscal year 2020 and offset revenue declines," said the report. "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."

Reserves are projected to be about $3 billion at the end of fiscal 2021, reflecting full use of CARES Act funding.

Total state direct debt outstanding as of June 30, was $19.2 billion, a $1.4 billion decrease from the prior fiscal year, the report said. Net tax-supported debt for programs supported by state tax revenues or tax-like revenues totaled $15.6 billion, while self-supporting debt, representing debt secured by revenues generated from operating bond-financed facilities, totaled $3.6 billion.

Annual debt service payments increased by $274 million to $2.3 billion in fiscal 2020. The increase reflects the variability in annual payments under public-private partnerships financing transportation projects as well as additional payments negotiated by the Department of Transportation for the Interstate 4 Ultimate reconstruction project in the Orlando area.

About $2.7 billion of debt is projected to be issued over the next decade primarily for financing transportation projects.

As has been the case for more than nine years, the projections exclude any additional borrowing for the Public Education Capital Outlay program, Everglades Restoration, PPP projects not yet entered into by DOT, or proposed borrowings state agencies' legislative budget requests.

Once again the annual report stressed that rating agencies have increasingly focused on the financial challenges in some defined benefit retirement systems. In recent years, there have been downgrades of other states' credit ratings due to outsized pension liabilities.

"This year, Florida continued to make important progress in lowering its investment return assumption and made incremental improvement by reducing the amortization policy to 25 years from 30 years," the report said, adding that the investment return assumption has been lowered to 7% from 7.2%.

The report said Florida Retirement System’s investment consultants and the state’s actuary believe that 6.5% to 6.6% is more realistic.

"S&P has published guidance, which indicated 6.5% as a sustainable return assumption," it said. "Inadequate contributions may lead to a weaker financial position for the FRS and challenges to maintaining the state’s triple-A credit ratings."

The report concludes that the state will have available debt capacity due to limited issuance plans and projected revenue growth.

"The state is well positioned with significant debt capacity available to fund critical infrastructure needs,” it said. “However, available debt capacity and the ratio are sensitive to revenue declines from economic weaknesses such as those precipitated by the COVID-19 pandemic.”