Florida’s Outstanding Debt Shrinking, Credit Rating Rising

Florida's outstanding debt has dropped for the second year in a row to $26.2 billion. Two years of debt reductions came after about a decade of increasing debt loads and represents the first year-over-year drops in 20 years. Director of Bond Finance Ben Watkins in a report said that the state reduced its debt by about $1.5 billion this year, following last year's reduction of debt by $500 million. The drop to $26.2 billion as of June 30 from $28.2 billion in 2010, he explained, was largely due to Gov. Rick Scott’s move to limit new bond issuance last fiscal year to the lowest since 1990, as well as to reduce demand for infrastructure spending and to refinancing that saved $1.1 billion.

According to Watkins, Florida is not issuing new debt, primarily in its biggest borrowing program, the Public Education Capital Outlay, or PECO bonding program, because of lower revenue and efforts to be more frugal. PECO bonding, which funds school construction, relies largely on revenue from utility taxes to pay back bondholders. Revenue from the tax has dropped during the recession. The state legislators have also slowed down funding for land-buying for conservation purposes, another purpose for which the state has in the past borrowed more heavily.

In addition, Watkins pointed out that the state has refinanced more than $6 billion in debt over the last three years, equivalent to almost a third of the state's entire debt portfolio, to take advantage of low interest rates, allowing for a reduction in interest from 4.65 percent to 4.33 percent.

When applied to the entire $26 billion state debt portfolio, the reduction on future interest costs is likely to be about $1.1 billion. With interest rates at very low levels because of federal monetary policy, refinancing outstanding state debt has been made a priority of the state bonding agency.

The debt reduction as a result has driven Florida’s bonds to the best performance in almost a decade. Standard & Poor’s data show that the 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 bond market. Further, Bloomberg data indicate that 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. Gov. Scott, a former businessman and CEO of Columbia/HCA, has cited improving the state’s credit rating as reason for shrinking the debt load. Florida is one of just eight states with the top general-obligation grade from both Standard & Poor and Fitch. Moody’s grades it Aa1, the second-highest possible rating.