2008-03-25 23:35:19 -

- Fitch Ratings has assigned an 'AA+' rating to Florida's (the state) approximately $200 million full faith and credit state board of education public education capital outlay (PECO) bonds, 2006 series D. The bonds are expected for bids on 18 hours notice, as early as this week. In addition, Fitch has affirmed the rating on approximately $13.2 billion outstanding Florida

full faith and credit bonds at 'AA+'. The Rating Outlook is Stable.

Florida's 'AA+' debt rating and Stable Rating Outlook is based on a moderate debt burden, sound financial management practices, fully funded pension systems, and a broad service-based economy, although rapid growth over the last several years has halted abruptly with the housing downturn. Fitch believes the state's strong reserves provide sufficient cushion as the state considers measures to offset precipitous revenue losses, although the intertwined economic and financial challenges to the state are significant. The state's rating and its direction will ultimately be determined by the state's ability to preserve adequate reserves and work towards restoring structural balance, given the severe housing market deterioration and slowing national economy. The state's reserve funds, including various trust funds, were built-up during the bounding economic expansion. The state faces large growth-related capital demands, especially for schools and class-size reduction, and Medicaid spending pressures.

The state's revenue sources - primarily a sales tax, but also a documentary stamp tax (in large part based on real estate transactions) - are vulnerable to declines in the rates of population growth and consumption and have proven especially susceptible to the decline in housing market activity. While general fund balances are being reduced, the state has taken corrective action this fiscal year and combined general and reserve fund balances are projected to remain notable at the close of fiscal 2008; approximating $1.6 billion or 6.6% of forecasted revenues.

Debt represents a moderate burden on Florida's resources, as the state targets debt service levels equal to 6% of revenues. As of March 1, 2008, net tax-supported debt approximated $20.1 billion or a moderate 3% of 2006 personal income. Debt is two-thirds full faith and credit general obligations.

Following revenue surges over several fiscal years, Florida accumulated large surpluses and reserves that have been used judiciously for additional operating expenditures and hurricane relief. The state closed with combined general and reserve fund balances of $6.1 billion or 22.5% of revenues in fiscal 2006 and $4.7 billion or 17.7% of revenues in fiscal 2007. However, fiscal 2007 general fund collections were 2.5% below fiscal 2006 receipts, representing the first year-over-year decline in more than 30 years, as revenue collections softened during the course of the fiscal year. Primarily reflecting the weakened Florida real estate market and its pervasive effect on business and consumer spending, the state's revenue estimating conference has reduced forecasted fiscal 2008 revenue by a combined $3.2 billion, including a $1.0 billion reduction earlier this month. In response, legislative action has had the combined effect of offsetting $1.4 billion of the shortfall, primarily through spending cuts. With the ending fund balance expected to absorb the remaining imbalance, fiscal 2008 is now projected to end with combined general and reserve fund balances of $1.6 billion or 6.6% of expected revenues, consisting mostly of the fully funded $1.35 billion reserve fund. Also available to the state are various trust funds, which have accumulated balances of over $2 billion, not including a tobacco reserve account.

The legislature is currently considering the governor's fiscal 2009 budget against the challenging financial condition of the state, as fiscal 2009 revenues are now projected to be nearly flat to fiscal 2008. Released in January, the governor's budget relied on sizeable general and trust fund drawdowns, additional lottery revenues, moneys from a Seminole gaming compact that is under litigation, and some budget cuts. The general fund drawdown is complicated by the reduced forecast. The proposal also absorbed the estimated cost to primary and secondary schools of the recently passed constitutional amendment intended to reform property taxes, and used a modest portion of the reserve fund, which brought its balance down the required 5% of expected revenues. Fitch anticipates the legislature will take additional measures towards restoring structural balance.

As the fourth most populous U.S. state and one of the fastest growing this decade, Florida boasts a broad service-based economy. Service industries, trade, and construction have an above average presence in the economy. The state has experienced a abrupt slow down in employment growth, reflecting the correcting housing and real estate markets, as state employment growth was flat in January 2008, compared to 0.7% nationally, and up 0.5% for 2007 versus 1.1% for the U.S. This dramatic slow down in growth compares with prior robust years that saw growth of 4% and 2.6% in 2005 and 2006, respectively. Year-over-year construction employment has declined each month since March 2007 and was down 10.5% in January 2008 from the January 2007 level. Growth has continued in two of state's important sectors, with the educational and health services and leisure and hospitality and the sectors up 3.5% and 1.1%, respectively, in January 2008. Personal income per capita for 2006 grew 5.6%, matching the national rate of expansion, and measured 100.1% of the U.S. level, ranking Florida 20th among all states.

PECO bonds are the state's primary method to fund school construction. A second lien on utility gross receipt taxes and Florida's full faith and credit secure the PECO bonds now being issued. A closed first lien accounts for less than 1% of debt service. Pledged tax revenues in fiscal 2007 of $1.1 billion rose 9.4% from the prior year and cover estimated maximum annual debt service (MADS) of both PECO liens by 1.25 times (x). Fiscal 2008 collections are projected to increase 6.6% from fiscal 2007, including the beneficial impact of a tax law change. Through the February 2008 collections were 7.9% above one year ago.

The 2006 series D bonds are issued to fund new school construction projects and are on parity with $10.4 billion outstanding PECO bonds. Issuance of parity bonds requires 1.11x MADS coverage based on average receipts during the past 24 months.

The bonds are scheduled to mature June 1, 2008-2037 and callable beginning June 1, 2017 at 101%.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, 'www.fitchratings.com'. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.

Fitch Ratings, New York
Kyle R. Gephart, +1-212-908-0661
Richard J. Raphael, +1-212-908-0506
Cindy Stoller, +1-212-908-0526 (Media Relations)