Fitch Rates Florida's $200MM PECO 2008A Bonds 'AA+'; Outlook Stable

2008-09-05 23:58:03 -

- 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, 2008 series A. The bonds are expected for bids on 18 hours notice, as early as September 9. 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 Outlook are based on a moderate debt burden, sound financial management practices, fully funded pension systems, and a broad service-based economy. Economic contraction has begun reflective of the state's severe housing market correction. The weakened economy has led to precipitous revenue losses, resulting in austere budgetary measures taken by the legislature to balance the past and current fiscal year. A recent and challenging deterioration in the state's revenue estimates could result in at least partial use of the state's reserve funds in combination with further budget corrective action. Fitch believes the state's reserves, including various trust funds, which were built-up during the earlier economic expansion provide satisfactory cushion for the current shortfall, although the uncertain depth and length of the real estate led downturn remains a significant concern.

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. Following revenue surges over several fiscal years, Florida accumulated large surpluses and reserves that were used judiciously. While the sizable general fund balances have been substantially depleted, the state has taken corrective action and closed fiscal 2008 with combined general and reserve fund balances approximating $1.7 billion or 6.9% of revenues - consisting largely of the fully funded $1.35 billion reserve fund.

The fiscal 2009 budget reduces all funds and general fund spending by 5.8% and 7.5%, respectively, from fiscal 2008 levels, with primary and secondary education funding receiving a sizable reduction. The budget currently maintains a fully funded general reserve fund and leaves largely untapped the various state trust fund balances that have accumulated nearly $3 billion, including a tobacco reserve account. An August state revenue conference significantly reduced revenue expectations in both the current and the next fiscal years, including $1.8 billion in fiscal 2009, in recognition of protracted economic distress. For fiscal 2009, the governor has recommended using half of the general reserve fund in combination with spending cuts and trust fund balances. It is anticipated the state will consider these recommendations, among other balancing actions, following the November 2008 revenue estimating conference. While the state's general fund is estimated to decline in fiscal 2009, the assumed moderation of the decline and recovery in fiscal 2010 places risk to the forecast given current economic trends.

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 experienced an abrupt slowdown in total employment growth in 2007, rising only 0.5% from 2006. Most recently Florida experienced job loss as state employment dropped 1% in July 2008 from July 2007 levels, compared to 0.1% national employment loss. Year-over-year construction employment was down nearly 13% in July 2008. Growth has continued in two of the state's important sectors, with the educational and health services, and leisure and hospitality sectors up 3.6% and 2.1%, respectively, over the same period.

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 2.9% of estimated 2007 personal income. Debt is two-thirds full faith and credit general obligations.

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 2008 of $1.1 billion rose 5.5% from the prior year and cover estimated maximum annual debt service (MADS) of both PECO liens by 1.28 times (x). Fiscal 2009 collections are projected to increase 3.6% from fiscal 2008.

The 2008 series A 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, 2009-2038 and callable beginning June 1, 2018 at 101%.

Note: Fitch issued an exposure draft on July 31 proposing a recalibration of tax-supported and water/sewer revenue bond ratings which, if adopted, may result in an upward revision of this rating (see Fitch research 'Exposure Draft: Reassessment of the Municipal Ratings Framework').

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)