Bloomberg News

Florida Debt Shrinking Most in Decades Fuels Rally: Muni Credit

December 03, 2012

Governor Rick Scott’s veto pen helped reduce Florida’s debt in back-to-back years for the first time in at least three decades. Lawmakers say it might be time to reverse course.

The cuts are driving bonds of the fourth-biggest state to the best performance in almost a decade. Debt of Florida and its localities has earned 9.2 percent this year, beating the 8.9 percent return for the $3.7 trillion municipal market, Standard & Poor’s data show. Florida also beat the market in 2011, leaving it on a pace to outperform in consecutive years for the first time since 2003.

Of the five most populous states, Florida alone saw its debt fall in the period, said John Sugden, director of U.S. public finance at S&P. The drop to $26.2 billion as of June 30 from $28.2 billion in 2010 followed Scott’s move to limit new issuance last fiscal year to the lowest since 1990, as well as reduced demand for infrastructure spending and refinancings that saved $1.1 billion.

“It’s a pretty rare achievement for an administration to bring down the actual level of debt,” said John Hallacy, head of municipal research at Bank of America Merrill Lynch in New York. “What’s interesting is you’d see this in bad times when you’d think issuing debt would raise proceeds to employ people.”

Financing Debate

While the state’s unemployment rate, at 8.5 percent, is down from 11.4 percent in the first quarter of 2010, it is still above the national average. Florida’s economy might have benefited had it financed more building of roads and schools, Hallacy said.

Scott, 60, a former chief executive officer at HCA Holdings Inc. (HCA:US) elected in the Tea Party wave of 2010, vetoed more than $474 million in new bond authorizations from the 2011-12 budget. The state’s $410 million in new issuance that year was the lowest in two decades, said Ben Watkins, the state’s bond finance director. The state hasn’t cut debt for two straight years since at least 1982, Watkins said.

The Republican governor’s approval rating has been above 39 percent just twice in 16 polls by Hamden, Connecticut-based Quinnipiac University since he took office.

“The governor continues to be concerned about the long- term debt obligations held by the state’s taxpayers,” Melissa Sellers, his communications director, said by e-mail. Scott “will consider any proposal for new debt through additional bonding based on the financial risk posed to Florida taxpayers and the return on investment of their tax dollars.”

‘Getting Better’

Florida isn’t alone in curtailing borrowing. California Governor Jerry Brown, a Democrat, curbed debt sales when he took office last year, trimming new general-obligation bonds in the past two years to $7.5 billion, from $30.8 billion the prior two.

In Florida, after two years of austerity and signs of economic recovery, lawmakers should consider financing more building with new debt, said state Senator Anitere Flores, a Miami Republican who has been on the budget committee for two years.

“Things are getting better,” Flores said in an interview. “It’s probably time to really look at the projects we haven’t gotten to in the last couple of years.”

Taxes on real-estate deals have helped push the state’s general fund 3.4 percent above estimates during the first four months of its fiscal year, which started July 1.

No Rule

State House Speaker Will Weatherford said he’d consider new borrowings on a “case-by-case basis.”

“I don’t have a hard-and-fast rule that we’re not going to increase debt,” said Weatherford, a Tampa-area Republican.

The state issued $888 million of new debt in the fiscal year ended June 30, 2011, after averaging $2.2 billion from 2002 to 2010, as lawmakers approved less money to buy conservation land and for higher-education construction.

The decline in debt has coincided with a diminishing yield penalty for Florida municipalities. The extra yield investors demand on general-obligation debt of the state and its local issuers has averaged 0.56 percentage point this year, the least since 2009, data compiled by Bloomberg show.

“Florida’s performed pretty well,” said Michael Schroeder, president and chief investment officer of Naples, Florida-based Wasmer, Schroeder & Co., which manages $3.1 billion in muni bonds. “It’s trading much tighter than it did at the peak of the foreclosure crisis.”

Moving Out

An outflow of residents contributed to reduce the need to take on more debt, Schroeder said.

The number of people leaving Florida outnumbered those moving in from 2006 to 2010, according to Atlas Van Lines data. Nicole Johnson, a credit analyst at Moody’s Investors Service, said part of the debt drop is a result of the state finishing a school construction program.

Florida still ranked sixth in terms of gross tax-supported debt in Moody’s 2012 state debt medians report, trailing only California, New York, New Jersey, Illinois and Massachusetts.

Scott’s emphasis on spending cuts also led to less issuance, said Senate President Don Gaetz, a Republican from the Panhandle.

“We have a debt-averse governor,” Gaetz said.

Scott has cited the state’s credit rating as reason for shrinking the debt load.

Florida, with 19 million people, is one of just eight states with the top general-obligation grade from both S&P and Fitch. Moody’s grades it Aa1, second-highest.

Following are pending municipal sales:

NEW YORK CITY plans to issue $850 million of tax-exempt general obligations as soon as Dec. 11, according to the city’s Office of Management and Budget. Proceeds will refund debt. (Added Nov. 30)

ALABAMA FEDERAL AID HIGHWAY FINANCE AUTHORITY is set to borrow $337 million of federal highway grant-anticipation bonds as soon as this week, data compiled by Bloomberg show. Proceeds will help finance roads and bridges, according to bond documents. (Updated Dec. 3)

To contact the reporter on this story: Michael C. Bender in Tallahassee at mbender10@bloomberg.net

To contact the editor responsible for this story: Stephen Merelman at smerelman@bloomberg.net


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