NEW YORK - (Business Wire) Fitch Ratings assigns an 'AA' rating to the Florida Department of Management Services' (the department) approximately $35,460,000 Florida facilities pool revenue bonds, series 2008A. The bonds are expected to be offered competitively on 18 hours notice as early as the week of September 8. The bonds will be due Sept. 1, 2010-2038 and optionally callable Sept. 1, 2018 at 101%. Fitch also affirms the 'AA' rating on the department's approximately $375.5 million outstanding Florida facilities pool revenue bonds. The Rating Outlook is Stable.
The bonds are payable on parity with the outstanding bonds from trust estate revenues. Trust estate revenues consist of payments derived from the leasing to state agencies of a pool of office buildings under the jurisdiction of the department. While bond payment depends on annual legislative appropriations, the present pool consists of 72 state facilities, including new and pre-existing debt-free facilities, and accounts for approximately 5.9 million square feet of office space. Periodically, the facilities in the pool will change, but the rates are set to meet debt service. A debt service reserve equal to maximum annual debt service will be met through purchase of a surety bond, consistent with previous practice.
The state legislature authorized the program and specifically approves each project and the bonds issued to finance the project. Central controls are strong, with the State Board of Administration approving fiscal sufficiency before issuance. The department oversees the leasing of all office space by the state agencies, whose rentals are required to be set to produce 110% debt service and reserve deposits, and 100% of operating and maintenance costs and required deposits to the capital depreciation reserve fund. Additionally, should an agency fail to make payments when due, the controller shall withhold the unpaid amounts from general revenues of the agency and allocate it to the department.
State facilities pool space now represents about 34% of total occupied office space. Some of the space is represented by debt-free pre-existing facilities, including the state capitol. Rentals in the facilities pool have become increasingly favorable as the pool has enlarged and are about 90% of the private rental rates; average pool rates have been below private space since 1995. Occupancy rates have been above 95% since the pool's creation in 1986.
Florida's 'AA+' debt rating and Stable Outlook is 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.
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 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.
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').
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Fitch Ratings, New York
Kyle R. Gephart, 212-908-0661
Richard J. Raphael, 212-908-0506
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