With a headline that reads “Florida Back on Track,’’ Moody’s Investors Service gives Florida an Aa1 rating and a stable outlook in a report issued last week, proclaiming that “the state’s recovery is well under way.”
The report gives the state good marks for its fiscal discipline, helped by the constitutionally required budget stabilization fund that requires legislators to sock away money to offset a decline in revenues.
But analyst Nicole Johnson warns that the state’s dependence on volatile documentary stamp tax and sales tax mean revenue fluctuation is higher than average in Florida and the potential for insurance premium assessment in the wake of a hurricane “are tax-like in nature” and that poses a credit challenge that weakens the rating.
Here are the good news/bad news excerpts from the report. Download Florida-Back-on-Track-June-2013
The good news:
- Florida’s financial strength is underscored by efforts to replenish its reserves even though the state’s economic recovery has been slower than originally expected, as in many states.
- Even at reduced levels, Florida’s reserve levels are impressive given the magnitude of the revenue deterioration that the state experienced during the recession.
- Florida has a constitutional mandate to fund the BSF at no less than 5% of prior year revenues, up to 10%, and the obligation to restore any draws in five equal annual installments from general revenues, commencing in the third fiscal year after the withdrawal, unless the legislature establishes a different schedule….The demonstrated willingness of lawmakers to restore the BSF as well as other reserves during a prolonged recovery underscores the state’s strong governance attributes.
- At the end of fiscal 2013, the state expects the BSF balance to grow to $710.5 million (from $496 million the prior year) and projects a general revenue fund balance of approximately $2.4 billion in combined surplus plus unspent General Revenue funds. In addition, total trust fund reserve balances are projected to be $1.7 billion at the end of fiscal 2013.
- Since residential permits bottomed out at about 35,300 in 2010, they are expected to double in 2013 and reach 97,200 in 2014. Foreclosures have slowed considerably and the state’s housing market appears to be stabilizing (see Figure 5). Increased affordability and foreign investment are boosting demand, which could limit house price declines.
- As the economic recovery takes hold, education, healthcare, and tourism sector jobs are driving employment gains. According to Moody’s Analytics, Florida’s 2013 employment growth is expected to increase 1.9%, surpassing the national rate of 1.3%, and remain higher than the nation over the forecast period through 2017.
- Over the long term, Florida’s economic performance is expected to be strong due to robust population growth and solid economic fundamentals.
- The state's unemployment rate has declined slowly but steadily from a peak of 11.4% in early 2010 to 7.1% as of May 2013, below the national rate of 7.6% the same month.
- Over the long term, Florida’s pace of growth is expected to outpace the nation due to thestate’s favorable climate and low cost of living as well as strong demographic and economic fundamentals, driven by the tourism, healthcare, and education sectors (see Figure 7). Those positive attributes are also expected to make Florida an attractive location for baby boomers as they start to retire.
The bad news:
- Annual revenue growth of 4.5% is projected for fiscal 2014 and 4.3% for fiscal 2015, but Florida is not expected to reach prerecession (fiscal 2006) peak revenue levels until fiscal 2015 reflecting the magnitude of the downturnin the state.
- Housing permits have increased modestly in recent years although the forecast for 2016 shows both single and multi-family permits at least 30% below peak levels in 2005. During the recession, Florida’s median home prices declined significantly and state foreclosure rates were among the highest in the nation.
- Periodic fluctuations in economic indicators and revenue trends highlight Florida’s above average exposure to boom-bust cycles… The magnitude of Florida’s volatility is underscored by the fact that the state is still recovering from the impact of the recent housing crisis on employment and the sales tax revenues that drive the state’s budget. Like the rest of the country, Florida could be vulnerable to a new housing bubble if national and international investors continue to drive home prices up.
- The state’s significant tourism industry is another economic driver that is subject to national as well as international fluctuations, as reflected in the fall-off in sales tax related revenues during the recent recession.
- Assessments levied to pay bond debt service are tax-like in nature because the assessment base includes nearly all property and casualty insurance written in Florida, except for insurance pertaining to medical malpractice, workers’ compensation, and accident and health. That is an important distinction from most other states: in Florida following a hurricane, taxpayers ultimately will bear much of the claims paying burden that elsewhere would be paid through private insurance.